STANDARD PROCEDURE AND FORMULA FOR PRICE ADJUSTMENT

(First Edition)

March, 2

Standard Procedure and Formula for Price Adjustment

PA"ISTAN EN#INEERIN# COUNCIL ISLAMA$AD

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Standard Procedure and Formula for Price Adjustment

AC"NO%LED#MENT

Pakistan Engineering Council extends deep appreciations and acknowledges the tremendous contribution in developing and finalizing this document by the following members of the Pakistan Engineering Council (PEC):
! %! (! +! .! /! 0! 1! 3! 4! Engr! "! "azhar#ul $slam (CEO, Techno Legal Consultants, Lahore) Engr &hehryar 'han (Joint Technolog Ad!iser, "inistr of Science # Technolog ) Engr " &hahid )afi* (Chairman, APCA, $slama%ad) Engr &ohail ,hmad 'hawa-a (&irector (Sur!eillance), "EPCO,'AP&A, Lahore) Engr "ahmood ,hmad &ulehri ((ead, Contract &i!ision, )ESPA*, Lahore) Engr ,rif 'asam ((onorar Secretar , ACEP, *arachi) Engr ,yaz "irza (&e+ut ,eneral manager, *ESC, *arachi) Engr! &hamshair 2ad 'han (Chief Engineer, 'AP&A, *arachi) Engr! E-az , ! 'han (Partner, )&C, Lahore) Engr 5afseer ,hmad 'han (&irector (Electrical), Pa-istan Standards # .ualit Control Authorit (PS.CA), *arachi) Engr "ushta* "ahmood (Senior Ad!iser, E//A, $slama%ad) Convenor "ember "ember "ember "ember "ember "ember Expert Expert Expert

Expert

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Standard Procedure and Formula for Price Adjustment

PREFACE
Pakistan Engineering Council the &tatutory )egulatory body entrusted to regulate the engineering profession of Pakistan has undertaken among others6 the standardization of 7Country specific7 documents to regulate and streamline the hiring of engineering consultancy services and procurement of works! &tandard Procedure and 8ormula for Price ,d-ustment is one such document prepared by a team of experts comprising Employers6 Constructors and Consultants in line with the instruction of Planning Commission in 33/! $t is expected that use of this document will provide a reasonable basis for calculating price ad-ustment for construction contracts! 5he following documents have been referred to in preparation of this document: 8$2$C Conditions of Contract # 333 "inistry of 9ousing and :orks6 ;overnment of Pakistan # Proposal for Escalation6 33/ <!"! =o!8 ((3)#)# %>0. dated (4th &eptember 30.! Pakistan Engineering Council wishes to place on record its deep appreciation for the tremendous work done by the &tandards and ?uality Committee6 PEC and ;aya Construction Company6 'arachi6 for drafting this document! @arious Engineering <rganizations and 2epartments are re*uested to use this document for calculating price ad-ustment in contracts! ,ny suggestions to improve this document are welcome which may please be addressed to: )egistrar Pakistan Engineering Council ,taturk ,venue (East) &ector ;#.>% $slamabad 5el A 3%#. #%%0/%%. 8ax A 3%#. #%%0/%%+ E#mail: registrarBpec!org!pk

