Comparative Study of Price Adjustment Formula and its Implications in Construction Contracts

Abstract

One of the wide ranging problems which construction industry is facing is the fluctuation in prices of construction inputs which is causing most of the projects to be completed at sums much higher than the original contract prices. In the recent past, we have seen significant price escalation occurring not only with the basic construction materials but also with the labor and fuel. This creates uncertainty among all the participants involved in a construction project. To overcome the effect of price fluctuations, certain methods or contract clauses are devised to deal with this uncertainty. The main purpose of the price adjustment clauses is to allow the contractors and clients to enjoy the benefit of increases or decreases in prices. In addition to this, it also encourages competitive bidding. Different methods and techniques are being used for the price adjustment in the construction contracts. The objective of this research study is to have an overview of previously used price adjustment methods and to evaluate in detail, the price adjustment formula being used currently in construction contracts, based on FIDIC. The emphasis remained on the construction contracts being executed in Pakistan. The study was undertaken via a questionnaire based survey. Data collected from 94 construction professionals from different categories of stakeholders located in different cities of Pakistan and Middle-East, was analyzed using SPSS. Results demonstrate that the knowledge among the stakeholders, regarding the phenomenon of price escalation/de-escalation resulting from the fluctuation in prices of construction inputs, is not at all satisfactory. Very lower percentage of respondents of the survey had the experience of dealing with escalation clauses and methods of price adjustment in construction contracts. The price compensation system that is currently in place is limited to very few construction inputs. Loss in profits and project delays were found to be the major effects of the price fluctuation and inflation. As far as the introduction of FIDIC price adjustment formula by PEC is concerned, majority of the stakeholders have shown their agreement and trust over this method as this formula provides equal opportunities and fair grounds to every stakeholder in a construction contract. However, the lack of awareness, practical knowledge and experience of using the subject formula in construction contracts was found among the stakeholders of the

CI. The comparison between previously implied methods for the calculation of adjusted prices and the price adjustment formula is also the part of this study. Based on the analysis of the results, recommendations for the stakeholders have been proposed for the betterment of the construction industry against the adverse effects of the price escalation/de-escalation. The study recommends the electricity rates should be included in the list of items on which escalation is admissible, and the requirement of establishing a comprehensive and reliable price database, with the joint efforts of all the stakeholders. The proposed database should be updated within short intervals. Finally, this study may be useful for clients, consultants, contractors and other stakeholders who desire to improve the price adjustment process in Pakistan.