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Construction Law/Price Adjustment of Additional Item

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Question
Dear Sir,
Keeping in view the FIDIC 1992, Engineer of the Project issue the Instructions under Clause 2.5 of the CoC for any additional work item, Contractor submits the cost and time implications accordingly and Employer approves the rates of that additional item as per recommendations of the Engineer.
The contractor started the execution of that additional item, which remain continued up to 10 months’ time. Within 10 months the prices of materials being used in the said item have gone up. What would be the mechanism to cater the said escalation as the Engineer and Employer are of the view that rate analysis of the additional item has been computed on the prevailing market rates, therefore no escalation is admissible.
Kindly clarify, I shall be grateful.

Answer
Dear Zia

Thanks for the question. This is a common question but generally the Engineer does not clarify it while issuing the Variation Order. Additional items are treated in the following three ways as for as adjustment in cost is concerned:

1. The rate analysis is done on current rates which also include provision for adjustment and the Contract Price is no more adjusted for any any increase in cost. This shall preferably be stated in the Variation order (V.O)

2. The rate analysis is approved using prices of materials on the date of the base rate and the variation order is issued stating that adjustment shall be made in accordance with the contract.

3. The rate analysis is approved using current rates but without any provision for future adjustment. In such case the V.O should state the any future adjustment for such work will use base price used in the analysis and shall be effective from the date of V.O for only that item.

I hope the question is answered. Please feel free to ask for any clarifications.

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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