STD Procedure and Formula For Price Adjustment
STD Procedure and Formula For Price Adjustment
STD Procedure and Formula For Price Adjustment
AND
(First Edition)
March, 2009
ISLAMABAD
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Standard Procedure and Formula for Price Adjustment
ACKNOWLEDGMENT
Pakistan Engineering Council extends deep appreciations and acknowledges the tremendous
contribution in developing and finalizing this document by the following members of the
Pakistan Engineering Council (PEC):
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Standard Procedure and Formula for Price Adjustment
PREFACE
Pakistan Engineering Council the Statutory Regulatory body entrusted to regulate the
engineering profession of Pakistan has undertaken among others, the standardization of
"Country specific" documents to regulate and streamline the hiring of engineering
consultancy services and procurement of works. Standard Procedure and Formula for Price
Adjustment is one such document prepared by a team of experts comprising Employers,
Constructors and Consultants in line with the instruction of Planning Commission in 1996. It
is expected that use of this document will provide a reasonable basis for calculating price
adjustment for construction contracts.
Pakistan Engineering Council wishes to place on record its deep appreciation for the
tremendous work done by the Standards and Quality Committee, PEC and Gaya Construction
Company, Karachi, for drafting this document.
Various Engineering Organizations and Departments are requested to use this document for
calculating price adjustment in contracts. Any suggestions to improve this document are
welcome which may please be addressed to:
Registrar
Pakistan Engineering Council
Ataturk Avenue (East)
Sector G-5/2
Islamabad
Tel # 92-51-2276225
Fax # 92-51-2276224
E-mail: [email protected]
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Standard Procedure and Formula for Price Adjustment
INSTRUCTIONS TO USERS
Background:
The provisions of Price Adjustment on account of increase or decrease in costs of goods and
services in construction contracts are practiced world over to have more realistic competitive
bids and execution of contracts on equitable and just 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.
In Pakistan, Finance Division has given the procedure and formula for calculating Price
Adjustment through Office Memorandums (OM’s), Pak-PWD periodically prepared graphs
for escalation for typical Civil, Mechanical and Electrical projects for compensation to the
contractors. Similarly in 1996, Government of Pakistan (GoP) also issued a consolidated
formula to simplify computation of Price Adjustment. Internationally reputed consultants
continued to use provisions of FIDIC. However, keeping in view all the methods and
practices, PEC prepared the document - “Standard Procedure and Formula for Price
Adjustment”, primarily on the basis of rate analysis of various elements in a contract. This
document when debated, felt the necessity to discuss the issue with the stakeholders
involving constructors, consultants, GoP officials and financial experts. Accordingly, a two
days National Workshop was arranged in PEC HQs on March 30 & 31, 2000 where the basic
criteria for adopting the formula method in line with FIDIC was decided. The 1st Edition of
this document was thus based on the recommendations of the said workshop. Again, two one-
day National Workshops were arranged in PEC HQ, Islamabad on June 30 and
August 9, 2008, wherein the document was debated keeping in view the abrupt price hike in
the prices of construction inputs, among others. This document (1st Edition, Revision 1) is
based on the recommendations of the latter workshop.
Objectives:
It is not in the best interest of the Employer to ask tenderers to quote firm prices with no
provision of adjustments, especially for long-term contracts. In bidding documents having
provisions for price adjustment, the Employer is expected to receive more competitive offers
from reputable parties and will have to meet the net variations in cost as may actually occur.
This document is intended to make reasonable price adjustment in the billed amount, which
by virtue of its being restricted to listed adjustable elements, is an approximation. The
objectives of this document are to:
(a) Make price adjustment (as a reasonable compensation against variation in prices of
the selected materials and inputs) as close as possible to the actual;
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Standard Procedure and Formula for Price Adjustment
How to Use:
1. The user of this document is not to change any provision hereof unless otherwise
stated in these Instructions.
2. No method, other than given in this document, is acceptable to compute the price
adjustment.
3. This Procedure is to assist the users for the preparation of provisions for price
adjustment in their bidding/contract documents.
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Standard Procedure and Formula for Price Adjustment
TABLE OF CONTENTS
PART-1: PROCEDURE 1
A: APPLICABILITY 1
B: PARAMETERS 2
C: PROCEDURE 4
PART-2: FORMULA 5
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Standard Procedure and Formula for Price Adjustment
PART-1: PROCEDURE
A. APPLICABILITY
2. The Price Adjustment shall be applicable only for the contracts having
contract price exceeding financial limit of PEC Contractors Registration
Category C-5 as amended from time to time. Contracts having value equal to
or less than this limit will be considered as fixed price contracts.
