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Construction Law/Price Adjustment of FIDIC - Currency Exchange Rates

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Question
Dear Elliott
Iam the RE of Consultant for a Highway Project of Uganda (based on FIDIC – Plant & Design-Build by the Contractor), the currencies of payment to the Contractor are as follows:

i) 30% in local currency i.e. in UGX
ii) 30% in foreign currency of Euros and
iii) 40% in foreign currency of US Dollars

And the date of exchange rate shall be 28 days prior to date of deadline for Bid Submission. Those exchange rates as on that date are; 1 US Dollar = 2019.98 UGX (Z$0) and 1 Euro = 2746.36 UGX (ZE0).

In the Works Contract, the Schedules of Adjustment Data as stipulated in Appendix to Bid (Adjustments for Changes in Cost: FIDIC Clause 13.8) are:

Table 13.8 a – Local Currency
Index Description   Source of Index   Base Value
Fixed   Nonadjustable   
Local Labour (LL0)   Uganda Bureau of Statistics   144
Bitumen (BI0)   Index Mundi, Dubai   73.55 USD
Fuel (FU0)   Uganda Bureau of Statistics   116
Equipment (EQ0)   CEMAC, China   104.2

Table 13.8 b – Foreign Currency
Index Description   Source of Index   Base Value
Fixed   Nonadjustable   
Expatriate Labour (EL0)   CEMAC, China   321
Bitumen (BI0)   Index Mundi, Dubai   73.55 USD
Fuel (FU0)   Uganda Bureau of Statistics   116
Equipment (EQ0)   CEMAC, China   104.2

The formulae for the Price Adjustment as in Contract are:
Local Currency:
Pn = 0.1+0.2×(LLn/LL0)+0.15×(BIn/BI0)+0.35×(FUn/FU0)+0.2×(EQn/EQ0)
Foreign Currency:
Pn = 0.1+0.3×(ELn/EL0)+0.3×(BIn/BI0)+0.15×(FUn/FU0)+0.15×(EQn/EQ0)

CASE  A (Engineer’s View)

The Price Adjustment will be worked out based on the above formulae i.e. 30% in Local currency and 70% in foreign currency (30% in Euro and 40% in USD).

Eg: If the value of work done is 1,000,000 UGX, and the Local Currency Pn = 40% and the Foreign Currency Pn = 30%, the payable amounts of Price Adjustment are:
Local currency – UGX: 30% of 1,000,000 UGX x 40% (Pn) = 120,000 UGX
Foreign currency – Euro: 30% of 1,000,000 UGX x 30% (Pn) = 90,000 UGX / 2746.36 = 32.77 Euro
Foreign currency – USD: 40% of 1,000,000 UGX x 30% (Pn) = 120,000 UGX / 2019.98 = 59.41 USD.

CASE  B (Auditor’s View)

The Price Adjustment has to be worked out same as above; but with currency conversion factors. The exchange rates as on today are; 1 US Dollar = 3000 UGX (Z$n) and 1 Euro = 3200 UGX (ZEn).
The Auditors wants to adopt these formulae for the Price Adjustment :
Local Currency:
Pn = 0.1+0.2×(LLn/LL0)+0.15×(BIn/BI0 x Z$0 / Z$n)+0.35×(FUn/FU0)+0.2×(EQn/EQ0 x Chinese Yuon Conversion Factor (CYCF to UGX) as the currency of bitumen is in USD and the index for equipment is of China.
Foreign Currency:
For USD:
Pn = 0.1 + 0.3 × (ELn/EL0 ) x Chinese Yuon Conversion Factor (CYCF to USD) + 0.3×(BIn/BI0)+0.15×(FUn/FU0) x Z$0 / Z$n +0.15×(EQn/EQ0) x Chinese Yuon Conversion Factor (CYCF to USD) as the indices for expatriate labour and equipment are of China and the index for fuel is of Uganda.
For Euro:
Pn = 0.1 + 0.3 × (ELn/EL0 ) x Chinese Yuon Conversion Factor (CYCF to Euro) + 0.3×(BIn/BI0) x Euro to USD conversion factor + 0.15×(FUn/FU0) x ZE0 / ZEn +0.15×(EQn/EQ0) x Chinese Yuon Conversion Factor (CYCF to Euro) as the indices for expatriate labour and equipment are of China and the index for bitumen is in USD and the index for fuel is of Uganda.

Considering the same illustration as above: If the value of work done is 1,000,000 UGX, and the Local Currency Pn = 35% and the Foreign Currency Pn for Euro = 20% and the Foreign Currency Pn for USD = 25%, the payable amounts of Price Adjustment are:
Local currency – UGX: 30% of 1,000,000 UGX x 35% (Pn) = 105,000 UGX
Foreign currency – Euro: 30% of 1,000,000 UGX x 20% (Pn) = 60,000 UGX / 2746.36 = 21.85 Euro
Foreign currency – USD: 40% of 1,000,000 UGX x 25% (Pn) = 100,000 UGX / 2019.98 = 49.51 USD.
Kindly advise who is correct ?

Thanks in advance

Warm Regards

Answer
Dear Jagadeesh,

My apologies for the delayed response, but this question is not simple.  

The purpose of clause 13.8 is to spread the risk of inflation between the Employer and the Contractor, not to compensate the Contractor fully for any inflationary effects.  It appears that it was assumed at tender stage that 30% of the Contractor's expenses would be in local currency and 70% in foreign currency, or perhaps that was the split in the funding and the funders wanted to split the risk of inflation.  If the index is not in the payment currency, then the index must be adjusted to the payment currency (clause 13.8).    

For a proper application of the proportional formula, there should be only one formula, with as many coefficients and indices as you wish, but preferably no more than 5.  Pn is a non-dimensional ratio, not a percentage so it could be 1.35 or .35 rather than 35%, depending on the relative inflation indices.  The proportional formula is applied to the net IPC in accordance with clause 13.8, before the sum is split into the relevant currencies.  Payment is made in the various currencies in accordance with clause 14.15.  

In short, I am uncertain that either solution is a correct interpretation of the relevant clauses in FIDIC 99.  

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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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