PRICE (A) Estimation of Fuel

for Excavation (Short

ADJUSTMEN Exercise)

T under PEC (B)Demonstration of

PROCEDUR Price Adjustment
Calculation
E
CONSTRUCTION CONTRACT

A contract is an agreement between the parties , enforceable under the law.

Creates mutual rights and obligations

A construction contract outlines the

• Scope
• Time
• Cost
• Risks
• Rights and
• Obligations (Duties) of both the Employer and the Contractor

Contracts feature some sort of Risk Allocation Scheme.

TYPES OF RISKS IN A
CONSTRUCTION SCONTRACT
 Safety Risk
 Project Management Risk.
 Design Risks
 Disputes
 Legal Risk (Subsequent Legislation)
 Strikes
 Environmental Risk
 Force Majeure
 Financial Risk
FINANCIAL RISKS

Currency/ Foreign Exchange Rate

Funding Difficulties
Payment risk
Political risk
Rise or Fall in Prices
RISK MANGEMENT

 RISK MANAGEMENT PROCESS

Risk Identification
Risk Assessment
Risk Mitigation/Management
 NOW WHEN:
Risk of Fluctuation in Prices has been identified
Assessment of the Price Fluctuation Risk is highly
difficult
How to manage this Risk?


PRICE FLUCTUATION

 Price Escalation is the upwards movement of price

 If the rise in prices is beyond the expectation, Price Escalation can badly affect a
contractor's cash flow

 Can lead to delays in construction

 Can Lower Quality of work

… PRICE FLUCTUATION

 In a fixed-price contract, bidders will factor in the aggregate financial risks

associated with price escalation in their bids.

 Cumulative impacts of price escalation can be substantial in contracts with

long completion periods.

 To Manage the Price Fluctuation Risk in a Construction Project, Price

Adjustment Formula is included in the Contract.
SIGUIFICANCE OF PRICE
ADJUSTMENT FORMULA/
PROVISIONS

Contracts including large, price-sensitive materials can also experience abrupt and
significant increases in price.
 If price adjustment provisions do not exist, then:
 If inflation turns out to be more, the contractor loses.
 If deflation occurs, the employer loses.
 For a fixed price contract, the contractor includes a margin for variation in prices
as risk management .
 The bid price may be higher.
 Price adjustment may also pass on savings to the Employer due to the downwards
movements in price.

SIGNIFICANCE OF PRICE
ADJUSTMENT FORMULA/PROVISIONS

 Price adjustment provisions include formulas designed to address such problems.

 Can protect both the Employer and the Contractor from price fluctuations
 Price adjustment formulas allow Contractors to offer more realistic price at
the time of bidding.
 Without Price Fluctuation provisions, Risk Management is erroneous.
...SIGNIFICANCE OF PRICE
ADJSTMENT FORMULA/
PROVISIONS
 Employer receives a balanced bid.
 No need for Complex Record-keeping of the Consumption of the Specified items.
 Reduces chances of claims and disputes .
 The Parties are in a win-win situation.
 PEC has introduced a Price Adjustment Formula in it's Standard Bidding
Documents.
COMPONENTS OF PRICE
ADJUSTMENT FORMULAS
 Full compensation for any rise or fall in Costs is not covered by the Price
Adjustment Sub-Clause.
 It is a reasonable compensation.
 There is a nonadjustable Portion.
 Components of the non-adjustable portion:
 Contingency ( ies )
 Over beads
 Profit
 Non Sensitive/ Controllable Cost Elements

...COMPONENTS OF PRICE
ADJUSTMENT FORMULAS
 The value of nonadjustable portion will depend on the actual calculations.
 An adjustable component.
 A price index to measure the adjustment

Allocation for price adjustments can be made in the contract under "Provisional
Contingency"

ESCALATION VS PRICE
ADJUSTMENT
 Escalated Price = V+E
 Where;
 V = Amount of the Payment of the Work carried out during the Subject Month in
accordance with Paragraph 60.1(a), 60.1 (b), 60.1(e)


 Payable Escalation, E = Q X R
 Q = Quantity of specified materials consumed during the billing period
 R = Current rate – Base rate

PRICE ADJUSTMENT for Unit Rate
Contracts
 Adjusted Price = Pn x V
 Where:
 Pn = Price Adjustment Factor
 = a + b Ln/Lo + c En/Eo + d Mn/ Mo + …..


