Construction Law/Price Escalation
Dear Sir my question is regarding Price Escalation Formula Pn = A + b Ln/Lo + c Mn/Mo + d En/Eo + ....
For a typical building contract with above formula, kindly guide us on following issues,
i. What value of ratio Ln/Lo or Mn/Mo or En/Eo will be taken in a particular month if the item it represent (eg cement, steel, bitumen etc) is not used.
ii. How does this formula caters for quantity of item used in a particular month (eg cement, steel,bitumen etc).
iii. After adopting this formaula for escalation, is it necessary to call inventory / delivery challans confirming material delivered at site from contractor.
Engr. Roop Chand
Dear Mr. Roop Chand,
Thank you for your question and my brief response is as follows. As you have not mentioned the type of contract nor the jurisdiction, i am responding on the basis of FIDIC IV and applicable law for contracts in Pakistan. You may have to then conclude on the basis of similar approach to your jurisdiction.
i. This is a controversial issue among professionals as per PEC stipulations. The simple answer before going in to details is that contractor has to be compensated for subsequent legislation in the form of laws or by-laws due to which his payments due are reduced. The PEC has clarified recently that this ratio will be 1 if either specified material is not used. This amendment was made in the March 2009 and so all contracts drawn before this date obviously have to be considered additional expense due to this subsequent change in PEC by-laws. On the other hand for contracts beyond March, 2009 has to be borne by the contractor himself as applicable law has priority consideration as per clause 5.1 / 26.1. After incorporation, it is to be later compensated under clause 70.2 depending on the signing date of the contract.
ii. It has no reference to quantum or quantities. In my views, the original FIDIC formula should be used in toto or if PEC wants to include some local modification, then it should prepare its own formula and include it in particular condition of contract part ii. This obviously refers to new contracts yet to be drawn.
iii. No. we have to only check/verify indices as published by statistical Bureau GOP.
There are actually 2 scenarios for contractors year:
If this march 2009 amendment is not considered, it means there is no subsequent legislation and hence no compensation for the effect due to this in the payment issue.
Scenario 2 :
If this march 2009 is included as per PEC instructions, it needs to be compensated back to the contractor under clause 70.2 and presently both scenarios are in practice at the moment.