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Construction Law/Price Adjustment (Escalation)

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QUESTION: Dear Sir,
        Hope you are fine. i am working as QS and facing problem regarding escalation.Bid of our project was approved for civil works in 2007. According to tender documents contractor is entitled for escalation on labor and diesel on the total work done of an IPC.

After 5 years in 2012 Electrical BoQs were revised. An addendum were also included in the revision of Electrical BoQs. All items in addendum were new items and contractor was submitted rate analysis of these items on the prevailing market rates.
  

Revised Electrical BoQs were included as addendum in electrical works in the original BoQs and were approved on May 05, 2012 by the competent authority. In the revised electrical BoQs, the contractor submitted rate analysis on the prevailing market rates with revised electrical BoQs and consultant also verified the same. As the addendum items were based on the prevailing market rates which are not tender rates.

1.the question is can contractor eligible for escalation claim on the addendum items work done ?

2. if contractor eligible for escalation on addendum items work done which base rate applies(base rate at the time of tender 2007 or base rate at the time of approval of addendum 2012)?
Best Regards,
Syed Afzaal Shah.

ANSWER: Dear Syed Afzal shah

Thanks for the question. You have not mentioned the form of Contract and therefore my answer will be based on FIDIC 1987 iv Edition (1992) / PEC documents. Actually there seems to be lot of confusion on this matter. Let me first explain the procedure for a Variation / Change Order(V.O).

The Employer / Consultants request the Contractor for additional work, the Contractor submits rate analysis, the Consultants after discussions / negotiations recommends the prices for the new items and the total amount of Variation Order to the Employer. After approval of the Employer, the Consultants (the Engineer) issue a V.O to the Contractor. Normally the Engineer, takes care of issues like 'Price Adjustments, Time Extension' etc in the V.O. The issues starts when such issues are not resolved in the V.O. Now I will come to your question.

You have yourself mentioned that the V.O was based on the prevailing market rates of 2012 and therefore the price adjustment will take effect from 2012. The principle for price adjustment is that the adjustment is made on the prices used in the tender and this is why the Base Date is fixed as 28 days prior to the date of submission of Tender in order to give the Contractor to collect information about the prevailing market rates of items at the time of tendering. The V.O is also a sort of a small tender but is not subject to competition but at the same time is subject to discussions and negotiations. This is why price adjustment for all V.Os takes effect from the date of issue of that V.O.

Please note that sometimes, for ease of computations of price adjustment, the prices for new items in V.O are calculated back to the time of tender by taking care of the inflation which has taken place during that period. In that case the price adjustment for all the V.Os takes effect from the base date mentioned in the tender.

I hope this answers your questions. You are welcomed for any further inquiry.

Regards

Abdul Majid Khan   

---------- FOLLOW-UP ----------

QUESTION: Thanks dear sir for response,

i still confused about the base rate for calculation for price adjustment for deisal and labor on addendedum items/additional items which wrer approved on 2012 after 5 year awarding the tender.

Answer
Dear Afzal Shah

The base rate for diesel and labor will be the rates applicable in 2012. The source for these rates will be the same as is given in the original Bidding / Contract documents. The source for diesel may be OGRA (Oil and Gas Regulatory Authority and for labor, the base rates can be obtained from the Monthly Bulletin of the Bureau of Statistics issued on monthly basis by the Statistic Division, Government of Pakistan.

I hope the question is answered.

Regards

Abdul Majid Khan  

Construction Law

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Abdul Majid Khan

Expertise

I am interested in questions related to time Extension, Liquidated Damages,variations, price adjustments,payments, disputes and Dispute Board under FIDIC IV, FIDIC 1999 and FIDIC 2006 Harmonized Documents.

Experience

I have been heading the Construction Management Division and Contract Divisions of National Engineering Services Pakistan (PVT) Limited, NESPAK, the largest Consulting Engineering Firm in Pakistan, for more than seven years and two years respectively. I have also worked as "The Engineer" on a number of projects. I have been working in Saudi Arabia for about seven years on a road projects. Additionally I worked as Arbitrator and am member of few Dispute Boards in individual capacity on Asian Development Bank funded projects.

Organizations
Inland and in Middle East. I have worked with National Engineering Services Pakistan (Pvt) Limited (NESPAK)as my Employer for more than 27 years in Pakistan. In Saudi Arabia I worked for Rashid Engineering, Consulting Engineers during 80s. After retirement I provided advisory services to NESPAK on technical and contractual matters to its various divisions and lately I was appointed as Advisor to Managing Director NESPAK on Technical and Contractual matters. Currently I work as Free Lance Contract Specialist on Fidic Form of Contracts.

Education/Credentials
I am a graduate with a B.E (Civil Engineering) degree. My year of graduation is 1970.

Awards and Honors
A few appreciation Letters and Honorariums during my service in NESPAK. I remained member of Administrative Committee and Board of Management of NESPAK. I had been part of the Management Committee in the absence of Managing Director.

Past/Present Clients
Most of the Clients used to be Government Departments, Corporations and Authorities. In Saudi Arabia the Client was Ministry of Communications. As Arbitrator and Dispute Board (DB) member, I provide services to various Government Departments and Contractors.

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