PRICE ADJUSTMENT IN

CONSTRUCTION &
CONSULTANCY CONTRACT

ByEngr. M. Mazhar-ul-Islam
Convener
PEC Act & Byelaws Committee

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 Terms – Escalation, Price Adjustments & Increase / Decrease.
 Meaning – Adjustment of Contract Price for increase or decrease of
prices of adjustable materials / services.
 It is compensation and not extra benefit to Contractor.
 Adjusted periodically during contract period.
 Basic formula: Price Adjustment = Quantity x (current rate – base rate).
 FIDIC formula: Pn = A+b Ln + c Mn + d En + ……
Lo Mo Eo
 To be built in the Bidding Documents.

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 Bidders quote price on prevailing market rates.
 Cost of basic construction materials fluctuate unpredictably
in Pakistan.
 Unlimited cost increase not foreseeable & cannot be built in
competitive bidding process.
 Contractors can execute work only at right costs.
 Legal contract not necessarily be executable unless
conductive mechanism equitable to the parties are included.

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 Results of non-adjustments: Project delay, disputes,
cancellation of contracts – resulting more cost for the
Employer.
 Exclusions:
 Variation Orders
 Claims
 Subsequent Legislation
 Measurement of Quantities

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 Standard Bidding Documents for Civil Works: Clause 70.1 of
PCC.
 Standard Bidding Documents for E&M Works: Clause 47.1 of
PCC.
 Standard Form of Bidding Documents (Smaller Contractor)
 Standard Contract for Consultancy (Time Based):
Clause 6.2(a) SC.
 Standard Procedure & Formula for Price Adjustments.

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 BelowRs 30 million contract (below C-5 Ceiling)
not covered for Price Adjustment (PA).
 Also
if original Contract Period less than 12
months, PA not applicable.
 Procedure for Price Adjustments deemed to be
notified.

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 FORMULA
FOR
ESCALATION

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 Price Adjustment Formula
In 1999, FIDIC introduced a formula to
calculate major part of price hike
escalation risk. The purpose of introducing
the formula was to:
• propose a uniform and realistic method.
• acceptable to all parties.
• Should workable in all kind of
circumstances.
• Should not favor any particular party.

In Pakistan, PEC adopted the use of this

formula in 2000. A two days National
Workshop was arranged in PEC HQs on 12/53

March 30 & 31, 2000 where the basic

Generalized Form of Formula
The formula for price adjustment is given below in
its generalized form:
Pn = A + b Ln + c Mn + d En
+ ....., where
Lo Mo Eo
• “Pn” is the price adjustment factor for the
work carried out in the period “n”
• “A” is the non-adjustable portion of the
contract price.
• “b,c,d, ….” are the coefficients or weight-
ages for each specified item of escalation
in the contract.
• “Ln, Mn, En, ….” are the current basic
prices of the escalable items for the period
“n”. 13/53
Parameters of the Formula
 Base Date: Base Date for any element shall be the date 28
days prior to the date of submission of the tender.
 Effective Date: The effective date for any element shall be
the date 28 days prior to the start of the execution month
for which the contractor executed the item.

 Coefficient or Weight-age: The Co-efficient for each

specified item shall be calculated and given in the
bidding/tender documents. The co-efficient for each
specified escalable item shall be determined by the user
proportionate to its ratio in the total amount of Engineer’s
 Adjustable
Estimate. & Fixed Portion of the Contract: The sum
of the coefficients shall form the adjustable portion of the
Contract. Fixed portion shall never be less than 35 percent
and the adjustable portion shall never be more than 65
percent of the Engineer’s Estimate. Sum of fixed portion,
“A” and weightages a, b, c, d, ….etc., of the adjustable
portion shall always be equal to one (1). 14/53
 Source of Prices: The prices of elements
subject to Price Adjustment shall be to the
extent possible as given in the Statistical
Bulletins published by Federal Bureau of
Statistics (FBS), Statistical Division
Government of Pakistan. Statutory
notifications and official price from public
sector organizations, where available, may
be used at the option of the Employer. The
source for prices of High Speed Diesel
(HSD) shall be either Statistical Bulletins or
Pakistan State Oil (PSO). However, for a
particular adjustable element, the same
source should be used throughout the 15/53