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Standard Procedure and Formula for Price Adjustment INSTRUCTIONS TO USERS $ac&'ro(nd) 5he provisions of Price ,d-ustment on account of increase or decrease in costs of goods and services in construction contracts are practiced world over to have more realistic competitive bids and execution of contracts on e*uitable and -ust manner! Prices of goods and labour are highly variable due to fluctuations in the currency market! Construction experts6 therefore6 thought it prudent to compute the cost of contracts on present price6 keeping provisions of Price ,d-ustment for probable fluctuations! $n Pakistan6 8inance 2ivision has given the procedure and formula for calculating Price ,d-ustment through <ffice "emorandums (<"Cs)6 Pak#P:2 periodically prepared graphs for escalation for typical Civil6 "echanical and Electrical pro-ects for compensation to the contractors! &imilarly in 33/6 ;overnment of Pakistan (;oP) also issued a consolidated formula to simplify computation of Price ,d-ustment! $nternationally reputed consultants continued to use provisions of 8$2$C! 9owever6 keeping in view all the methods and practices6 PEC prepared the document # D&tandard Procedure and 8ormula for Price ,d-ustmentE6 primarily on the basis of rate analysis of various elements in a contract! 5his document when debated6 felt the necessity to discuss the issue with the stakeholders involving constructors6 consultants6 ;oP officials and financial experts! ,ccordingly6 a two days =ational :orkshop was arranged in PEC 9?s on "arch (4 F ( 6 %444 where the basic criteria for adopting the formula method in line with 8$2$C was decided! 5he st Edition of this document was thus based on the recommendations of the said workshop! ,gain6 two one# day =ational :orkshops were arranged in PEC 9?6 $slamabad on Gune (4 and ,ugust 36 %4416 wherein the document was debated keeping in view the abrupt price hike in the prices of construction inputs6 among others! 5his document ( st Edition6 )evision ) is based on the recommendations of the latter workshop! O*+,cti-,s) $t is not in the best interest of the Employer to ask tenderers to *uote firm prices with no provision of ad-ustments6 especially for long#term contracts! $n bidding documents having provisions for price ad-ustment6 the Employer is expected to receive more competitive offers from reputable parties and will have to meet the net variations in cost as may actually occur! 5his document is intended to make reasonable price ad-ustment in the billed amount6 which by virtue of its being restricted to listed ad-ustable elements6 is an approximation! 5he ob-ectives of this document are to: (a) "a-e +rice adjustment (as a reasona%le com+ensation against !ariation in +rices of the selected materials and in+uts) as close as +ossi%le to the actual0 (%) Set out a sim+le +rocedure0 (c) "inimi1e am%iguities0 and

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Standard Procedure and Formula for Price Adjustment (d) "a-e the contract more e2uita%le3 .o/ to Us,) ! %! (! 5he user of this document is not to change any provision hereof unless otherwise stated in these $nstructions! =o method6 other than given in this document6 is acceptable to compute the price ad-ustment! 5his Procedure is to assist the users for the preparation of provisions for price ad-ustment in their bidding>contract documents!

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Standard Procedure and Formula for Price Adjustment

TA$LE OF CONTENTS
DESCRIPTION PART12) PROCEDURE A) $) C) PART12) APPLICA$ILIT3 PARAMETERS PROCEDURE PA#E NO0 2 2 2 4 5

FORMULA

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Standard Procedure and Formula for Price Adjustment PART12) PROCEDURE A0 APPLICA$ILIT3 ! 5he provisions for Price ,d-ustment shall be applicable to the pro-ects to be executed! 8or the ongoing contracts6 the existing provisions provided in the contract shall continue to apply6 until and unless a mutually agreed amendment to the contract is signed by the parties to the contract6 thereby incorporating a Price ,d-ustment clause6 provided the 8ederal ;overnment has issued such =otification from time to time for those contracts having no Price ,d-ustment provisions! 5he Price ,d-ustment shall be applicable only for the contracts having contract price exceeding financial limit of PEC Contractors )egistration Category C#. as amended from time to time! Contracts having value e*ual to or less than this limit will be considered as fixed price contracts! Construction schedule should be provided by the contractor as re*uired in the Contract! Price ,d-ustment shall be applicable as payable in full for the original scheduled completion period! $n the event the completion of contract exceeds the original scheduled period: (i) $n case of default on the part of the contractor causing delay in original scheduled completion6 the rate of Price ,d-ustment will be frozen at the original scheduled date of completionH however Price ,d-ustment will be applicable till actual completion! :hile computing Price ,d-ustment beyond the scheduled completion period6 in the event the rate is reduced6 then that reduced rate will be applied! 5he Price ,d-ustment will be payable in full for the extended period if the contractor has been granted an extension of time for no fault on the part of the contractor6 duly approved by the Employer!

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Inless specifically stated otherwise in the contract6 the basis for compensation will be only those elements6 which are specifically listed as specified items in the tender documents! 5his list will specify the elements for Civil6 Electrical6 "echanical6 &anitary6 9@,C6 etc!6 separately! 8ormula for Price ,d-ustment provided herein will be applicable for all the contracts such as civil6 electrical6 mechanical6 etc! , list of commonly known elements sub-ect to Price ,d-ustment is provided below: (i) (ii) (iii) (iv) CementH &teelH P<J (9&2)H Jabour InskilledH

/! /!

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Standard Procedure and Formula for Price Adjustment (v) (vi) KricksH and Kitumen!

