Cost escalation in Construction Variations

 

1) if you are you eligible for Escalation, if the contract says ‘yes’ then the method should also be mentioned in it. If not by way of a formula atleast it will state something regarding it.

 

2) Is there any point in your contract stating that the contract is back to back, i.e., if only client pays then the GC pays? If that is the case you request your GC to provide the formula that is mentioned in his contract with client for arriving at escalation. So that there will be uniformity.

3) As a last recourse Escalation can be arrived at as follows:

Step 1: arriving percentage of components

Suppose you have the following components involved in your work : Labour, Material, Plant & Machinery.

Now, based on the rate analysis of the rate quoted at the time of Tender workout the cost involvement of each component.

Based on the scope of Work try to estimate costwise the % of each component:

Say your Project cost is 100. Removing profits and Overhead component say 15%, the cost price of work components is 85.

Say by your total estimate with your tender rates you obtained the following percentages Labour cost =10%, Fuel Cost = 10% (fuel cost is important in India), Material Cost = 60%, P&M cost=20% (total making 100%); ……..(1)

now you can safely regard that for a given amount of work during a month (period) the above arrived percentages of cost will give you the approximate cost involvement of each component.

By way of illustration suppose work done during july 2010 is Rs. 200, labour component cost will be 0.85x200x10%.

for specific materials such as M1 (say, Steel), M2 (say, Stainless Steel ) and M3 (for materials other than steel and stainless steel).

Assess the quantity of steel consumed during the month and then calculate the cost using the basic rate quoted during tender for steel, say cost is Rs. 20

The cost percent of steel during the month is S = 20/200=10%,

Following the same lines calculate for Stainless steel, say SS = 10%, then the percentage contribution of other materials would be 60-10-10 = 40% from (1) since total material component percent is 60%.

Now 0.85x 200x60% of work done will be material component, but instead of using 60% directly adopt individual % , as explained above, for each material you want to claim and deduct the same from Total material % to obtain other material percent.

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Step 2: Escalation formula:

Escalation amount = [100%-B]xWx ∑ [(Ai-Aoi)/Aoi]xPi,

Pi is the cost percentage (as derived above) of component use the same % every month for all (labor, fuel, P&M ) except for materials. For materials Pi should be calculated each month based on consumption.

B=Percentage of Overheads and profits, 15% in the above case

W= work done during the month

Ai is the index of component 28 days prior to the billing month, alternately, if you go by rates Ai will be average rate calculated based on the invoices in First in First Out (FIFO) order. Whether you go by rates or index adhere to the same in Ao and Ai

Ao= Index/ Rate 28days prior to the submission date of Tender;

A is the component for Escalation, say, Labour, steel, other materials, Plant & Machinery etc.

for index use national index where available or a standard manufacturers rates (whose source approval is available with you and whose material you are using).

Pi is the percentage of that component costwise (as explained above, except for materials other components can be arrived based on total estimate workout, however, It all depends on how sensitive the basic rates are in that country and how they affect your price - the choice should be made judiciously)