Scenario:

ABC (Pvt) Ltd. is constructing a commercial building in Colombo, Sri Lanka. The project began
when construction material prices were relatively stable. However, the issue of price fluctuations
in construction materials has become increasingly prominent. Over the past few months, the
prices of crucial construction materials have surged by more than double, significantly impacting
construction projects nationwide. This has created several challenges for both contractors and
project owners.

Contractors, who typically work with tight profit margins, need help managing their budgets and
maintaining profitability. The steep price increases in materials such as cement, steel, and
finishes have disrupted cost estimates, making it difficult for contractors to forecast project
expenses accurately. Also, since it is a commercial building, almost all the finishes are imported,
and due to the price fluctuation, contractors need to be in a better position. Consequently, this has
led to financial strain, potential delays, and disputes between contractors and project owners. On
the other hand, project owners are concerned about the potential cost overruns and project delays
caused by these price fluctuations. They seek to ensure that their project is completed on time
and within budget, but the unpredictability of material costs has made it challenging to achieve
this goal. Furthermore, they want to be fair to contractors while protecting their financial
interests.

This scenario highlights the pressing need to address the issue of price fluctuations in
construction projects in Sri Lanka. It calls for innovative solutions and a thorough examination
of the relevant contract provisions, specifically within the framework of the FIDIC Red Book
(1st edition 1999).

Issues Related to Price Fluctuations:

 Budget Overruns: The sudden price increases have caused the project's budget to be
exceeded, potentially leading to financial strain on the contractor and disputes with the
client.

 Profit Margins: Contractors may need help maintaining their profit margins as they are
contractually obligated to complete the project at the initially agreed-upon price.
  Uncertainty: The uncertainty surrounding future price fluctuations makes it difficult for
contractors to estimate project costs accurately and may hinder effective project planning.

 Contractual Obligations: The contract is based on outdated price adjustment provisions

that do not adequately reflect current market conditions.

Proposed Solutions with FIDIC Red Book (1st Edition, 1999) Clauses:

Clause 13.8 - Adjustments for Changes in Cost- Addresses contract price adjustments due to
cost changes. This clause is particularly relevant to the steep price fluctuations in construction
materials in Sri Lanka. Construction material prices in Sri Lanka have witnessed significant and
unpredictable increases in the scenario provided. Contractors need help managing their budgets,
and project owners are concerned about cost overruns and delays. Clause 13.8 comes into play as
it allows for adjustments to the contract price based on cost changes.

 Periodic Price Adjustments: To address the issue of rapidly changing material prices, the
parties (the Contractor and Employer) can utilize Clause 13.8 to include provisions for
periodic price adjustments. These adjustments can be agreed upon and carried out at
specified intervals (e.g., quarterly or semi-annually) to account for material cost changes.

 Incorporating an Escalation Formula: Within the framework of Clause 13.8, an escalation

formula can be introduced to calculate price adjustments. This formula would consider
the percentage change in material costs from a baseline period, providing a transparent
and standardized method for adjusting the contract price.

 Risk Allocation for Price Fluctuations: Clause 13.8 can also be used to allocate the risk
associated with price fluctuations. The parties can define the threshold beyond which
price adjustments are triggered, ensuring the risk is fairly allocated between the
Contractor and the Employer.

By utilizing Clause 13.8 and incorporating these proposed solutions, construction contracts in Sri
Lanka can effectively manage the challenges of price fluctuations. These solutions provide a
structured approach to adjusting the contract price based on changing material costs, promoting
fairness and transparency while mitigating disputes between contractors and project owners.
Clause 13 - Variations and Adjustments: Amend this clause to include provisions for dynamic
price adjustments. Specify that the contract price shall be adjusted periodically based on changes
in the market prices of critical materials, such as cement, steel, and timber. The adjustment
mechanism should be clearly defined, considering the specific materials affected by price
fluctuations.

Clause 12 - Measurement and Evaluation of the Works: In the scenario provided, where
construction material prices in Sri Lanka are experiencing significant and unpredictable
increases, there is a need for a specific methodology to calculate price adjustments due to these
fluctuations. This ensures that contract valuations accurately reflect current market conditions
and mitigate budget challenges for contractors. In response to volatile market conditions and
price fluctuations for materials, the contract shall incorporate a methodology for calculating price
adjustments to ensure that contract valuations align with actual market prices. This methodology
shall reference an updated Price Index reflecting current market conditions.

Clause 13.5 - Provisional Sums: In the scenario provided, where construction material prices in
Sri Lanka are experiencing significant and unpredictable increases, contractors face budget
challenges due to the soaring costs of essential materials. Clause 13.5 becomes highly relevant as
it allows for the adjustment of provisional sums to align with actual market prices, addressing
cost fluctuations effectively. To address the issue of material cost increases, the contract should
specify a regular review mechanism for provisional sums allocated to materials susceptible to
price fluctuations. This review can be conducted periodically to ensure that the provisional sums
accurately reflect the current market prices of these materials.

Clause 20.1 - Contractor's Claims: The Contractor must maintain meticulous records of all
materials used, costs, and invoices. These records should be readily accessible for inspection by
the Employer, engineer, or their representatives. Please maintain accurate records to avoid a
claim being disallowed or adjusted.

Clause 17.3 - Employer's Risks: Add a sub-clause allowing the Contractor to enter into hedging
contracts or similar financial instruments to mitigate the risks associated with material price
fluctuations. This sub-clause should specify that any gains or losses resulting from such hedging
arrangements shall be the Contractor's responsibility.
Incorporating these solutions within the framework of the FIDIC Red Book (1st Edition, 1999)
can help address the challenges posed by price fluctuations in construction projects in Sri Lanka.
These amendments and additions provide a structured and legally sound approach to managing
the impact of volatile material prices, ensuring fairness and transparency for all parties involved
in the contract.