Price Adjustment in Contract | How to Calculate Escalation

 Price Adjustment in Contract

Price Adjustment is cost control mechanism to adjust the escalation. If the project period is longer than 24 months, client might propose price adjustment in order to bear market escalation that might occur. Provision of Price Adjustment is stated in SCC Clause 53.1 of contract document. Maximum amount of price adjustment is stated in SCC 49.1 of  a contract document. 

 

 

Index of Price Adjustment

• pn = price adjustment factor
• A = coefficient. This is also fix coefficient. Generally its value is 0.15.
  
• b = labor coefficient or proposed weightage of labor in escalation. Shall be submitted by contractor while bidding.
  
• c = construction material coefficient. Shall be submitted by contracted while bidding.
  
• d = equipment coefficient. Shall be submitted while bidding.
  
• Ln = Current Labor index value 
• Mn = Current Construction Material index value
• En = Current Equipment index value
• Lo = Base period Labor Index Value
• Mn = Base period Construction Material index value
• En = Base period Equipment index value

Base period is the time frame of 30 days before the bid is published. Example: if the bid is published in 16th of June 2020, the base period is 16th of May 2020 i.e May/June index will be effective.

Thus, Lo=495.97, Mo=103.45, Eo=107.74. 

Lo index is listed in SWRI and Eo & Mo in WPI.

If the IPC is submitted in 4th May 2021, then the Ln, Mn, En shall be drawn from index of 4th April  2021, i.e March/April.

Thus, Ln=514.53 , Mo=108.21 , Eo=113.51

Assume the contractor had proposed coefficient as follow:

• A=0.15
• b=0.15
• c=0.4
• d=0.3

Then as per formula: pn=A+b x Ln/Lo + c x Mn/Mo + d x En/Eo = 0.04  

Assume the IPC amount is 1000000 (excluding VAT & PS), then the price adjustment amount = 0.04 x 1000000 = 40000. In case the IPC includes mobilization deduction or insurance payment, the sum is not eligible for PA thus shall be deducted before multiplication.

I hope, you have well understood the price adjustment. Visit NRB website for indices.

*SCC - Special Condition of Contract

*GCC - General Condition of Contract

*PA - Price Adjustment

*ESC - Escalation