currency of contract as also stipulated in

Applicability of the Formula
1.Admissible for only contracts having duration of
12 months or more and having contract values of
Rs 30 millions or more.
2.Price adjustment will be paid full for the original
scheduled completion period.
3.No price adjustment will be paid to the contractor
for the time beyond original contract period, if
the delay is on the part of the contractor.
However, if the employer is responsible for the
delay then the contractor will be paid full
compensation for price adjustment.
4.Contractor will not be paid price adjustment for
the items supplied by the employer either free of
cost or at fixed prices.
5.Applicable to all type of contracts except fixed
16/53
price contracts.
6. Elements with cost impact of 5% or more will be
included for adjustment, except POL & Labor,
which will be included irrespective of their cost
impact in contract.

7. Any item on which price adjustment is

admissible as per contract and in a particular
billing month that item is not used, then the
current date price and base date price ratio will
be considered as “one” for the price adjustment
for that particular month.

8. Sometimes the cost indices are not available

timely for current months, then till the
availability of the cost index for current month
the engineer may determine the provisional
17/53
index for the issue of Interim Payment Certificate
Procedure for Application of the Formula
1. The Engineer’s Estimate will be prepared for the
complete project, and the costs of the basic elements, on
which price adjustment is to be paid, are calculated from
the engineer’s estimate. Each cost element is then
divided by the total amount of the engineer’s estimate to
get the co-efficient of the weight-ages.
2. Weight-ages of all the elements are added and subtracted
from “1” to get the Non-Adjustable Portion of the
contract. Adjustable portion should not be more then 65%
and accordingly Non-adjustable part should not be less
then 35%.
3. If the total weight-age of the cost elements including POL
and Labor exceeds 65%, then the elements having lower
percentages other than POL and Labour will be excluded
to keep the total percentage equal to or less than 65%.
4. The billed amount of the Works for each calendar month
will be obtained from the checked bills submitted by the 18/53
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Contractor. In case the billed amount is for more than one
5. The Base Date Prices and the Current Date
Prices shall be determined as per procedure
explained earlier.

6. Similarly the sources of prices are also provided

in the contract.

7. The Price Adjustment in the billed amount will

then be calculated for the month under
consideration in accordance with Formula for
Price Adjustment to get the adjustment factor
“Pn” which is then multiplied by the amount of
bill to get the adjusted billed amount.

8. Except labor and POL, if any other adjustable

item(s) is not used in a particular billing period 19/53

then the ratio of current date price and base date

 ◦ Following is the list of commonly used items
on which price adjustment is admissible:
 Cement
 Steel
 POL
 Labor Unskilled
 Bricks
 Bitumen
 However, any element can be added,
substituted or deleted as deemed appropriate
and then the weight-ages or coefficients would
be decided accordingly.

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◦ The contractor will not be paid price adjustment
for the items supplied by the employer either free
of cost or at fixed prices.
◦ This document is applicable to all types of
contracts including lump sum contracts,
percentage over schedule contracts and items
rate contracts. However fixed price contracts are
excluded.
◦ According to this document the price adjustment
will only be paid in local currency (Pakistani
Rupees). However the contracting parties may
decide by mutual agreement regarding the price
adjustment is some other foreign currency.

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◦ The cost elements, which have cost impact of 5 percent or
more, can only be selected for adjustment. However, HSD
and labor shall be included in the Price Adjustment formula
irrespective of their percentage in a particular project, if
these are applicable for that project.
◦ If any item on which price adjustment is admissible as per
contract and in a particular billing month that item is not
used, then the current date price and base date price ratio
will be considered as “one” for the price adjustment for that
particular month.
◦ Sometimes the cost indices are not available timely for
current months. FIDIC 1999 states that till the availability of
the cost index for current month the engineer may determine
the provisional index for the issue of Interim Payment
Certificate (IPC) or may use the index costs for the previous
month. When the cost index for that particular month is
available, the adjustment will be re-calculated accordingly.

