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Escalation Mechanism

3 replies [Last post]
Thu, 2008-10-23 08:19
RAJESHKUMAR RAJEN...
User offline. Last seen 13 years 31 weeks ago. Offline
Joined: 19 Aug 2006
Posts: 7
Groups: None
I need your valuable advice on Escalation Mechanism
Iam working with Client
We are bound by FIDIC 99 - 1st edition, our contract is based on Lumpsum basis
Location: Dubai
this is the scenario
1. BOQ rate in Tender approved - A dhirams

2. Accepted Escalation rate during the starting of the project (july 08) - B dhirams

(basically increase in the rate of concrete, steel, blockwork etc,..)

3. For Interim Payment Certificate the contractor has to produce the Invoice - C dhirams

(we will pay C, it may be more than B or less, we will pay B, but never less than A)
rate C will be provided when it exceeds 10% of A, otherwise it will be absorbed by the Contractor
we fixed the Escalation mechanism for B, but iam finding difficulty in fixing the rates of C during the interim payment certificate....
whether the contractor has to produce the invoice
***every month or
***15 days once or
*** if there is any abrupt changes in the market or
***based on the BOQ item wise
***sometimes the contractor may ordered materials for rate B and stage by satge, they are receiving the material till the end of the project, eventhough the material price gone down in the market
*** sometimes the contarctor may cheat us by producing fake invoice/LPO
how to setup a standard? i need your valuable advice
you have any format kindly send it to me

Thanking you in Anticipation
Rajeshkumar. R
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Replies

Wed, 2008-11-05 02:38
#1
RAJESHKUMAR RAJEN...
User offline. Last seen 13 years 31 weeks ago. Offline
Joined: 19 Aug 2006
Posts: 7
Groups: None
Thanks Mr Carlito Ogoy
very much useful information

Take care
Bye
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Tue, 2008-11-04 19:40
#2
Carlito Ogoy
User offline. Last seen 4 years 13 weeks ago. Offline
Joined: 27 Feb 2003
Posts: 16
Groups: Civil Engineering
Hi Raj,

I have a similar experience with you. But I am on the contractor side and you are on the client side. Here is what I did and it worked somehow.

I issue my payment cert to the client every month as per the contract payment terms and conditions. I have my actual quantities with the approved BOQ rates in the contract as basis in determining the value of my claim. This is your "A".

During the interim, we have faced sudden increase in price for steel. And as per the contract, we have an agreed rate for escalation. I simply raised variation order for these items so I can easily monitor what quantities/items were utilised for this claim. This claim is then submitted in the next monthly payment application. However, similar to your case, if my escalation cost does not exceed 10%, as per contract, I cannot claim it.

If you have claimed for "A" already, and you have a VO for "B" for the same item/material, then the value of your claim "C" is simply the difference of the two. However, if you haven’t claimed for "B" yet, then your "C" value is the full value of "B".

As a client, require your contractor to submit original invoice as proof. If they cannot provide one, let them submit a certified-true-copy of the invoice. So your worry of receiving fake invoices is gone.

Lastly, as a client, you also know when prices of steel or other materials are increasing in the market. You might as well can predict this prior to contracting, that is why you have that 10% margin. Again for you to have backup data, require your contractor to submit their PO then simply check its date and the current market price.

Hope this helps you somehow.

Cheers.


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Fri, 2008-10-24 05:07
#3
Samer Zawaydeh
User offline. Last seen 5 years 25 weeks ago. Offline
Joined: 3 Aug 2008
Posts: 1664
Groups: Civil Engineering, Regional Representatives
Dear Raj,

This is a standard practice. What you want to do is to prepare your original invoice as per approved BOQ in Contract.

In a different section, you will calculate the amounts due to approved escalation formula.

In the cover page of the Invoice, you apply the required deductions:
a)Recovery of Down Payment, Retention and Discounts to the Original Contract.
b)Retention % to the amounts of Variation Orders.
c)Retention % to the amounts of Escalation paid.

This is done for every Interim Payment Certification on a Monthly basis or when the value of the works completed reach the minium payment amount is reached.

Regarding the purchase of Material and the associated compensation due to escalation or prices, if you have the cash flow required to buy the complete quantities of material, then it is recommended to buy them after the approval of material is secured and store them at site and invoice for Material on site (80% of invoice amount).

If the cash flow is not strong enough to buy all the material after is is approved by the Engineer, then the market fluctuation in prices will be absorbed by the Contractor.

Buying the material, storing it at site and invoicing 80% of its value, can be done for the majority of material except Concrete, which has to be mixed and poured within 90 minutes, hence you can not fix it’s price.

If you have more detailed question, please let us know.

Good luck,

Samer
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