Construction Law/FIDIC 13.8

Advertisement


Question
QUESTION: For Price Adjustment as per Clause 13.8 of GCC,In cases where the “currency of index” is not the relevant currency of payment, each index shall be converted into the relevant currency of payment at the selling rate,established by the central bank of the Country, of this relevant currency on the above
date for which the index is required to be applicable.

The Contractor had quoted price indices for Plant and equipment from Ukraine whereas, the currency of payment is USD ( Dollars). If, the base index of Plant and Equipment is 100 and current index is 110, how the index is to be converted into relevant currency of payment when the conversion ratio of UAH ( Ukraine currency) to Dollar of base date was 7.954 UAH= one Dollar and conversion ratio of UAH ( Ukraine currency) to Dollar on current rate was 12.35 UAH= one Dollar
procedure for calculation of conversion of index into currency of payment may please be clarified.

Thanks

ANSWER: Dear D.K.VERMA,


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.  

So each term in the indexation formula is adjusted in accordance with the above discussion.  



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

QUESTION: Mr. Peter M. Elliott

Thank you very much for the reply. Although, you have explained about two options but the decision has to be taken by the Engineer strictly as per provision of Clause 13.8 of General Conditions of Contract ( FIDIC MBD 2010)

For certification of Price Adjustment as per Clause 13.8 of GCC, In cases where the “currency of index” is not the relevant currency of payment, each index shall be converted into the relevant currency of payment at the selling rate,established by the central bank of the Country, of this relevant currency on the above date for which the index is required to be applicable.

The Contractor had quoted price indices for Plant and equipment from Ukraine whose currency is UAH whereas, the currency of payment is USD          ( Dollars). If, the base index of Plant and Equipment in Ukraine currency is 100 and current index in Ukraine currency is 110 and for certifying the price adjustment, the base indices are to be converted into the currency of payment i.e. in US dollar. You are requested to please clarify as to how, the base indices and current indices in Ukraine currency are to be converted into relevant currency of payment i.e. in US dollar when the conversion ratio of UAH ( Ukraine currency) to Dollar of base date was 7.954 UAH= one Dollar and conversion ratio of UAH ( Ukraine currency) to Dollar on current rate was 12.35 UAH= one Dollar
I would request you to please clarify about the procedure for the conversion of base index and current index into the currency of payment as per guidelines of FIDIC without using any discretionary option of considering any loss or gain to the Contractor but strictly as per provision of Clause 13.8 of General Conditions of Contract.

Thanks

D.K.VERMA

Answer
Dear D.K.VERMA,

From my previous answer, I calculate that the Plant and Equipment value should be varied by the following factor
(Base exchange rate)/(Current exchange rate)*(Base Index)/(Current index)
to make a proper adjustment for the variation in index and exchange rate.

Construction Law

All Answers


Answers by Expert:


Ask Experts

Volunteer


Peter M. Elliott

Expertise

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.

Experience

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')

Organizations
Institution of Civil Engineers, Association of Chartered and Certified Accountants, Society of Construction Law, Dispute Resolution Board Foundation

Education/Credentials
B Sc(Hons) in Civil Engineering

©2016 About.com. All rights reserved.