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 Undertake rate analysis of rightly prepared BOQ’s
 Consider all members of a family of escalatable items
 Consider 5% & more weightages as escalatable elements
 POL & labor shall always be considered even below 5%
 Maximum adjustable portion shall not exceed 65% and
fixed portion not less than 35%
 Sum of all weightages plus fixed portion must be unity

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Cost Element Description Weightage Applicable Index
1 2 3 4
(i) Fixed Portion 0.350
(ii) Local Labor PICC
(iii) Cement – in bags PICC
(iv) Reinforcing Steel PICC
(v) High Speed Diesel PICC
(HSD)
(vi) Bricks PICC

(vii) Bitumen PICC

(viii)
Total 1.000

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Employers using this price adjustment provisions may
add or delete any elements as deemed appropriate to
the project.

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Indices for “(ii)” to “(vii)” are taken from FBS. The base
cost indices or prices shall be those applying 28 days
prior to the latest day for submission of bids. Current
indices or prices shall be those applying 28 days prior
to the last day of the billing period.

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Any fluctuation in the indices or prices of materials other
than those given above shall not be subject to
adjustment of the Contract Price .

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Fixed portion shown here is for typical road project,
Employer to determine the weightage of Fixed Portion
considering only those cost elements having cost
impact of five (5) percent or more on his specific
project.

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Pn = A + b Ln + c Mn + d En + ……
Lo Mo Eo

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 Pn is Price Adjustment Factor
A is constant, representing the nonadjustable portion
 b, c, d, etc. are coefficients / weightages representing
portion of each cost element
 Ln, Mn, En, etc. are the current cost indices of cost
elements for month “ n ”
 Lo, Mo, Eo , etc. are base cost indices corresponding to

above cost elements

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 Source of indices shall be those listed in Appendix-C
as approved by Engineer.
 As the basis of Price adjustment, Contractor shall
have submitted the tabulation of Weightages & Source
of Indices if different than Appendix – C.

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 Base cost indices or prices shall be those prevailing
on the day 28 days prior to the latest date of bid
submission.
 Current indices or prices shall be those prevailing on
the day 28 days prior to the last day of the period to
which a particular monthly statement is related.

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 If at any time, current indices are not available,
provisional indices are determined by the Engineer will
be used subject to subsequent adjustments.
 If an element is not used, ratio between base and
current rates should be considered unity

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 Clause 43 GC: Time for Completion – within Schedule
or extended Schedule pursuant to Clause 44 GC.
 Clause 44 GC: Extension of Time for Completion – not
for fault of Contractor.
 Clause 48GC: Taking over Certificate – by the Engineer.

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 Price adjustments admissible even for the extended
completion period.
 If extension due to Contractor's fault, PA will be using
indices before or after the completion, favorable to the
Employer.
 If extension pursuant to Clause 44 (No fault of
Contractor), PA as usual is allowed.

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 The Weightages of each of the cost factors shall be
adjusted at any stage of the project, if it is found
unreasonable, unbalanced or inapplicable in review of
the Engineer.
 Weightages change for Instruction under clause
51(v.o.).
 Such adjustments shall have to be agreed in such v.o.

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 “ PRICE ADJUSTMENT
IN
CONSULTANCY CONTRACT”

BY:
Engr. M. Mazhar-ul Islam
Convener
PEC Act & Bye-laws Committee

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 Applicable to Time Based assignment Contract only.
 Generally increase in cost for services.
 Exclusions:
 Increase in ceiling
 Cost of Additional work
 Subsequent Legislation for other provisions
 Modification of Contract under Clause 2.5 SC
 Payment to be adjusted under Clause 6.2(a) SC.
 Applicable for both Foreign & Local currency adjustments.

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 Option – 1
 Billing rates for each person shall be adjusted in each July.
 First adjustment in July following submission of final
proposal.
 Revision Elements:
 Annual increment
 Increase due to promotion
 Salary revision to Clause 5.3 SC or otherwise

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 Option – 2
 Using the formula:
RI = RIo x II/IIo
Where:
 RI is the adjusted billing rate

 RIo is the billing rate payable

 II is the combined consumer Price Index (CPI) General

for Govt. employees

 IIo is CPI in July of the year Consultant submitted its

proposal

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 To be adjusted every 12 months using formula:
Rf = Rfo x If / Ifo
Where:
 Rf is adjusted remuneration
 Rfo is the remuneration payable
 If is the official salary index in foreign country for the first
month for which adjustment is suppose to have effect
 Ifo is the official salary index for the monthly date of
contract

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THANK YOU

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