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Escalation in a Project Cost

Salim Javed PMP® Certified Senior Civil Engineer + Follow
Civil Engineer with 25+ years of Experience in Managing and Supervising the
Construction of Multiple Multibillion dollar Mega Infrastructures looking for
Construction Manager/Project Manager roles
Published Aug 28, 2022

Explanation of Sub-Clause 70.1-Increase or Decrease of Cost (FIDIC 87) and Sub-

Clause 13.8-Adjustments for Changes in Cost ( FIDIC 99).

During any project of a long duration (usually more than 3 years), the prices of the
materials are increased from the base price that was agreed upon or offered at the
beginning of the project.

This increase in prices could be due to;

The fluctuation of the cost of materials, equipment, and labor is due to currency fluctuation.

The Shortage of materials is due to some other ongoing project.

New taxes are levied by the governments.

Any other circumstances.

This results in an increase or decrease of the actual cost of a project, which is called an
escalation in cost (whether positive or negative).
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A Contract Engineer of the Client, while preparing the
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price adjustment formula for the future expected escalation.
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of this formula before submitting their bids.

To estimate a price adjustment factor, the Contract Engineer shall segregate the
Nonadjustable and adjustable items of the project and allocate a weightage for
adjustable items. Of course, he would know the base prices of adjustable materials.

In most countries, there are organizations and governmental bodies that determine the
non-adjustable and adjustable items, as well as the consumer price indices for every
specific construction material such as Steel, cement, gravel, concrete, brick masonry, etc.

This article will help understand the basic concepts of price adjustment procedures.

A. How to segregate Non-Adjustable and Adjustable portions in BOQ?

1. Segregate the "Cost items" out of the BOQ.

An Item is called a Cost item whose cost is 3% of the total cost of Materials. For
Example, the total BOQ is 100 million. All Items worth 3 million or above will be the Cost
items. If the cost of total estimated steel in the project is 4 million then it will be called a
cost item. If the cost of total estimated wood in the project comes out as 1.5 million then
it will not be counted as a cost item.

For highway and bridge construction, typical cost items are POL (HSD); Labor; Cement;
Steel; Bitumen; Aggregate; and any other major elements depending on the nature of the
project.

2. The "Cost Items" are called Adjustable items while the rest of the items in BOQ will be
assumed as Non-Adjustable items.

This means that escalation/price adjustment for the adjustable items will be provided
only. The cumulative value of all adjustable items shall be 75% of the total BOQ. In case it
becomes more than 75% then take some low-important items from this list and shift
them to the fixed portion so that sum of the adjustable group shall not be more than
75% of BOQ.
3. Allocate the weightage/ratios to the adjustable items. These ratios will be as per the
cost of each item as explained below. These weights will be expressed as b, c, d … (as
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given in the escalation formula). The Remaining & Join LinkedIn
portion (which is usually 25%) will
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4. The Sum of fixed portion ratio (A) and weightage for an adjustable portion (b, c, d…)
shall always be equal to one. (75%+25% expressed as 0.75+0.25=1.00)

The Client, at the time of preparation of their bidding/tender documents, shall determine
the proportion of A, (Non-Adjustable Portion) and b, c, d… (Coefficients for Adjustable
portion of for Cost Items). The weightage or ratios thus determined shall be included in
RFP as part of the Bid.

B. Escalation Formula.

“Pn” is the Price Adjustment factor for the work carried out in the period “n”.

“A” is a constant or the Non-Adjustable Portion of the Price Adjustment Factor to be

specified in Appendix-C to Bid, representing the Non-Adjustable Portion of the Contract
Price.

“b, c, d...” are Coefficients or weightages weights of 0. xx (i.e., fractions rounded off to
two decimals) for each specified element of adjustment in the Contract.

The sum of A, b, c, d, etc., shall be one.

“Lo, Mo, Eo........” is the Base Date Prices/Indices for the specified (adjustable) elements.
“Ln, Mn, En.......” are the Current Date Prices/Indices of the specified (adjustable)
elements for the period “n”.

The value of Pn shall be multiplied by the total payable Amount for the month "n" to get
the escalated amount.

Using the above formula, one must know the following three basic terminologies;

Base Date Price

The base date price (or base date index) of any element shall be the price of the element
for the month on the day falling 28 days before the latest day for submission of bids.
Current Date Price

The current date price (or current date index) of any

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Sources of Prices

The prices of elements subject to Price Adjustment shall be to the extent possible as
given in the Statistical Bulletins published by the Federal Bureau of Statistics (FBS),
Statistical Division Government of Pakistan. ( in other countries, one may follow the
relevant official data).

C. An Example of Calculating Escalation Amount:

Last Bid date of a project X (Base Date) = May 2018

Current IPC month= August 2022.

Total Budget for the Project (BOQ for permanent works)= 100 Million

Cost Items weightage given in the BID document is as under.

Fixed Portion = 0.25

Local Labor = 0.15

Cement (bags) = 0.15

Steel = 0.30

HSD = 0.15

Total = 1.00

Current IPC value= 10Millions (unit of the currency is deliberately omitted).

A). Official Prices for the above items in April 2018(28 days before the base date);

Local Labor = 500

Cement (bags) = 500

Steel = 1000

HSD = 100
B. Official Prices for the above items in July 2022(28 days before the current IPC
date);
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Local Labour = 700

Cement (bags ) = 800

Steel = 1500

HSD = 300

Adjustment Factor for Escalation (Pn) for August 2022;

Pn= 0.25+0.15(700/500)+0.15(800/500)+0.30(1500/1000)+0.15(100/300)

Pn=1.2

Hence the Current IPC Value including the Escalation cost = 10x1.2=12 Millions

If you want to know only the escalation amount for the current IPC then make it 1.00-
1.20=0.20x10 Million which is 2 Million

If the Current Bill is composed of two different months then segregate it per day and
look for the current prices of the relevant months. Then using the escalation formula, find
two different Pn and multiply the two segregated amounts
Articles People Learning to find the
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Get the app escalated IPC

cost.

C. Price Adjustment for Lump Sum Contract

The formula of Price Adjustment provided shall be used in determining Price Adjustment
for contracts having a detailed breakdown of cost. However, when a contract is assigned
on a lump sum basis without a detailed breakdown of quantities and cost, Price
Adjustment for the Specified Elements in the contract will be computed as follows:

Increase/ Decrease in Cost (Price Adjustment Factor) = Current Date Price − Base Date
Price

If the resulting Price Adjustment Factor is positive (+ve), the price should be added to the
contractor’s payable amount. If the result is negative (-ve), the price should be subtracted
from the payable amount. The executed quantities of the elements subject to Price
Adjustment can be obtained from the actual measurement or the certified invoice of the
contractor or any other mode agreed between the parties which shall be stipulated in the
contract.
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Baran Dam Project. Pakistan

Like Comment Share 13 · 6 Comments

Khan Mohammed 1y
Resident Engineer at Umer Munshi Associates

How to calculate late the cost of labor work in an engineering project specially highways and bridges? Is
there any formula for that?

Like · Reply

Alvin Sihombing 1y
Contract Engineer at Samsung C&T Corporation

Thank you for sharing, sir.

Like · Reply 1 Reaction

Mohammed Rafay 1y

Well written and explained with examples. Good wishes to you for your success 👍
Like · Reply 1 Reaction

Muhammad Ilyas 1y
(PMP®, MSc,BSc Civil,NEBOSH IGC)

so simple and great articles. Please share the articles in pdf and also need excel sheet for price
adjustment

Like · Reply

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