Isers of the formula may add6 substitute or delete any element as deemed appropriate! 5hey would then decide on the weightages or coefficients for the elements! 0! 8inancial compensation for the elements classified as above shall not be considered again due to provision of &ubse*uent Jegislation6 if separately specified in the contract! 5here shall be no Price ,d-ustment for the elements which the Employer has either supplied free of cost or at fixed prices as well as for those elements for which an umbrella exgratia or escalation cover is provided by the ;overnment through an Executive <rder or &tatutory )egulatory <rder (&)<)! 5his document will be applicable to all contracts including $tem )ate Contracts6 Jump &um Contracts and Lage over &chedule Contracts but excluding fixed price contract! 5his document will be applicable only for Price ,d-ustment in local currency (Pak! )s!)! Price ,d-ustment in foreign currency is not in purview of this document which6 if applicable6 is to be finalized with mutual agreement among the parties prior to the award of Contract!

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PARAMETERS ! :eightages of &pecified $tems Each of the cost elements6 having cost impact of five (4.) percent or higher can be selected for ad-ustment! Cost elements of 9&2 and labour shall be included in the Price ,d-ustment formula irrespective of their percentage determined for a particular pro-ect6 if these are applicable for that pro-ect! $n determining the weightages6 the following procedure shall be adopted: (a) Kase 2ate Price alone of an element based on market rate shall be considered excluding cost of construction> installation6 overheads and profit! EngineerCs Estimate shall be prepared for complete pro-ect! ,ppropriate )ate ,nalysis of the EngineerCs Estimate shall be made to determine costs of the basic elements! 8or such elements having various types of a particular element6 individual cost of such family of the element to be determined and added to work out the element cost! 8or example6 in a particular pro-ect various types of steel such as sheet steel6 ;rade#+4 F ;rade#/4 steel

(b) (c) (d)

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Standard Procedure and Formula for Price Adjustment are used! $n such a case6 respective base prices of all three types of steel are to be considered and added up to come out with the single steel cost component! &imilar case may be for different types of cement used6 etc! (e) (f) Each cost element determined as above6 shall be divided by the total amount of EngineerCs Estimate to determine various weightages! $t is clarified that while computing Price ,d-ustment6 base and current prices of the representative elements have to be used in the same way as they are mentioned in the PEC bidding documents! 8or example ;rade#+4 half inch dia &teel is the representative cost element for all types of steelH similarly un#skilled labour is the representative cost element for all types of labour etc!

:eightage of fixed portion (=on#ad-ustable portion of the estimated cost of the contract)6 D,E shall be determined as under: (i) 8irst the weightages of all the cost elements having value of . percent or more (9&2 and Jabour to be included irrespective of their weightages) to be added up to see whether the total is /. percent or less! $n that case the total is to be subtracted from one to determine the weightage of the fixed portion6D,E $n case total weightage of the cost elements including 9&2 and labour exceeds /. percent6 the element(s) having lowest weightage(s) other than 9&2 and labour6 shall be excluded in considering the ad-ustable costs elements! 8ixed portion shall never be less than (. percent and the ad-ustable portion shall never be more than /. percent of the EngineerCs Estimate! &um of fixed portion6 D,E and weightages a6 b6 c6 d6 M!etc!6 of the ad-ustable portion shall always be one (4 )!

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(iii) (iv)

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Kase 2ate Price 5he base date price (or base date index) of any element shall be the price of the element which was prevalent twenty eight (%1) days prior to the date of submission of the tender!

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Current 2ate Price 5he current date price (or current date index) of any element shall be the price of the element which was prevalent twenty eight (%1) days prior to the start of

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Standard Procedure and Formula for Price Adjustment the execution month to which a particular monthly statement is related! 5he unit of time shall be a calendar month! +! &ource of Prices 5he prices of elements sub-ect to Price ,d-ustment shall be to the extent possible as given in the &tatistical Kulletins published by 8ederal Kureau of &tatistics (8K&)6 &tatistical 2ivision ;overnment of Pakistan! &tatutory notifications and official price from public sector organizations6 where available6 may be used at the option of the Employer! 5he source for prices of 9igh &peed 2iesel (9&2) shall be either &tatistical Kulletins or Pakistan &tate <il (P&<)! 9owever6 for a particular ad-ustable element6 the same source should be used throughout the currency of contract as also stipulated in the tender documents before issuing the tender documents! C0 PROCEDURE ! 5he billed amount of the :orks for each calendar month will be obtained from the checked bills submitted by the Contractor! $n case the billed amount is for more than one month6 the amount of the bill shall be segregated for actual work done in each month! 5he Kase 2ate Prices and the Current 2ate Prices shall be as per procedure K% and K( provided hereinbefore! 5he &ource of Prices will be as per procedure K+ provided hereinbefore! 5he Price ,d-ustment in the billed amount will then be calculated for the month under consideration in accordance with 8ormula for Price ,d-ustment! Except labour and P<J6 if any other ad-ustable item(s) is not used in a particular billing period then the ratio of current date price and base date price for that particular ad-ustable item(s) shall be considered as one!

