Construction Law/Escalation Formulae


Dear Sir Salam

Thanking you for being helpful in the past.
Once again I need your prompt expert opinion and guidance for the amicable resolution of the matter stated below:-

We have recently processed the contractor claim of escalation in accordance with the criteria and formulae defined in GCOC Part-1 (FIDIC) vide clause-13.8, which has been returned unapproved with the observation stated below in detail:-

The escalation Payment Certificate was processed as per the given formulae:-
Price Adjustment Under Clause 70 of "COC-Part-1, Appendix-C To Bid" Formula As Given Below:-
Pn =a+b (Ln/Lo) + c (Bn/Bo) + d (Sn/So) +e (Dn/Do)

“a” was the fixed coefficient i.e 0.60, stated in the relevant table of adjustment data, representing the non-adjustable portion in contractual payments;

“b”, “c”, “d”, … were coefficients representing the estimated proportion of each
cost element related to the execution of the Works, as stated in the relevant
table of adjustment data; against Unskilled Labor = 0.1, Bitumen = 0.1, Billet Steel= 0.1 and HSD=0.1

At the initial stages during the first month contractor started construction execution at site and started the earth work related activities i.e Removal of Tree stumps, C&G & NGC and work done amount for the month Feb-2013 as per approved check requests record was Rs. 431998/-.
We then as per above stated formulae calculated the escalation which was precisely estimated to an amount of Rs. 4038/- for the month Feb-2013.

The client returned the EPC with the observation that “ as the contractor has just worked with earth work related activities thus in evaluation of escalation we shall ignore cost factor of “Steel & Bitumen and their factor shall not be entertained” and just “ Labour & HSD” will stand valid for escalation.” It means that the cost factor against the bitumen & Steel will remain invariable i.e 0.1, whereas the cost factor against the labor & HSD will be evaluated with regards to the said coefficient by addition and division of new rate by old rate and multiplying with the work done amount will stand valid amount for escalation.”

I tried to define them that the fidic doesn’t mean this but they asked me for the valid justifications under the provision of contract conditions/FIDIC which compelled me to consult you for an expert opinion.
You early response in this regard will enable me to satisfy the client at the earliest accordingly.
Ali Iqtidar Dara

Dear Iqtidar,

The Client has returned IPC on the basis of PEC Guide line for Price Adjustment.In fact, there is a lacuna in the PEC document for Price Adjustment.Now coming to solution,Clause 13.8 is very much clear and does not put any bar for ignoring elements for which there is no activity under execution during the specific   time period n, ---In 2nd para of this clause,it is expressly stated that full compensation for any rise or fall in Costs is not covered by the provisions of this  or other clauses,meaning thereby that compensation depends upon to the extent specified in the table of Adjustment data.Under para -7,  current cost indices have been given for period n, expressed in relevant currency of payment,each of which is applicable to the relevant tabulated cost element,irrespective  whether its relevant activity is physically executed or not,that is why in the last para,it is mentioned that weightings can be adjusted by the Engineer ,if there is huge variation and the original weightings   become appropriate. All this means that all elements will be considered in each month or for period n and it will not be seen which activities have been physically executed.

Please not that the end result will be remain the same and each component will get adjustment up to the limit defined in shape of weighting for that element.It is also important that PEC guideline will not be bindings for this MDB FIDIC version.However,if it has been expressly  mentioned in Particular applications/Contract Data,then the Client stance is OK.Nonetheless,If Client will still insist, Either Party may refer the matter to DB. Hopefully,after Eid,I,m going to request PEC to amend the documents of Price Adjustment which has some omissions.


Engr.Arshad Mahmood  

Construction Law

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Arshad Mahmood


I may answer to the questions relating to FIDIC 4th as well as FIDIC 2010 MDB Harmonized version,price adjustment ,Variations,Eot and Cost claims,EPC Contract,Bidding Document,consultancy Contracts,certification,Standard Forms, Dispute resolution; and others pertaining to Contract implementation.


Contract management and Contract Administration, using FIDIC Conditions of 4th Addition as well as Fidic 1999 Red, Yellow and Silver Books including MDB Harmonized Edition 2010. Particularly in the area of Procurement of Contracts, Certification,Price Adjustment, variations,disputes management, EoT and Cost Claims; and other contractual issues arises from time to time during currecy of the Contracts.

Member -Pakistan Engineering Council Member -Pakistan Engineering Congress Member -FIDIC Organisation

Joint Venture and Consortium Agreements for Pakistan Engineering Council,Pakistan

BSc Civil Engineering; Basic Management course; Hydro power Projects; and various other on Job Trainings

Awards and Honors
Commendation Certificate for the excellent management qualities and dedication at Ghazi Barotha Hydropower Project; and Certificate of Excellent work performed during Survey Camp.

Past/Present Clients
Water and Power Development Authority (WAPDA),Associate Consulting Engineer(ACE) and National Engineering services Pakistan(Pvt.) Limited (NESPAK)

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