Variation and cost escalation

Dear Sathish,

Everything you explained is beautiful.

The formula for Escalation amount = [100%-B]xWx ∑ [(Ai-Aoi)/Aoi]xPi, is not clear

what Ai    , Aoi   stands for ?

Dear Harish,



It is very important that you adhere to the procedural requirements of FIDIC, if you want to be compensated according to FIDIC.



Please remember that you have to submit your complete claim analysis with supporting documents and total amount within 28 days from the end of the event.



You have a difficult situation, because chances are you don’t have a copy of the GC contract, and you have no way of knowing what are the CoC of that Contract! Unles your contract is specific to the Back-to-Back clauses of the GC contract with the Client.



With kind regards,



Samer

Dear Harish,



Make yourself clear on the following points:



1) Are you eligible for Escalation, if the contract says ‘yes’ then the method should also be mentioned in it. If not by way of a formula atleast it will state something regarding it.



2) Is there any point in your contract stating that the contract is back to back, i.e., if only client pays then the GC pays? If that is the case you request your GC to provide the formula that is mentioned in his contract with client for arriving at escalation. So that there will be uniformity.



3) As a last recourse Escalation can be arrived at as follows:



Step 1: arriving percentage of components

Suppose you have the following components involved in your work : Labour, Material, Plant & Machinery.



Now, based on the rate analysis of the rate quoted at the time of Tender workout the cost involvement of each component.



Based on the scope of Work try to estimate costwise the % of each component:



Say your Project cost is 100. Removing profits and Overhead component say 15%, the cost price of work components is 85.

Say by your total estimate with your tender rates you obtained the following percentages Labour cost =10%, Fuel Cost = 10% (fuel cost is important in India), Material Cost = 60%, P&M cost=20% (total making 100%); ……..(1)



now you can safely regard that for a given amount of work during a month (period) the above arrived percentages of cost will give you the approximate cost involvement of each component.



By way of illustration suppose work done during july 2010 is Rs. 200, labour component cost will be 0.85x200x10%.

for specific materials such as M1 (say, Steel), M2 (say, Stainless Steel ) and M3 (for materials other than steel and stainless steel).



Assess the quantity of steel consumed during the month and then calculate the cost using the basic rate quoted during tender for steel, say cost is Rs. 20

The cost percent of steel during the month is S = 20/200=10%,



Following the same lines calculate for Stainless steel, say SS = 10%, then the percentage contribution of other materials would be 60-10-10 = 40% from (1) since total material component percent is 60%.



Now 0.85x 200x60% of work done will be material component, but instead of using 60% directly adopt individual % , as explained above, for each material you want to claim and deduct the same from Total material % to obtain other material percent.



.................................................

Step 2: Escalation formula:

Escalation amount = [100%-B]xWx ∑ [(Ai-Aoi)/Aoi]xPi,



Pi is the cost percentage (as derived above) of component use the same % every month for all (labor, fuel, P&M ) except for materials. For materials Pi should be calculated each month based on consumption.



B=Percentage of Overheads and profits, 15% in the above case



W= work done during the month



Ai is the index of component 28 days prior to the billing month, alternately, if you go by rates Ai will be average rate calculated based on the invoices in First in First Out (FIFO) order. Whether you go by rates or index adhere to the same in Ao and Ai



Ao= Index/ Rate 28days prior to the submission date of Tender;



A is the component for Escalation, say, Labour, steel, other materials, Plant & Machinery etc.



for index use national index where available or a standard manufacturers rates (whose source approval is available with you and whose material you are using).



Pi is the percentage of that component costwise (as explained above, except for materials other components can be arrived based on total estimate workout, however, It all depends on how sensitive the basic rates are in that country and how they affect your price - the choice should be made judiciously)



Hope this helps.

Regards,

K

Dear Harish,

If there is an increase in quantity without any increase in scope or alteration of scope and if you are sure that the way you measure the quantities is correct-as per the terms of your contract or as per prevailing industry practice, you provide the code pertaining to the method of measurement; There should have been an error on the part of the Client in arriving at the BOQ estimate.



Alternately, if there is an increase in the scope, the client should have instructed you by way of a letter, MOM or a verbal instruction which you should have confirmed or yet to confirm, with reference to that take forward the proposal for variation.



Regarding escalation:



Refer your COPA (Conditions of Particular Application) for Escalation, first look whether you are eligible for Escalation, if yes then check in which way. If no formula is provided and nothing else is said about it for arriving at escalation, but if the contract speaks only that you are eligible for escalation, check whether you have provided a rate breakup to the client for the rates quoted by you during the tender stage and compare the present rates with them and claim the difference.



Regarding WCT and Service Tax:

Why are you worrying about WCt and Service tax, they are anyhow not yours but the governments!?, ask your contractor to give the same in writing and produce the same where required. However, check whether you have stated that service tax is extra in your quote? If you did not quote and further if you did not provide the rate breakup to your client at tender stage, he may assume that the same is deemed to be included in the quoted rates.



Hope this helps to a certain extent, All the best.



Regards,

K

proving escalation cost is not easy but that does not mean it cannot be done, and most clients and engineers would ask u to prove there was a price escalation.



u need to do some research on the national price index for that particular materials in that country to prove that was an escalation, ie when the contract was awarded and the price as it is now.



certain types of contract has a mathematical formula in the conditions of contract on how to calculate the price escalation, if there is such a formula in your contract, go along that way.



rgds

Dear Harish,



What do you mean by PT works? Do you adhere to FIDIC or is there any other contract between you and your client.