Construction Law/Price Adjustemnt
Salam Aleykum dear Abdul Majid Khan,
We have a construction contract in Azerbaijan with FIDIC 2010. The project is financing through JICA ODA loans( in USD). The contract payment currency and BOQ items are in USD. We are getting paid in USD. In the tender period as well as in the Contract Table A (local currency) was not applicable. Only Table B is applicable in accordance to contract. For information please note that two times in Azerbaijan was devaluation.
When we prepare our bid offer 1 USD was 0.78 AZN (local currency of Azerbaijan). When we receive advance payment 1 USD was 1.05 AZN and now 1 USD approximately equal to 1.61 AZN. Due to devaluation price for construction materials in local market is also increased for 100-120%
- Through the Engineer’s request, we’ve prepared a price adjustment table according to FIDIC 13.8 as per formula below;
Pn = a + bLn/Lo + cMn/Mo; Whereas, a, b, c (0.25,0.25,0.50) values are in our Table B. Foreign Currency, and source of index for both labor and material are based on The State Statistical Committee of the Republic of Azerbaijan.
- However Engineer request us to revise the table by applying the exchange rate between US$ and AZN (Azerbaijan currency) according to the paragraph;
‘’In cases where the “currency of index” (stated in the table) is not the relevant currency of payment, each index shall be converted into the relevant currency of payment …’’
Therefore the Engineer wants to reflect devaluation to contractor and request a payback from us about %28 of our IPC amount payed previously.
Our opinion is that the purpose of this spec 13.8 is spread the risk of inflation between the Employer and the Contractor; adjustment for only inflation, as specified in the formula, with no adjustment for devaluation, so exchange rates should not be applied to this formula. The Employer has taken the risk of currency fluctuations, not The Contractor.
We kindly ask your interpretation dear Mr Abdul Majid Khan.
Thank you in advance and best regards,
Wa' alaikumussalam. Thanks for your question. On the face of it, the demand of the Consultants to convert the indices to the currency of payment seems logical and in accordance with the provisions of the Sub Clause 13.8. However if you can provide me with some more specific data and that how your point of view is supported by the Conditions of Contract, then I will be in a better position to answer.
Abdul Majid Khan