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BE-4603 Post Contract Management

Price Fluctuations

1. ICTAD SBD-2 Formula for Price Fluctuations


In general, construction projects usually are carried out over a quite lengthy period ranging from several months to several years. Therefore, there is a strong probability that the cost of labor and materials will rise and fall periodically, to a greater or lesser extent, during the life of the project. Various parties try to cope with this risk in terms of mitigation, incorporation or transfer depending on their attitude towards the risk and their capability to manage it. Therefore there should be provision for price fluctuation for construction contract and proper, accurate and speedy method to recover the actual fluctuation. ICTAD formula method is the most popular and widely used method in Sri Lankan construction industry due to its standard, speed and high availability of data. Price indices are used to calculate the increased or decreased costs of construction under a fluctuation type contract. There are two separate formulas for contracts between Rs.5 million Rs.500 million and contracts not exceeding Rs.5 million. The following formula shall be applicable for adjustments for changes in local costs.

Where; Value of work done: : Price adjustment for the period : Valuation of work done during the period concerned : Value of non-adjustable element : Percentage cost contribution of input : Current index for input , published by ICTAD : Base index for input , published by ICTAD The total price adjustment for the period is the final output of the formula and the calculation can be carried out for the valuation of work done. Therefore the non-adjustable items can be clearly listed out and it can be included in the value of non-adjustable portion in the formula and deducted from the valuation of work done. The difference between the current cost index ( ) and base cost index ( ) The Fluctuation index:

is divided by the base cost index to calculate the total price adjustment. These indices shall be the monthly indices published by ICTAD for different inputs. The current index in particular input shall be the index published by ICTAD for that input for the calendar month, one month after the previous valuation was done. 0.966 is a fixed coefficient of allowance for Goods and Services Tax. Above formula can be used for contacts not exceeding 5 million.
Department of Building Economics 1

BE-4603 Post Contract Management

Price Fluctuations

2. FIDIC 1999 Formula for Price Fluctuations


The Price Adjustment on account of increase or decrease in costs of goods, labour and services in construction contracts are practiced internationally with the use of FIDIC 1999 formulae for price adjustment in order to execution of contracts on equitable and economically reasonable manner. Prices of goods and labour are highly variable due to fluctuations in the currency market. Construction experts, therefore, thought it prudent to compute the cost of contracts on present price, keeping provisions of Price Adjustment for probable fluctuations. The FIDIC 1999 formula, introduced for that purpose is mentioned below in its generalized form.

Where: The adjustment multiplier to be applied to the estimated contract value in the relevant currency of the work carried out in period n (Period n being a month unless otherwise stated in the Appendix to tender) Fixed coefficient, representing the non adjustable portion in contractual payments which stated in the relevant table of adjustment data Coefficients representing the estimated portion of each cost element related to the execution of the works as stated in the relevant table of adjustment data Current cost indices or reference prices for period n expressed in relevant currency or payment each of which is applicable to the relevant tabulated cost element on the date 49 days prior to the last day of the period Base cost indices or reference prices expressed in the relevant currency of payment each of which is applicable to the relevant tabulated cost elements on the base date

The user shall determine the proportions of ,

by appropriate rate analysis at the time of

preparation of their bidding/tender documents. If 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
Department of Building Economics

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BE-4603 Post Contract Management

Price Fluctuations

3. Major Differences between ICTAD SBD-2 and FIDIC 1999 Formulas for Price Fluctuations
ICTAD SBD-2 Answer of the formula Output of the formula (F) represents price Output of the formula (Pn) is an adjustment adjustment for the period concerned only. multiplier to be applied to the estimated contract Estimated contract value (excluding the value in the relevant currency of the work carried adjustment for price escalations) shall be added to out in the period n. the bill separately. Multiplier of the product of coefficients and indices Valuation of work done for the period (excluding Estimated contract value for the period is used the value of non adjustable elements i.e: V-Vna) is as the multiplier of the product of coefficients and considered as the multiplier indices Non adjustable elements Value of non adjustable elements for the period A fixed coefficient (a) as stated in the relevant concerned (day works and other works done table of adjustment data is added in formula to under current prices) is deducted from total value represent the non-adjustable portion in contractual of work done for the period (V-Vna). This amount payments. This coefficient for non adjustable of non adjustable elements changes from one elements does not change during the course of month to another. the Contract unless otherwise changed under last paragraph of sub-clause 13.8 Clearly listed out the non adjustable elements 3rd paragraph of sub-clause 13.8 mentions that which shall be included in the value of non No adjustment is to be applied to work valued on adjustable portion in the formula under section (c) the basis of Cost or current prices. Not clear to of sub-clause 13.7 which exact items this provision is intended. Profit and overhead In theory, no adjustment for the profit and There is no in built coefficient to disallow the overhead of the Contractor shall be given under Contractor from gaining price adjustments for his this provision. Coefficient of 0.966 is built into P&OH. the formula in order to address this issue. 15% P&OH has been considered when developing the formula.
Department of Building Economics 3

FIDIC 1999

BE-4603 Post Contract Management

Price Fluctuations

ICTAD SBD-2 Price Indices

FIDIC 1999

Normally, monthly indices published in the The cost indices or reference prices stated in ICTAD Bulletin of Construction Statistics are the table of adjustment data shall be used. If used. If there are doubts on the sources of indices, their source is in doubt, it shall be determined by no provision is given in SBD 2 price fluctuation the Engineer. for the Engineer to determine the source. No provision is allowed to state any provisional FIDIC 1999 state that, until current cost index is index if the required index is not published available the engineer shall determine a

provisional index for the issue of IPCs. When a current cost index is available, the adjustment shall be recalculated accordingly. Source and title/definition should not be stated as When providing the indices for each index, the there is no such requirement source and title shall be stated in each table.

The current index of a particular input shall be the The current cost index is applicable to the relevant index published by the ICTAD for the one month tabulated cost element on the date 49 days prior after the previous valuation done is applicable. to the last day of the period (to which the particular Payment Certificate relates). Price adjustments after the due date of completion If the Contractor fails to complete the Works If the contractor fails to complete the work within within the Time for Completion, adjustment of the Time for Completion prescribed under the prices thereafter shall be made using either (i) Sub-clause 8.2 [Time for Completion] and Subeach index or price applicable on the date 49 days clause 8.4 [Extension of Time for Completion] prior to the expiry of the Time for Completion of price adjustment for work perform after the due the Works, or (ii) the current index or price: date of the completion using these current indices whichever is more favourable to the Employer. prevailed of the due date of completion.

In built allowance for G.S.T. (Goods and Services Tax) There is a fixed coefficient of 0.966 as an No allowance for Goods and Service Tax. allowance for Goods and Services Tax Currency of Payment Conversion of indices due to currency changes are Necessary to convert indices from the currency of not discussed index" to the "currency of payment" at the selling rate if these currencies are not the same
Department of Building Economics 4

BE-4603 Post Contract Management

Price Fluctuations

4. Applicability of FIDIC 1999 Formula to the Sri Lankan Context

Department of Building Economics