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Price Escalation Information and Formulas

Price escalation refers to the adjustments made in construction cost estimates due to increases in equipment, material, and labor costs over time, driven by factors like inflation and market conditions. The document outlines specific formulas for adjusting costs related to labor, cement, steel, fuel, and other materials, each incorporating indices and weightages to calculate increases or decreases in costs. This assessment is crucial for managing risks associated with long-term construction projects.

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Bhuvnesh pandey
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13 views3 pages

Price Escalation Information and Formulas

Price escalation refers to the adjustments made in construction cost estimates due to increases in equipment, material, and labor costs over time, driven by factors like inflation and market conditions. The document outlines specific formulas for adjusting costs related to labor, cement, steel, fuel, and other materials, each incorporating indices and weightages to calculate increases or decreases in costs. This assessment is crucial for managing risks associated with long-term construction projects.

Uploaded by

Bhuvnesh pandey
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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PRICE ESCALATION

It is the provision in the cost estimate for increases in the cost of equipment, material, labor, etc. due to
continuing price changes over the time. Escalation is caused by many factors such as inflation, market
conditions, risk allocation clauses in the contract, interest rate and taxes. It is a risk that can account for
a substantial part of construction cost. Especially in long term projects where the variability and
uncertainty is greater. Therefore, there is a need to assess the risk of cost escalation in construction
programs.

APPLICATION OF A PRICE ADJUSTMENT FORMULA FOR Price Escalation


 Adjustment for 'labor' Component
 Adjustment for 'Cement' Component
 Adjustment for 'Steel' Component
 Adjustment for 'POL’ (fuel and lubricant) Component
 Adjustment for 'Other Materials' Component

Adjustment for 'labor' Component:


Price adjustment due to an increase or decrease in the cost of labor shall be paid in accordance with the
following formula:

VL =0.85 x (PL/100) x R x (Li—Lo)/Lo

VL = Increase or decrease in the cost of work during the month under consideration due to change in
rates for local labor.

Lo = The consumer price index for industrial workers for the State for the month under consideration, as
published by Labor Bureau, Ministry of Labor.

Li =The average consumer price index for industrial workers for the State for the month under
consideration as published by Labor Bureau, Ministry of Labor

PL= 25% value of labor Component of the work. (Weightage given according to Cost Index)

R = Total value of work done during the month. It would include the amount of secured advance
granted.
Adjustment for 'Cement' Component:
Price adjustment due to an increase or decrease in cost of cement procured by the Contractor, shall be
paid in accordance with the following formula:

Vc = 0.85 x (Pc/I00) x R x (Ci-Co)/Co


Vc = Increase or decrease in the cost of work during the month under the consideration due to change in
rate of cement.

Co=The countrywide wholesale price index for cement as published by the Ministry of Industrial
Development.

Ci=The countrywide average price index for cement as published by the Ministry of Industrial
Development.

Pc = 15% value of cement Component of the work. (Weightage given according to Cost Index)

R = Total value of work done during the month. It would include the amount of secured advance
granted.

Adjustment for 'Steel' Component:


Price adjustment due to an increase or decrease in the cost of steel procured by the Contractor shall be
paid in accordance with the following formula:

Vs= 0.85 x (Ps/100) x R x (Si — So)/ So

Vs = Increase or decrease in the cost of work during the month under consideration due to change in
rate of steel.

So = The country-wide wholesale price index for steel (Bars and rods) as published by the Ministry of Industrial
Development

Si = The countrywide average wholesale price index for steel (Bars and rods) for the month under consideration, as
published by Ministry of Industrial Development

Ps = 25% value of steel Component of the work

R = Total value of work done during the month. It would include the amount of secured advance granted.

Note: For application of this clause, the index of Bars and Rods may be chosen to represent the Steel
group .
Adjustment for 'POL’ (fuel and lubricant) Component:
Based directly on price of HSD, Price adjustment due to increase or decrease in the cost of POL (fuel and
lubricant) shall be in accordance with the following formula:

Vf = 0.85 x (Pf/100) x R x (Fi-Fo)/Fo


Vf =Increase or decrease in the cost of work during the month under consideration due to change in
rates for fuel and lubricants.

Fo =The official retail price of HSD in base month

Fi = The official retail price of HSD in the existing month

Pf = 5% value of fuel and lubricants Component of the work (Weightage given according to Cost Index)
R = Total value of work done during the month. It would include the amount of secured advance granted.

Note: For application of this clause, the price of HSD oil may be chosen to represent the fuel and Lubricants group.

Adjustment for 'Other Materials' Component:


Price adjustment due to an increase or decrease in the cost of local materials other than cement, steel,
bitumen and POL procured by the Contractor, shall he paid in accordance with the following formula:

Vm = 0.85 x (Pm/100) x R x (Mi —Mo)/Mo

Vm =Increase or decrease in the cost of work during the month under consideration due to changes in
rates of local materials other than cement, steel, bitumen and POL.

Mo =The countrywide wholesale price index (all commodities) as published by the Ministry of Industrial
Development

Mi =The countrywide average wholesale price index (all commodities) for the month under
consideration as published by the Ministry of Industrial Development

Pm= 10% value of local material Component (other than cement, steel, bitumen, and POL) of the work
(Weightage given according to Cost Index)

R = Total value of work done during the month. It would include the amount of secured advance
granted.

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