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# Construction Law/Related to Formula for Escalation

Question
Formula for Escalation- Labour component
V1 = 0.85 P K1/100 *(L1-L0)/L0

Where, V1 = Amount of price variation,
P    = Cost of work done during the period,
K1  = Percentage of labour component in the project cost,
L0   = Basic consumer price index,
L1   = Average consumer price index
Formula for material component shall be similar as above with appropriate changes to the material specific.
Q1. Why 0.85 of P is taken.
Q2. In case, while estimating any work contractors profit restricted to 7.5 % instead of 15 %. Is the formula changes to 0.925 0f P.

Dear Kishor Kalita

Thanks for your question. You have not mentioned the type of Contract. If You can provide me with more details about this clause then I may provide good input. However I may add that the factor 0.85 does not relate to profit of the contractor but I understand that this relates to the variable component of the Contract Price and 15% is being considered as fixed component and escalation is not applied to this 0.15 component. If we agree on this understanding then Q 2 has already been explained which means that the factor 0.85 will remain the same and is independent of contractor's profit.

I hope the question is answered. However if there is some confusion then kindly send me the complete clause and I will explain it.

Regards

Abdul Majid Khan

#### 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.