Controlling Unprecedentent Price Escalation in a Contract- A Contractor QS Approach

As we are all aware that unprecedented price escalation has hit all the construction projects drastically, here are six strategies I apply as a Contractor QS to control the price escalation in my project.

1.????Pre Oder-Material ahead of Procurement Schedule

A procurement schedule is a document which is prepared align with the project programme which denotes what are the total resource requirements of the project and when they are going to be deliverd to the Site. As the material prices are surging continuously preordering the materials substantially can control the price hikes.

2.????Material at Site Payment Arrangement

Preordering can be beneficial if you are eligible to get payments for Material at Site if not Contractor should negotiate with the Employer for a Material at Site Payment mechanism. Otherwise, preordering materials will create severe cash flow problems.

3.????Check the Price Indices released by the relevant Authority

Price escalation formulae are calculated based on current price indices released by relevant approved authority monthly, but sometimes these price indices fail to reflect the current market prices, at that time a Contractor QS can justify the situation to the Engineer because Engineer has the authority to input fair price indices for the calculations

Sub Clause 13.8 Adjustments for Changes in Cost (FIDIC 1999 RB)

The cost indices or reference prices stated in the table of adjustment data shall be used. If their source is in doubt, it shall be determined by the Engineer

4.????Keep a record of actual Cost Incurred

Each month cost reimbursed through price escalation and actual cost incurred should be reconciled to make sure actual cost incurred by Contractor is absorbed within the formula, if not additional cost incurred should be claimed as an Ex gratia Claim.

5.????Similar Rates applicability for Variations in Price Escalation Situations

Existing rates are used to evaluate Variations in a Contract as per Sub Clause 12.3 Evaluation (FIDIC 1999 RB)

(i) If an additional work is instructed under Clause 13 [Variations and Adjustments],

(ii) a rate or price is specified in the Contract for this item, and

(iii) a specified rate or price is appropriate because the item of work is of similar character, or is executed under similar conditions, as any item in the Contract.

Engineer normally cite this sub clause for fixing existing rates for Variation, but the tragedy here is due to price escalation hits our existing rates are outdated or expired so agreeing to execute Variations for existing BOQ rates will kill the cash flow. But luckily there is a way out, in this situation if you carefully read the Sub Clause 12.3 (iii) it says that

a specified rate or price is appropriate because the item of work is of similar character, or is executed under similar conditions, as any item in the Contract.

So as a Contractor QS we can argue that the economic condition under which the tender was priced is not the same as the current conditions so our existing rates are inapplicable to value variations.

6.????Prepare a Cost Forecast

Prepare a Cost Forecast for Price Escalation Claimable elements ?and always cross check with you project budget and report to top management ?about the financial burden company is ?about to face.

Cost Forecast Format attached ?

Thanks For Your Patience, Please leave your comments if you have anything additional