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Construction Law/Price escalation based on FIDIC

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Question
Our price adjustment formula (as given in particular conditions of contract) is,
pn= a+ b(LLn/LLo)+ c(FLn/FLo)+  d(LMn/LMo)+ e(FMn/FMo)+ f(FMDIn/FMDIo)
Where a,b,c,d,e are pre defined coefficients which are 0.2, 0.024, 0.056, 0.216, 0.126 and 0.378 respectively.
LL is local labor
FL is foreign labor
LM is local material
FM is foreign material
FMDI is foreign material (other than cast iron pipes)

All the relevant sources for indices are given in the particular conditions.

Please be noted that Local indices are in Sri Lankan rupees (SLR) and Foreign indices are given in Indian Rupee(IR). But the currency of contract is US dollars.

The FIDIC conditions of contract says that "in cases where the currency of index is not the relevant currency of payment (in our case), each index shall be converted into the relevant currency of payment at the selling rate established by the central bank of the country (it is Central bank of Sri lanka as per the definition of FIDIC), of this relevant currency on the above date for which the index is required to be applicable".

Please help me for the calculation. For the easiness, I am giving the following data.

For Base month
     LL is SLR 433.20
     LM is SLR 564.10
     FM is IR 127.7
     FMDI is IR 127.7
     1 USD= 132.04 SLR = 55.9824 IR

For the month "N"
     LL is SLR 469.80
     LM is SLR 583.30
     FM is IR 132.6
     FMDI is IR 132.6
     1 USD= 130.8277 SLR = 61.8688 IR


As per the contract, no price escalation is applicable to foreign labor and hence FLo and FLn can be considered as 1.

Can you show me the calculation method for month "N"?

Answer
Dear Chamin,

The FIDIC Formula
The only thing that is difficult about the formula is the application of the fluctuation in exchange rates.  Should the currency correction be A) Tx0/Txn or B) Txn/Tx0 ?
Stripping out the effects of inflation and considering the effect of fluctuation in currency rates only, with the exchange rate defined as US$1= X Local currency units.  

Scenario 1 Increase in Exchange Rate
Assume that US$1 = 100 local currency units (lcu) on the base date = Tx0
Assume that US$1 = 120 local currency units (lcu) at month n = Txn
Assume an item costs 5,000 lcu on the base date, which equates to 5,000/100 = US$50.  
Using formula A, the Contractor will be paid US$50*100/120 = US$41.67, which will equate to US$41.67*120 = 5000 lcu, so the Contractor will recover his expected costs.  
Using formula B, the Contractor will be paid US$50*120/100 = US$60, which will equate to US$60*120 = 7,200 lcu, which will give the Contractor a windfall gain.  
Thus formula A is more equitable to both parties in this situation.

Scenario 2 Decrease in Exchange Rate
Assume that US$1 = 100 local currency units (lcu) on the base date = Tx0
Assume that US$1 = 80 local currency units (lcu) at month n = Txn
Assume an item costs 5,000 lcu on the base date, which equates to 5,000/100 = US$50.  
Using formula A, the Contractor will be paid US$50*100/80 = US$62.50, which will equate to US$62.50*80 = 5000 lcu, so the Contractor will recover his expected costs.  
Using formula B, the Contractor will be paid US$50*80/100 = US$40, which will equate to US$40*120 = 3,200 lcu, which will create an unexpected loss for the Contractor.  
Thus </b>formula A</b> is more equitable to both parties in this situation.  

I will leave you to calculate the effect of the formula based on the following

pn= a+ b(LLn/LLo)(Tx0/Txn)+ c(FLn/FLo)(Tx0/Txn)+ d(LMn/LMo)(Tx0/Txn)+ e(FMn/FMo)(Tx0/Txn)+ f(FMDIn/FMDIo)(Tx0/Txn)

Where Tx0 is the exchange rate for the relevant index at the base date and Txn is the exchange rate for the relevant index at month n.  

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Peter M. Elliott

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First response to queries regarding extensions of time, variations orders, site instructions and payment using FIDIC and other forms of Conditions of Contract, based on English Law, and derivatives only. Anyone who needs advice about EoT should download and study the SCL Delay & Disruption Protocol www.eotprotocol.com before submitting a question.

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Value . . .
It's unwise to pay too much, but it's unwise to pay too little. When you pay too much you lose a little money, that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing you bought it to do.
The common law of business balance prohibits paying a little and getting a lot. It can't be done. If you deal with the lowest bidder, it's well to add something for the risk you run.
And if you do that, you will have enough to pay for something better.
. . . John Ruskin (1819 - 1900)
"We are too poor to buy something cheap"
.Romanian Proverb 2002
A lean compromise is better than a fat lawsuit. George Herbert (English poet 1593-1633)
I said it in Hebrew, I said it in Dutch,
I said it in German and Greek:
But I wholly forgot (and it vexes me much)
That English is what you speak!" Hunting of the Snark - Lewis Caroll
Match your presentation to the reader!
The joy of food lasts but an hour, of sleep but a day, of a woman, but a month, but the joy of a building lasts a lifetime. Syrian proverb.
Comments and observations leading to improvements in the translation of FIDIC Red & Yellow books into Romanian prior to approval by FIDIC (reference 'Preface to the Romanian edition')

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