4. In the event the completion of contract exceeds the original scheduled period:
(i) In case of default on the part of the contractor causing delay in original
scheduled completion, the rate of Price Adjustment will be frozen at
the original scheduled date of completion; however Price Adjustment
will be applicable till actual completion. While computing Price
Adjustment beyond the scheduled completion period, in the event the
rate is reduced, then that reduced rate will be applied.
(ii) The Price Adjustment will be payable in full for the extended period if
the contractor has been granted an extension of time for no fault on the
part of the contractor, duly approved by the Employer.
5. Unless specifically stated otherwise in the contract, the basis for compensation
will be only those elements, which are specifically listed as specified items in
the tender documents. This list will specify the elements for Civil, Electrical,
Mechanical, Sanitary, HVAC, etc., separately.
6. Formula for Price Adjustment provided herein will be applicable for all the
contracts such as civil, electrical, mechanical, etc.
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Standard Procedure and Formula for Price Adjustment
Users of the formula may add, substitute or delete any element as deemed
appropriate. They would then decide on the weightages or coefficients for the
elements.
8. 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 exgratia or escalation cover is provided by the Government
through an Executive Order or Statutory Regulatory Order (SRO).
10. This document will be applicable only for Price Adjustment in local currency
(Pak. Rs.). Price Adjustment in foreign currency is not in purview of this
document which, if applicable, is to be finalized with mutual agreement
among the parties prior to the award of Contract.
B. PARAMETERS
Each of the cost elements, having cost impact of five (05) percent or higher
can be selected for adjustment. Cost elements of HSD and labour shall be
included in the Price Adjustment formula irrespective of their percentage
determined for a particular project, if these are applicable for that project.
(a) Base Date Price alone of an element based on market rate shall be
considered excluding cost of construction/ installation, overheads and
profit.
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Standard Procedure and Formula for Price Adjustment
are used. In such a case, respective base prices of all three types of
steel are to be considered and added up to come out with the single
steel cost component. Similar case may be for different types of
cement used, etc.
(e) Each cost element determined as above, shall be divided by the total
amount of Engineer’s Estimate to determine various weightages.
(f) It is clarified that while computing Price Adjustment, base and current
prices of the representative elements have to be used in the same way
as they are mentioned in the PEC bidding documents. For example
Grade-40 half inch dia Steel is the representative cost element for all
types of steel; similarly un-skilled labour is the representative cost
element for all types of labour etc.
(i) First the weightages of all the cost elements having value of 5 percent
or more (HSD and Labour to be included irrespective of their
weightages) to be added up to see whether the total is 65 percent or
less. In that case the total is to be subtracted from one to determine the
weightage of the fixed portion,“A”
(ii) In case total weightage of the cost elements including HSD and labour
exceeds 65 percent, the element(s) having lowest weightage(s) other
than HSD and labour, shall be excluded in considering the adjustable
costs elements.
(iii) 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.
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 tender.
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
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Standard Procedure and Formula for Price Adjustment
4. Source of Prices
C. 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.
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.
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Standard Procedure and Formula for Price Adjustment
PART-2: FORMULA
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:
Pn = A + b Ln + c Mn + d En +................
Lo Mo Eo
where,
“Pn” is the Price Adjustment factor for the work carried out in the period “n”.
“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..
The base date and Current date prices of the specified elements shall be obtained from
the sources specified in the contract.
The specific elements for highway and bridge construction would typically be:
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Standard Procedure and Formula for Price Adjustment
Similarly, the specified elements for building construction would typically be:
Similarly, major specified elements for other types of projects can be specified in the
contract in addition to or instead of the specified elements as enumerated above.
4. Co-efficient or Weightages
The co-efficient for each specified element shall be calculated and given in the
bidding/tender documents. The co-efficient for each specified adjustable element shall
be determined by the user proportionate to its ratio in the total amount of the
Engineer’s Estimate, in accordance with the procedure B-1 given under Part 1. The
sum of these co-efficients shall form the adjustable portion of the Contract, which
shall not exceed 0.65.
6. Source of Price
Source of Base Date and Current Date Prices shall be as stipulated at item B-4 under
Part 1. If any other source is used, it must be clearly stated in the tender documents
before issuing the tender documents.
If the resulting Price Adjustment Factor is positive (+ve), the price should be added to
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Standard Procedure and Formula for Price Adjustment
the contractor’s payable amount. If the result is negative (-ve), the price should be
subtracted from the payable amount.
The executed quantities of the elements subject to Price Adjustment can be obtained
from the actual measurement or from certified invoice of the contractor or any other
mode agreed between the parties which shall be stipulated in the contract.
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