 V = Amount of the Payment of the Work carried out during the Subject Month in
accordance with Paragraph 60.1(a), 60.1 (b), 60.1(e)



POLYNOMIAL/NOTIONAS FORMULA
for PRICE ADJUSTMENT
 Pn = a + b Ln/Lo + c En/Eo + d Mn/ Mo + …..
 Polynomial Formula in Structure
 National Formula in Nature
 Simple and Compact Method
 World Bank Method
 World Bank Method
 ADB Method
 ENAA (ENgineering Advancement Association of Japan)
 An Overall Price Variation Index
….POLYNOMIAL/NOTIONAL
FORMULA for PRICE ADJUSTMENT
 A contract may have multiple Formulas
 Inputs for Price Adjustment Formula


 Base Rate

 Current Rate and

 Value of Work done


PRICE ADJUSTMENT for Lumpsum
Contracts
 Adjusted Price = Pn x V
 Where;
 Pn = Price Adjustment Factor
 = Current CPI/ Base CPI
 V = Amount of the Payment of the Work carried out during the Subject Month

OTHER PRICE ADJUSTMENT
FORMULAS


 P 1 is adjustment amount payable to the contractor

 P o is contract price (base price)
 a = Percentage of fixed element in contract price (for goods a is generally set at 5%)
 b = Percentage of labor component in contract price
 a + b + c = 100%

PRICE ADJUSTMENT under PEC
PROCEDURE
2.PRICE ADJUSTMENT PROCEDURE AND
FORMULA, MAY 2022
(FUTURE PROJECTS)
DEVELOPMENT OF THE " STANDARD PROCEDURE
AND FORMULA FOR PRICE ADJUSTMENT"

 PEC is the Statutory Regulatory body entrusted to regulate the engineering

profession of Pakistan.
 PEC has undertaken the standardization of Standard Procedure and Formula for
Price Adjustment
 Formula for Price Adjustment is prepared by a team of experts representing
Employer, Constructors and Consultants.
 Standard Procedure and Formula for Price Adjustment, 2009
 Standard Procedure and Formula for Price Adjustment, 2002
FORMULA METHOD OF PRICE
ADJSTMENT OF CONSTRUCTION
COMTRACTS
Provisions in the Bidding Documents
• Price adjustment formula in Particular Conditions of Contract
• FIDIC 1987 Reprinted 1992 : Sub –Clause 70.1 - Increase or Decrease of Cast
• Appendix- C to Bid : Table of adjustment data (PEC Standard Form of Bidding
Documents (Civil Works))
• OR
• FIDIC 2017 (2nd Ed):Sub-Clause13.7- Adjustment for Changes in Cost
• Formula for Price Adjustment will be applicable for all the contracts such as
Civil, Electrical, Mechanical, etc.
•

•
HOW TO USE PRICE ADJUSTMENT
CLAUSEIN CONSTRUCTION
CONTRACTS
Effective Implementation of the
Price Adjustment Procedure and Formula, 2022
• For use in Future Projects
• The document is mandatory in nature.
• Must be incorporated in the Particular Conditions of Contract
• Will be effective only when included in the Contract
• There may be more than 1 Formulas in a Contract.
• Appendix- C to Bid: Table of adjustment data (PEC) Standard Form of Bidding
Documents (Civil Works))
•
MAJOR COST ELEMENTS SUBJECT
TO ADJUSTMENT
Cost elements are elements of costs which are estimated to have significant impact of
inflation and should not be less than 3% of total contract amount.
• High Speed Diesel (covers all types of fuel used for the Works)
• Local Labour (Unskilled Labour, also reflects Skilled Laboure)
• Cement OPC Includes all types of Cement
• Reinforcing Steel (Covers all types of steel used for the works).
•

•
PRICE AKJUSTMENT FORMULA

 Pn = a + b Ln/Lo + c En/Eo + d Mn/Mo +…..

 Where:
 "Pn" is a Price adjustment Factor
 "a" is a fixed coefficient specified in appendix – C to Bid, representing non-
adjustable portion in contractual payments
 "b", "c", "d", ….are weightages or coefficients representing the estimated
proportion of each cost element
 "Ln" , "En" , Mn , ….are the current cost indices of the cost elements for month
"n"
 "Lo", "Eo", "Mo", …..are the base cost indices prevailing on the base date as
defined in the bidding documents

OVERVIEW OF PRICE ADJUSTMENT
FORMULA
 Formula method: "notional" price adjustment, not the actual/exact price adjustment
 The estimated contract value of the work carried out in the period "n" is adjusted:
 This Price Adjustment Formula shall be applicable to Civil, Electrical, Mechanical,
etc. contracts.
 Disregarding the type of the work or quantities of actual usage
 Supplying weightings in the formulas as determined for the whole of the Works
 Weightings air based on analysis of various specified cost elements
 Effect of cost elements not executed in the billing periodisalso considered in
calculation of the Pn
 The "national" price adjustment formula is based upon good faith that the project will
be successfully completed.

