Polytechnic University of the Philippines

Open University System

Master of Science in Construction Management

CM 652
Construction Contract Administration

Module 7
Price Adjustments and Price Escalation

Engr. Guillermo O. Bernabe

Subject Specialist
Definition of Price Escalation

An adjustment of monetary values made periodically to

compensate for fluctuation in cost of construction
supplies, materials, equipment and labor.
Processes and guidelines required for the implementation of
price escalation

Scope and Application

1. These Guidelines shall govern requests for price escalation
during implementation of contracts for the procurement of
goods and infrastructure projects under extraordinary
circumstances pursuant to and in accordance with Section
61 of RA 9184 otherwise known as Government
Procurement Reform Act.
2. This guidelines shall apply to all branches, constitutional
commissions and offices, agencies, departments, bureaus
and instrumentalities of the Government, including
government-owned and/or controlled corporations,
government financial institutions, state universities and
colleges and local government units.
Price Escalation
A constraint is a condition, agency or force that
impedes progress towards an objective or goal.

Constraints should be identified, and described in as

much detail as possible during the early stages of a
project, so that awareness of them and their potential
impact can be managed. This includes understanding
the dynamics of the project, and how different
constraints interrelate.
Design Constraints

Design constraints are factors that limit the range of potential

design solutions. In the early stage of a project only some of these
constraints may be known, while others become apparent as the
design progresses.

Technical Constraints

Technical constraints generally refer to the processes involved in

completing construction activities, and are often based on the
practicality of building methods and standards. For example, in
constructing a foundation, the site must be leveled before
excavation can take place; then formwork can be placed as well as
rebar before concrete is poured. Each task must be completed
before the next can begin; therefore each task acts as a constraint
on the next task.
Economic Constraints

Economic constraints relate to the project budget and the allocation of

resources. If the budget is inadequate, or is allocated inappropriately, then it
can have a negative impact on the success of the project in terms of quality,
safety, functionality and performance.

Management Constraints

These can include particular shift patterns, overtime requirements, resource

allocation, safety procedures, working practices, and so on.

Legal Constraints

Legal constraints refer to the many regulations that the activities and
practices on a construction project must conform to. These most commonly
relate to employment law, safety requirements, planning and building
regulations requirements, environmental requirements, and so on.
Time Constraints

These include key dates on the project schedule or project milestones.

Conforming to these date constraints is often very important in terms of the
overall project completion.

Environmental Constraints

Environmental constraints include limiting factors concerning geographical location,

geological features, hazardous materials, air pollution, excavation, noise, vibration,
traffic, tree and wildlife preservation, and so on. These can often overlap with legal
constraints.

Social Constraints

Social constraints include factors that may arise as a result of wider interest in or
opposition to a project. Public concern and media pressure can often impose greater
scrutiny and tighter constraints on a project, and can sometimes result in major
alterations to the original plans.
Pricing strategy refers to method companies use to price
their products or services. Almost all companies, large or
small, base the price of their products and services on
production, labor and advertising expenses and then add on
a certain percentage so they can make a profit. There are
several different pricing strategies, such as penetration
pricing, price skimming, discount pricing, product life cycle
pricing and even competitive pricing.
Pricing Strategies

1. Customer value-based Pricing

Good pricing usually starts with customers and their perceptions

of value. Eventually, the customer will decide whether a product
is worth its price or not. Therefore, we start with customer
value. When customer buy a product, they exchange something
of value (the price) to get something of value (the benefits of
having or using a particular product). Therefore, it is crucial to
understand how much value consumers place on the benefits
they receive from the product and setting a price that captures
exactly this value.
2. Cost-based Pricing

While in customer value-based pricing, customers’

perceptions of value are key to setting prices, in cost-
based pricing the seller’s costs are the primary
consideration. Costs set the floor for the price that the
company can charge. Therefore, cost-based pricing
involves setting prices based on the costs for producing,
distributing and selling the product. In order to make
some profit, a fair rate of return is added to account for
efforts and risks.
3. Competition-based Pricing

Competition-based pricing involves setting prices based

on competitors’ strategies, costs, prices and market
offerings. In highly competitive markets, consumers will
base their judgements of a product’s value on the prices
that competitors charge for similar products. For
instance in the gasoline industry, competition-based
pricing is applied.
Four Types of Pricing Objectives

1. Survival
Prices are flexible. A company can lower them in order to
increase sales enough to keep the business going. The company
uses a survival-based price objective when it's willing to accept
short-term losses for the sake of long-term viability.

2. Profit
Price has both direct and indirect effects on profit. The direct
effect relates to whether the price covers the cost of producing
the product. Price affects profit indirectly by influencing how
many units sell. The number of products sold also influences
profit through economies of scale -- the relative benefit of
selling more units. The primary profit-based objective of pricing
is to maximize price for long-term profitability.
3. Sales
Sales-oriented pricing objectives seek to boost volume or
market share. A volume increase is measured against a
company's own sales across specific time periods. A company's
market share measures its sales against the sales of other
companies in the industry. Volume and market share are
independent of each other, as a change in one doesn't
necessarily spur a change in the other.

4. Status Quo
A status quo price objective is a tactical goal that encourages
competition on factors other than price. It focuses on
maintaining market share, for example, but not increasing it, or
matching a competitor's price rather than beating it. Status quo
pricing can have a stabilizing effect on demand for a company's
products.
References:

1. Contract Administration by CMDF

3. Hare, J. I. Clark. 2003. The Law of Contracts. Clark, N.J.:

Lawbook Exchange.

4. Marsh, P.D.V. 2001. Contract Negotiation Handbook.

Burlington, Vt: Gower.

5. PMBOOK 4th Edition

Thank you very much!