QUESTION: Dear Mr. Mohsen,
I am grateful, if I receive the answer to the following at the earliest.
Conditions of Contract: FIDIC MDB June 2010
Clause 12.3 Evaluation
According to this clause, "a new rate or price shall be appropriate for an item of work if,
(a) (i) the measured quantity of the item is changed by more than 25% from the quantity of this item in the Bill of Quantities or other schedule,
(ii) this change in quantity multiplied by such specified rate for this item exceeds 0.25% of the Accepted Contract amount,
(iii) this change in quantity directly changes the cost for unit quantity of this item by more than 1%
(iv) this item is not specified in the Contract as a "fixed rate item".
Further it says, "Each new rate or price shall be derived from any relevant rates or prices in the Contract, with reasonable adjustments to take account of the matters described in sub-paragraph (a) and/or (b) as applicable.
Please explain me, "What are the reasonable adjustments"available.
ANSWER: Dear Basil
You have highlighted one of the most troublesome aspect of FIDIC Contracts. This clause has been a source of countless claims particularly in case of FIDIC 1988. I remember having long strenuous arguments about this issue, however in new FIDIC this clause has been considerably improved and a lot of clarity has been added.
Your question is related to “reasonable adjustments” and for that you must read Clause 12 and 13 in conjunction with each other. Clause 13 (Variation and Adjustments) delineates the rights and obligations in relation to variation and what sort of Adjustments that can be applied. Particularly under Clause 13.7 and 13.8 it has been expounded that the Adjustments in the determined rates; can be made to cover any changes in legislation (e.g. change in rate of taxation, duties etc.) and in order to cover the impact of increase or decrease in prices (escalation or de-escalation)
Thus in context of your particular question, it is my opinion that the FIDIC MDB Contract explains the sort of reasonable adjustments under Clause 13.7 and 13.8 and I hope this answers your query.
However, you are more than welcome to get in touch again if need any further clarification. You can also look me up on LinkedIn & Twitter for future reference.
With Kind Regards,
Engr. Mohsen Islam Khan, PMP
---------- FOLLOW-UP ----------
QUESTION: Dear Engr.Mohsen,
I am greatful for your quick response.I studied the following clauses and decided to write back to you for further clarifications.
Clause 13.7 - Adjustments for changes in Legislation
Clause 13.8 - Adjustments for change in Cost
Clause 13.7 - The present case is a major quantity variation in number of existing BOQ items.Our request for New Rates as per clause 12.3 entitled Evaluations, has been accepted by the Employer. Now our present task is to present New Rates with acceptable justifications.
Because of these Variations, the Contractor is entitled for Contract Time Extension with prolonging costs, which will be a subsequent task.
Clause 13.7 is an event which may emerge in future and therefore it is not possible to predict how it will affect the work in future.Therefore I think the Contractor can not make use of this clause for his benefit.
Clause 13.8 - This is on payment of Price Fluctuations. The Contractor is already entitled for this for all the BOQ rates, which we are trying now to get New Rates.
But such items with New Rates will not be qualified for Price Fluctuations, as per a clause in Particular Conditions of Contract.
If the Contractor is now getting say, 30% for Price Escalation for the original BOQ items, in order to gain benefit, New rates should be invariably higher than 30% of their corresponding original rates.
As I understand, the only possible way of adjusting the present rate is, building up new rates using current market prices for which I think it is not possible to add a mark up for future Price Escalations, since we are not certain, what will be future Price Fluctuations.
Therefore my personal view is, if the original rates are either closer to present market prices, to forget about trying New Rates and to be satisfy with the present Original BOQ Rates + entitled Price Escalations.
Kindly advice me further.
I am terribly sorry for the delayed response I have been awfully busy during last couple of days. Referring back to your follow up question; as you have also mentioned that Escalation is not allowed on the new rates of an item which is understandable because new rates are generally determined on the basis of "Market Rates"+"Overheads"+"Profit"+"Taxes (if applicable)"+"Factoring CPI (Consumer Price Index)".
In case of the aforementioned formula the CPI becomes the reasonable adjustment and covers the escalation. Although you cannot accurately pinpoint the exact escalation expected over a certain duration of time but still CPI gives you a crude idea to incorporate escalation factor into the rates.
However, certain experts discourage the incorporation of CPI in rates and argue that it unjustly favors the contractor as the inflated rate is applied right from the start of that activity when there is no increase in actual. Incorporating a weighted average CPI factor can take care of this objection but still there is no ideal way to precisely incorporate inflation / escalation into the rates.
Returning to the Clause you referred you may have noted that the "reasonable adjustment" is a non-capitalized term and can be reasonably and justly interpreted by the parties to the contract.
As you said in the end; when escalation is permissible in the contract then it is advantageous to the both parties to avoid using new rate and just apply the old rates along with escalation. This is not only in line with the spirit of the contract but also reduces chances of disputes in future.
I hope this answers your question; I apologize again for not able to reply you earlier. I hope I have not wasted too much of your time.
Take care & Good Day.
Mohsen I Khan.