WEIGHTINGS OF SPECIFIED ITEMS

• Cost Elements, having cost impact of three (03) percent or higher

can be selected for adjustment
• Base Date Price of any element shall be the Price of the element for
the month on the day falling 28 days prior to the last day for
submission of the Bids.
• Current Date Price of any element shall be the price of the
element for the month falling 28 days prior to the last day of the
period to which the particular Payment Certificate relates.
...WEIGHTINGS OF SPECIFIED ITEMS

 Prices of the selected Cost Elements shall be based on market rate alone
(excluding cost of construction/installation overheads and profit.
 Each cost element shall be divided by the total amount of Engineers Estimate to
determine various weightages.
 Weightages of specified items shall be of the order of 0.xx
Source of Prices
• Statistical Bulletins published by Federal Burean of Statistics(FbS)
•
• Statutory notifications and official price from public sector organization, where
available
FIXED PORTION IN A FORMULA FOR
PRICE ADJUSTMENT FACTOR
 Part of Contract Value not subject to price adjustment includes but is not be
limited to :
 Less sensitive and less significant (<3%) Cost Elements not included in the Price
Adjustment Factor
 Cost of Providing various Guarantees
 Contingencies
 Overheads and Profit

 Fixed portion shall be 25%

 If Fixed portion exceeds 25%, it shall be supported by calculations
attached with the bidding documents.



ELEMENTS FOR PRICE ADJUSTMENT

 Typical Specific Elements for Highway and Bridge construction:

i. 1POL (HSD);
ii. 2Labour;
iii. 3Cement;
iv. 4Steel;
v. 5Bitumen;
vi. 6Aggregate; and
vii. 7Other major elements depending on the nature of the project
ADJUSTMENT DATA (Appendix-c)

●
Cost Element ●
Description of ●
Weightage ●
Source of Cost
Cost Index or Index or
Reference Reference
Price Price
●
1 ●
2 ●
3 ●
4
●
Fixed Part ●
Non- ●
0.25
adjustable
●
Local Labour
(L)
●
Fuel (F) ●
PSO/OGRA/
FBS
●
Cement of all
EXAMPLE (Weightages of Cost Elements for
Projects)

●
PROJECT ●
A ●
B ●
C ●
D ●
E ●
F
●
Fixed ●
0.61 ●
0.15 ●
0.20 ●
0.25 ●
0.25

●
Labour ●
0.06 ●
0.34 ●
0.07 ●
0.20 ●
0.11

●
HSD ●
0.16 ●
0.085 ●
0.18 ●
0.15 ●
0.10

●
Re.Bars ●
0.05 ●
0.085 ●
0.08 ●
0.16 ●
0.22

●
Cement ●
0.03 ●
0.085 ●
0.07 ●
0.10 ●
0.06

●
Bitumen ●
0.09 ●
0.0425 ●
0.10

●
Misc./ Galvanized Steel ●
0.085 ●
0.16

Timber 0.085

Aggregate 0.0425

Equipment 0.20 0.04 0.10

EXAMPLE (Calculation of Weightages of Cost Elements)
Construction of Road Network, Water Supply and Sewerage System for
Project Colony in Thor Valley

 Engineer's Estimate Rs. 1,289,308,010.00

●
S ●
Const. Cost ●
Unit ●
Quantity ●
Base ●
Amount (Rs.) ●
Weig ●
Portio
r Element Rate htag n
. (Rs.) e(%)
N

Adjustable Portion
o
.

