CURRENT PRICE &

FLUCTUATION COST
'Current Price'
 
Current price is the market value or the price at which goods are currently being
sold in the market. Similar to market price, which is the price determined by
buyers and sellers in an open market, the current price of a security is the price at
which at a security is presently traded.
 

Harga semasa ialah nilai pasaran atau harga yang padanya barang kini
sedang dijual di pasaran. Sama seperti harga pasaran, iaitu harga yang
ditentukan oleh pembeli dan penjual dalam pasaran terbuka, harga
semasa adalah harga yang lebih selamat diniagakan.
Fluctuation
• Fluctuations are a way of dealing with inflation on
large projects that may last for several years.
• On smaller projects, the contractor will be considered
to have taken into account inflation when calculating
their price (a firm price).
• However, on the larger projects, the contractor may
be asked to tender based on current prices (prices at
an agreed base date)
• Then the contract makes provisions for the contractor
to be reimbursed for price changes to specified items
over the duration of the project (a fluctuating price).
Short Meaning for fluctuation

The fact of prices going up and down: The goods

price fluctuation has been driven by financial
speculation
What Causes Fluctuating Unit Cost?

When a company develops a marketing plan for

releasing a new product, part of that plan is
dedicated to determining the unit cost. Fluctuations
in the unit cost affect company profit margins and
the ability of the company to maintain necessary
production levels. There are several reasons why a
product unit cost fluctuates that a business owner
needs to understand to maintain a competitive
profit margin:-
a) Demand
b) Materials
c) Overhead
d) Dollar Strenght
 Demand
• An initial unit cost is developed based on a projected
demand that determines the initial production levels.
• The unit cost fluctuates when that demand does not
follow the projections in the marketing plan.
• Production costs are tied to buying raw materials and
the man hours needed to manufacture and deliver the
product.
• If demand drops, then the quantities of raw materials
needed drops. Buying raw materials in small
quantities can increase the per unit price for
production.
• If the demand is higher than expected, then the
increase in manpower needed to manufacture
products can affect the unit price.
Materials
• Businesses buy raw materials in bulk to avoid
the fluctuation in pricing that can occur in a
particular market.
• If the cost of materials drops, then the company
can either lower the per unit price to sell more
product or take in more profit per unit by
keeping the price the same.
• But if raw material costs go up, then the unit
price will have to go up to maintain the product
profit margin or profit will have to be sacrificed.
Overhead
• Unit costs take into account the company
overhead required to manufacture, package,
advertise and ship the product.
• A rise or fall in any of these overhead costs will
have an effect on the unit cost.
• If your shipping company decides to raise its
rates on getting your products out to your
warehouses, then that rise in cost has to be
reflected in the unit price to maintain
profitability.
Dollar Strength
• If you buy materials from overseas, or ship your
products to international warehouses, then the
fluctuation in the value of the United States
dollar will affect your unit cost.
• If the dollar drops in value, then you will need to
pay more for the materials you buy overseas and
it may cost you more to ship products to
international warehouses.
Guiding Opinion on Cost Fluctuation Risks and
Price Adjustment Provisions in Construction
Contracts

10 July 2008
Mayer Brown JSM Legal Update
1. Cost fluctuations during the project design and
tendering stage

1. Cost fluctuations during the project design and

tendering stage

The Opinion recommends that parties should make provisions in the

construction budget to cover construction cost fluctuation risks which may arise
during the construction period.

In addition, the tender and construction documents must clearly stipulate the
price range of the construction material agreed between the parties in view of
the anticipated cost fluctuation.
Adjustment mechanisms dealing with
situations where the actual cost of the
construction material exceeds the agreed
price range should also be included
2. Cost fluctuations during the
construction stage

During the construction stage, when the cost

of construction material exceeds the price
range agreed by the parties, the Opinion
suggests that the following adjustment
methods should be adopted:
(a) weighted average method;

(b) arithmetic average method; or

(c) other methods as agreed by the parties.

3. List of construction material concerned

The Opinion provides a reference list of the construction material concerned:

(a) Residential building projects: steel, cement, concrete, timber material, sand and stone, mortar, etc.

(b) Municipal infrastructure projects: steel, cement, concrete, timber material, sand and stone, bridge columns, expansion joints, asphalt products, drainage
pipes, pre-fabricated concrete components, etc.
(c) Civil defence projects: steel, cement,
concrete, timber material, sand and stone,
mortar, etc.

(d) Landscape projects: steel, cement, concrete,

timber material, sand and stone, mortar, plants,
stone material, construction material for
classical architecture, etc.
4. Cost fluctuations after the execution of construction contracts

If the construction contract does not contain cost adjustment mechanisms to deal with price fluctuations, the parties shall address the price fluctuations by
entering into a supplemental agreement.

The Opinion suggests that a comparison should be made between the following cost figures:
(a) the cost of construction material and labour published by the local construction cost administration for the month when the tender price or the contractual
price was agreed; and
(b) the weighted average or the arithmetic average of the cost of construction material and labour issued by the local construction cost administration for each month during
the construction period.
The cost of construction material and labour should be adjusted if the difference between the above figures exceeds:
(a) 3% for labour cost,

(b) 5% for the cost of steel,

(c) 8% for the cost of all the other construction material mentioned above.
Q&A
a) Explain briefly the cause of current
price is using in cost estimation [ 10
marks]
Huraikan dengan ringkas sebab harga
semasa digunakan didalam membuat
anggaran kos
To getting accuracy in cost estimation
• Easy to making reference if confusion
arise while cost estimation process
• Data cost will update from time to
time
• Saving time for the QS to obtain
material cost from supplier or etc.
b) Explain how to manage
material fluctuation cost in
construction project in order
to reduce the construction
cost.
• Identify priced in
state/country/worldwide
commodities
• Research the availability of and
demand for local materials
• Outline any special materials
required for the project, such as
marble or ceramics
• Compare similar projects and look
at your own company’s historic data
• Utilise clients’, contractors’ and sub
contractors’ databases
• Keep track of changes in real estate
demands and in construction laws
• Carry out value engineering during
the design stage
• Improve and implement construction-
quality programmes
Contract methods should promote
flexibility and change
• Decisions should start on day one of
the project