Price Adjustment in Construction Contract

•Price adjustment clauses in construction contracts are intended to reduce

the financial risk to an Employer and a Contractors if the input costs rise or
fall sharply during construction when the contract period is long.
•In theory, if a contractor knows at the bidding stage that payments for his
work will be periodically indexed, he will have less of a need to add a
premium to the bid price for possible cost increases during construction.
•This reduces his risk of losing the contract by adding the premium.
Adjustment provision in a contract also lowers the risk of contractors
underestimating cost increases, and later experiencing financial difficulties
and defaulting on their obligations.
•An Employer , on the other hand, ideally can benefit from lower bid-prices,
less likelihood of contractors going into bankruptcy mid stream of a project,
and lower final Contract Price, especially when costs are declining.
 Commonly known elements subject to Price Adjustment
(i) Cement;
(ii) Steel;
(iii) Labor Unskilled;
(iv) Bricks; and
(v) Bitumen.
(vi) Fuel
One may add, substitute or delete any element as deemed
appropriate. They would then decide on the weightages or coefficients
for the elements.
There shall be no Price Adjustment for the elements which the
Employer has either supplied free of cost or at fixed prices as well as
for those elements for which an umbrella escalation cover is provided
by the Government through an Executive Order or Statutory Regulatory
Order (SRO).
 Parameters of Price Adjustment

(i) Weightages of Specified Items

(ii) Base Date Price: The base date price (or base date index) of any element shall be the price of the element
which was prevalent twenty eight (28) days prior to the date of submission of the bid.
(iii) Current Date Price: The current date price (or current date index) of any element shall be the price of the element which
was prevalent twenty eight (28) days prior to the start of the execution month to which a particular monthly statement is
related. The unit of time shall be a calendar month.
(iv)Sources of Price
Procedure:
1. The billed amount of the Works for each calendar month will be obtained from the checked bills submitted by
the Contractor. In case the billed amount is for more than one month, the amount of the bill shall be segregated
for actual work done in each month.
2. The Base Date Prices and the Current Date Prices shall be as per procedure B2 and B3 provided hereinbefore.
3. The Source of Prices will be as per procedure B4 provided hereinbefore.
4. The Price Adjustment in the billed amount will then be calculated for the month under consideration in
accordance with Formula for Price Adjustment.

5. Except labour and POL, if any other adjustable item(s) is not used in a particular billing period then the ratio
of current date price and base date price for that particular adjustable item(s) shall be considered as one.
 Application of Price Adjustment
When to Apply Price Adjustment
This risk of price escalation is likely to arise
(i) for goods contracts with long delivery periods;
(ii) for works contracts with long completion periods;
(iii) for major civil works contracts;
(iv) for contracts that contain supplies or commodities whose prices
fluctuate significantly over a short period;
(v) for time-based consulting services, such as construction supervision
services (see footnote 1); and
(vi) due to any unusual circumstances in the market in question.
When Not to Apply Price Adjustment
Price adjustment provisions may not be necessary for
(i) simple supply contracts (i.e., not involving components that are
usually affected by escalating or fluctuating prices) with short delivery
periods;
(ii) the procurement of certain types of equipment where normal
commercial practice requires bidders to submit firm prices regardless
of the delivery time, which may be the case for
(a) engineering, procurement, and construction contracting
arrangements; and (b) fixed-price contracts that are common in projects financed by private sector financiers, who
are generally reluctant to accept the risk of cost overruns, as it increases credit risk rating and reduces
financial viability of the project; and
(iii) contracts for the supply, installation, and construction of facilities wherein the value of the permanent works
represents the major part of the estimated cost of the contract. All major equipment is usually supplied from fixed
production lines; thus, an experienced manufacturer should be able to mitigate the risk of price fluctuations
 Parameters of Price Adjustment

(i) Weightages of Specified Items

(ii) Base Date Price: The base date price (or base date index) of any element shall be the price of the element
which was prevalent twenty eight (28) days prior to the date of submission of the bid.
(iii) Current Date Price: The current date price (or current date index) of any element shall be the price of the element which
was prevalent twenty eight (28) days prior to the start of the execution month to which a particular monthly statement is
related. The unit of time shall be a calendar month.
(iv)Sources of Price
Procedure:
1. The billed amount of the Works for each calendar month will be obtained from the checked bills submitted by
the Contractor. In case the billed amount is for more than one month, the amount of the bill shall be segregated
for actual work done in each month.
2. The Base Date Prices and the Current Date Prices shall be as per procedure B2 and B3 provided hereinbefore.
3. The Source of Prices will be as per procedure B4 provided hereinbefore.
4. The Price Adjustment in the billed amount will then be calculated for the month under consideration in
accordance with Formula for Price Adjustment.

5. Except labour and POL, if any other adjustable item(s) is not used in a particular billing period then the ratio
of current date price and base date price for that particular adjustable item(s) shall be considered as one.
 Price Adjustment Formula
1. Formula for Price Adjustment ( For Large Contract)
The formula mentioned below is in its generalized form. The Employer/user shall at the time of preparation of their
bidding/tender documents shall determine the proportions of A, b, c, d, ……….. by appropriate rate analysis following
the procedure enumerated herein below:
Formula for Price Adjustment:
Pn = A + b Ln/Lo + c Mn/Mo + d En/Eo +................
where,
“Pn” is the Price Adjustment factor for the work carried out in the period “n”.
“A” is a constant or the Non-Adjustable Portion of the Price Adjustment Factor to be specified in Appendix-C to Bid,
representing the Non-Adjustable Portion of the Contract Price.
“b, c, d.........” are Coefficients or weightages of the order of 0.xx (i.e., fractions having two significant digits) for each
specified element of adjustment in the Contract. The sum of A, b, c, d, etc., shall be one.
“Lo, Mo, Eo........” are the Base Date Indices for the specified (adjustable) elements.
“Ln, Mn, En.......” are the Current Date Indices of the specified (adjustable) elements for the period “n”.
If “P” is the amount payable (prior to adjustment) at the rates entered in the Price Schedule of the work carried out
in period “n” then, Adjusted amount payable to the Contractor for the work carried out in the period “n” shall be
equal to Pn*P..
2. Base and Current Dates Prices
The base date and Current date prices of the specified elements shall be obtained from the sources specified in the
contract.
3. Elements for Price Adjustment
Specified Elements are subjected to Price Adjustment.
 Price Adjustment Formula
Small Works
MDB
Harmonizedd
Formula
Pc= Ac +Bc(Imc/Ic)
Pc is the adjustment factor for the portion of the contract price payable in a specific
currency
“c.”
Ac and Bc are coefficients specified in the particular conditions of contract, representing
the
nonadjustable (usually 0.10 to 0.20) and adjustable portions, respectively, of the contract
price
payable in that specific currency “c.” Ac + Bc = 1.
Imc is a consolidated index prevailing at the end of the month being invoiced and Ioc is the
same consolidated index prevailing 28 days before bid opening for inputs payable; both in
the
specific currency “c.”