1 Cement bag 252,805,49 510,0 128,930,801.00 10

0
●
2 ●
Reinf - Steel ●
kg ● 1,744,928 ● 120. ● 209,391,375.6 ● 16
,.13 00 0
●
3 ●
Bitumen ●
kg ● 1,704,204 ● 83.2 ● 141,823,881.1 ● 10
.29 2 0
●
4 ●
HSD ●
ltr. ● 2,308,106 ● 83.7 ● 193,396,201,. ● 15
.00 9 50
PRICE ADJUSTMENT under PEC
PROCEDURE
3.UNPRECEDENTED PRICE HIKE IN
CONSTRUCTION INPUTS FOR
ON-GOING PROJECTS (AUG 2022)
PEC TAKES THE LEAD

 PEC appreciates the gravity of the problem

 PEC takes the Initiative
 To support the Construction Sector
 Proposing a solution to the subject problem
 PEC has formulated the procedure of price adjustment for the on-going
contracts.
CONTRACTUAL BASIS FOR
INCORPORATING PRICE ADJUSTMENT CLAUSE IN
ONGOING CONTRACT
 NOT APPLICABLE IN THIS CASE
 70.1(1) Increase or Decrease of Cost-Weightages
 If, for varied or additional work
 The weightages have been rendered unreasonable, unbalanced, or unapplicable.
 Weightages for each of the factors of cost given in Appendix ca shall be adjusted
….CONTRACTUAL BASIS FOR
….INCORPORATING PRICE ADJUSTMENT CLAUSE IN
ONGOING CONTRACT
 General Practice in Construction Contracts for incorporating a mutually agreed
clause in the existing/ ongoing contract
 The contracting parties need to mutually agree and incorporate Price adjustment
clause in the ongoing contract.
 By way of signing an amendment to the contract
 (Ref. Para (1) of Section (A) APPLICABILITY of Part-1: PROCEDURE of
("Standard Procedure and Formula for Price Adjustment, Second Edition, May
2022)
PROCEDURE

CRITERIA
 All ongoing projects shall be considered for Price Adjustment
 Of Whatever financial value
 Whether, the price adjustment clause was incorporated or not
 Effectiveness Date = 01-01-2021
 Applicable Procedure: Standard Procedure and Formula for Price Adjustment,
Second Edition, May 2022
 Scope of Application the balance work of the respective contract (31.12.2020
 Specified Items: All items (meeting the selection criteria)
AMENDMENT TO CONTRACT

Fixed Price Contracts/ Contracts without

Price Adjustment Clause

 Price Adjustment clause be incorporated
 Procedure Standard Procedure and Formula for Price Adjustment, Second
Edition, May 2022
 Prepare a suitable draft of Amendment to the Contract
 Sign the Amendment to the Contract
 10% amount shall be deducted from the total worked out price adjustment of the
contract before payment.
….AMENDMENT TO CONTRACT

 Contracts based on PEC Construction Document with

Price Adjustment Clause

 The existing Price Adjustment clause be replaced with the relevant
provisions from Standard Procedure and Formula for Price
Adjustment, Second Edition, May 2022
 Prepare a suitable draft of Amendment to the Contract
 Sign the Amendment to the Contract

….AMENDMENT TO CONTRACT

 Consultancy Contracts

 Applicable to all consultancy contracts, whether with or
without price adjustment provisions
 Remunerations paid in local currency pursuant to the billing
rates agreed for each item activity shall be adjusted w.e.f.
01-01-2021, to be computed with the following formula: RI
= RIo x II/IIo
 Where;

PAYMENT OF THE DETERMINED
PRICE ADJUSTMENT
 The total amount of such additional Price Adjustment may be released:
 Progressively (in installments)
 Up to second last certified invoice and
 Such condition may be made part of the Amendment to the Contract;


OR
….PAYMENT OF THE DETERMINED
PRICE ADJUSTMENT
 Any suitable method of payment mutually agreed by the parties
 The condition of unprecedented price hike in construction inputs shall be deemed
to discontinue when the price adjustment falls to 10% or below
 Upon occurrence of condition, the amended contracts shall revert back to the
earlier (un-amended/original) state.
 The individual Procuring Agencies/ Employer Departments shall monitor their
contracts for occurrence of such a conditions and take action upon
its occurrence.
MODE OF IMPLEMENTATION

 Special Cells to be constituted by the respective Head of the Procuring Agency

 Including capable professionals for invoking Price Adjustment Provisions in the
on-going contracts
 The entire process shall be well-documented and transparent.
...MODE OF IMPLEMENTATION

 These Special Cells also to ensure that the Project Directors (PDs) also
accomplish the following:
 Obtain Total Financial Implications on the project cost by applying the price
adjustment provisions
 Obtain necessary approvals and complete all the departmental codal formalities, if
any
 Also, the Provision of Funds for payment of Price adjustment may be made in PC-
1, so that there are no restraints in payment of the Price Adjustment to the
Contractor.