Price adjustment in construction contracts: when it is due and how to work it out
Price adjustment (escalation) changes the value of work done under a construction contract by as much as the prices of its inputs, such as steel, cement and labour, have moved since a base date set by the contract. When prices rise the difference is paid to the contractor; when they fall it is deducted. It is worked out with a formula that gives each input a weight (coefficient) in the item price and measures its change with an official price index.
By Ta3mir engineering team · Published · Last updated
When price adjustment is due
As a rule the contract decides: with no price adjustment clause, prices are fixed. Some laws make it mandatory, as in Egyptian public contracts.
| Egyptian public contracts (Law 182 and its Regulation) | FIDIC Red Book 2017 | |
|---|---|---|
| Mandatory? | Yes for works contracts of six months or more; it binds both parties and any contrary agreement is void (art. 47) | Only if the contract includes a schedule of cost indexation data (13.7) |
| Frequency | At the end of every three contractual months from the opening of the technical envelopes or the direct award (art. 47) | The amounts payable to the contractor are adjusted by the formula in the contract schedule, per currency (sub-clause 13.7) |
| Indices | Producer price indices published by CAPMAS, the national statistics agency (art. 47) | The indices named in the contract schedule; a provisional index is used until the actual one is published |
| Items and weights | The public body names the variable items in the tender conditions from the Ministry of Housing list; the contractor states their coefficients in the technical envelope; no coefficient may be zero and their sum per item is below 100% (Regulation art. 97) | Weights in the contract schedule; no adjustment on work valued at cost or at current prices |
| Payment | The approved certificate is paid on time without waiting for the formula; differences are reviewed and paid within 60 days at most of the claim (Regulation art. 97) | Within the payment certificates |
| Delay | If the contractor gets an extension for reasons beyond their control, the formula applies to the extension quantities (art. 48) | If the contractor misses the Time for Completion, later adjustment uses the lower, in the employer's favour, of the index 49 days before it expired and the current index |
- In Egyptian public contracts no price adjustment is paid on purchases funded by the advance payment (Regulation art. 92).
- Egyptian public contracts shorter than six months are not adjusted if the delay is the contractor's; if the delay is the public body's, quantities done after the six months are adjusted by CAPMAS inflation rates (Regulation art. 97).
The general index-based formula
An item's value is split into a fixed part (a) that never changes and variable parts, each with a weight (w) and an official index. Lo is the index in the base month and Ln its value in the period being paid. The fixed part plus the weights total 100%.
Pn = a + Σ w × (Ln ÷ Lo)
Price adjustment = value of work subject to adjustment × (Pn − 1)
The Executive Regulation of Law 182 writes the same formula per variable item; the two forms are arithmetically equal:
Compensation or deduction = value of work subject to adjustment × coefficient × (Ln − Lo) ÷ Lo
| Symbol | Meaning |
|---|---|
| a | The fixed part of the price that is not adjusted |
| w | The weight (coefficient) of a variable input in the item price, as in the tender or the contract schedule |
| Lo | The index value in the base month the contract sets, e.g. the month the technical envelopes were opened |
| Ln | The index value in the period being paid |
| Pn | The adjustment factor: 1 means no change, above 1 an increase, below 1 a deduction |
Worked example, step by step
The value of work subject to adjustment in the period is EGP 1,000,000. Weights and index values are illustrative, not from a real bulletin; the fixed part is 15%. Formula: Pn = 0.15 + 0.35 × (112 ÷ 100) + 0.2 × (105 ÷ 100) + 0.3 × (108 ÷ 100) = 1.076.
| Input | Weight | Lo | Ln | Change | Difference (EGP) |
|---|---|---|---|---|---|
| Reinforcing steel | 35% | 100 | 112 | 12% | 42,000 |
| Cement | 20% | 100 | 105 | 5% | 10,000 |
| Labour | 30% | 100 | 108 | 8% | 24,000 |
| Fixed part (not adjusted) | 15% | 0 | |||
| Total | 100% | 76,000 |
Price adjustment = 1,000,000 × (1.076 − 1) = EGP 76,000, the same as the sum of the inputs (76,000). Had the steel index fallen instead, its difference would be negative and reduce the total.
Steps to work out a price adjustment claim
- Check that the contract provides for price adjustment, or that the law requires it, as in Egyptian public contracts.
- Find the base month in the contract, e.g. the month the technical envelopes were opened.
- List the variable items and their coefficients from the tender or the contract schedule, and check the fixed part and weights total 100%.
- Collect the official index values for the base month and the period from their official source.
- Work out the value of work done in the period that is subject to adjustment, following the agreed programme.
- Apply the formula per item or per input and add the results.
- Submit the claim separately from the certificate, with the index table and its sources, and keep the submission date.
How to do it in Ta3mir
In Ta3mir you set price adjustment once in the project contract terms: base month, fixed part, the weight of each index, and monthly or quarterly frequency. When each certificate is approved, Ta3mir works out the adjustment factor and adds a «price adjustment» line.
- The set-up is refused unless the fixed part and the weights total 100%.
- With quarterly frequency the average of the quarter's published months is used.
- The calculation shows which period each index was read from, so a month not yet published is visible.
- The price adjustment line is kept apart from retention and from the quantity comparison, and turns into a deduction when prices fall.
Sources
- Law 182 of 2018 on contracts made by public bodies (Official Gazette no. 39 bis (d), 3 October 2018)
- Executive Regulation, Minister of Finance Decree 692 of 2019 (Al-Waqa'i' al-Misriya no. 244 cont. (b), 31 October 2019)
- FIDIC Conditions of Contract for Construction (Red Book), 2nd edition 2017. Text from the licensed publisher copy
This guide is an explanatory summary written by the Ta3mir engineering team. It is not the text of the law or of any contract and it is not legal advice. Figures in the examples are illustrative. Your contract and the officially published text govern, so check them with a contracts adviser before acting.