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Standard Procedure and Formula for Price Adjustment PART12) FORMULA ! 8ormula for Price ,d-ustment 5he formula mentioned below is in its generalized form! 5he Employer>user shall at the time of preparation of their bidding>tender documents shall determine the proportions of ,6 b6 c6 d6 MMM!! by appropriate rate analysis following the procedure enumerated herein below: For6(7a 8or Pric, Ad+(st6,nt) Pn N , O b Jn O c "n O d En O!!!!!!!!!!!!!!!! Jo "o Eo

where6 DPnE is the Price ,d-ustment factor for the work carried out in the period DnE!

D,E

is a constant or the =on#,d-ustable Portion of the Price ,d-ustment 8actor to be specified in ,ppendix#C to Kid6 representing the =on#,d-ustable Portion of the Contract Price!

Db6 c6 d!!!!!!!!!E are Coefficients or weightages of the order of 4!xx (i!e!6 fractions having two significant digits) for each specified element of ad-ustment in the Contract! 5he sum of ,6 b6 c6 d6 etc!6 shall be one! DJo6 "o6 Eo!!!!!!!!E are the Kase 2ate $ndices for the specified (ad-ustable) elements! DJn6 "n6 En!!!!!!!E are the Current 2ate $ndices of the specified (ad-ustable) elements for the period DnE! $f DPE is the amount payable (prior to ad-ustment) at the rates entered in the Price &chedule of the work carried out in period DnE then6 ,d-usted amount payable to the Contractor for the work carried out in the period DnE shall be e*ual to PnPP!! %! Kase and Current 2ates Prices 5he base date and Current date prices of the specified elements shall be obtained from the sources specified in the contract! (! Elements for Price ,d-ustment &pecified Elements are sub-ected to Price ,d-ustment! 5he specific elements for highway and bridge construction would typically be: (i) P<J (9&2)H

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Standard Procedure and Formula for Price Adjustment (ii) (iii) (iv) (v) (vi) Jabour InskilledH CementH &teelH KitumenH and <ther ma-or elements depending on the nature of the pro-ect!

&imilarly6 the specified elements for building construction would typically be: (i) (ii) (iii) (iv) (v) (vi) P<J (9&2)H Jabour InskilledH CementH &teelH KricksH and <ther ma-or elements depending upon the nature of the pro-ect!

&imilarly6 ma-or specified elements for other types of pro-ects can be specified in the contract in addition to or instead of the specified elements as enumerated above! +! Co#efficient or :eightages 5he co#efficient for each specified element shall be calculated and given in the bidding>tender documents! 5he co#efficient for each specified ad-ustable element shall be determined by the user proportionate to its ratio in the total amount of the EngineerCs Estimate6 in accordance with the procedure K# given under Part ! 5he sum of these co#efficients shall form the ad-ustable portion of the Contract6 which shall not exceed 4!/.! .! ,d-ustable Portion of the Contract 5he ad-ustable portion of the Contract shall be computed as provided in forgoing Procedures! /! &ource of Price &ource of Kase 2ate and Current 2ate Prices shall be as stipulated at item K#+ under Part ! $f any other source is used6 it must be clearly stated in the tender documents before issuing the tender documents! 0! Price ,d-ustment for Jump sum Contract! 8ormula of Price ,d-ustment provided at $tem# above shall be used in determining Price ,d-ustment for contracts having detailed breakdown of cost! 9owever6 when a contract is assigned on lump sum basis without detailed breakdown of *uantities and cost6 Price ,d-ustment for the specified elements in the contract will be computed on simple derivation6 increase>decrease in cost N Current 2ate Price # Kase 2ate Price! Kase 2ate Price $f the resulting Price ,d-ustment 8actor is positive (Ove)6 the price should be added to

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Standard Procedure and Formula for Price Adjustment the contractorCs payable amount! $f the result is negative (#ve)6 the price should be subtracted from the payable amount! 5he executed *uantities of the elements sub-ect to Price ,d-ustment can be obtained from the actual measurement or from certified invoice of the contractor or any other mode agreed between the parties which shall be stipulated in the contract!

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