Example of Price Adjustment as of FIDIC RED BOOK M.

Hanif ZAKI

Contents
1.0 Aim and Scope: ................................................................................................................ 2
2.0 Background: .................................................................................................................... 2
3.0 Introduction: ..................................................................................................................... 2
4.0 Price Adjustment as of FIDIC Red Book NPA SBD for large work ............................... 2
4.1 Application of Price Adjustment on a Virtual project ................................................. 3
4.2. Summery of Calculations............................................................................................ 7
5.0 Conclusions:..................................................................................................................... 7

List of tables
TABLE 4.1.1 VIRTUAL PROJECT’S BOQ CONSIDERED FOR ANALYSIS ....................................................................................... 4
TABLE 4.1.2 INVOICE DATE AND AMOUNT (ASSUMPTION) ................................................................................................... 5
T ABLE – 4.1.3 : KABUL PROVINCIAL CAPITAL CONSUMER PRICE INDEX ................................................................................. 5
TABLE 4.2.1 SUMMERY OF NORMAL PRICE AND ADJUSTED PRICE AS OF FIDIC RED BOOK AND NPA, SBD.................................... 7

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Example of Price Adjustment as of FIDIC RED BOOK M. Hanif ZAKI

1.0 Aim and Scope:

The purpose of this paper is to demonstrate a numerical example of price adjustment
as of the FIDIC Red Book that is equivalent to the National Procurement Authority (NPA),
Standard Bidding Documents (SBD) for large works. The data for the scope of this paper are
consist of Bill of Quantity of a virtual (imaginary) Project and cost indices which is derived
from the Central Statistic Organization of Afghanistan.

2.0 Background:
Price adjustment is a contemporary and new clause in contract management of
construction industries. It appears in contract management with FIDIC Red Book and the
World Bank and United Nation Office for Project Service practice for small and large work.

In most countries, there are organizations and governmental bodies that determine the
non-adjustable and adjustable items, as well as the consumer price indices for every specific
construction materials such as: cement, gravel, concrete, brick masonry and etc.
Unfortunately, in Afghanistan the CSO provide the consumer price indices only for food item
and non-food items for every province, and a few other items for country wide, which
construction materials are not on their lists. So the cost indices for construction materials,
equipment and labour are considered as of non-food item, which is the closest ones to them.

3.0 Introduction:
Price adjustment consider the fluctuation of cost of materials, equipment and labour
due to currency fluctuation, inflation, shortage of materials due to some other on-going
project, or any other circumstances that varies the cost. It can result in increase or decrease of
actual cost, depending on the fluctuation of current indices comparing to base indices. The
base indices normally stipulate in contract data on base date and current indices are derived
from the time of invoice submission. The formula for SBD large work is different from SBD
for small work. But herein both method will be demonstrated. Nevertheless, the price
adjustment in Afghanistan is very rare practice and in most contract documents are not
applicable.

4.0 Price Adjustment as of FIDIC Red Book NPA SBD for large work
Adjustments for Changes in Cost (Price Adjustment) in FIDIC Red book explained
under clause 13.8. the formula for this cost adjustments are given as follow

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Example of Price Adjustment as of FIDIC RED BOOK M. Hanif ZAKI

𝐿𝑛 𝐸𝑛 𝑀𝑛
𝑃𝑛 = 𝑎 + 𝑏 + 𝑐 + 𝑑
𝐿𝑂 𝐸𝑂 𝑀𝑂
𝑃𝑛 = is the adjustment multiplier to be applied to the estimated contract value in the relevant
currency of the work carried out in period “n”,
a = is the weighted fixed coefficient representing the non-adjustable portion of accepted
contract amount.
b, c, d = are weighted coefficients representing the labour, equipment and material cost
portion of the accepted contract amount. These coefficients are normally to be determined in
the contract data before the commencement of works.
𝐿𝑛 , 𝐸𝑛 , 𝑀𝑛 the current cost indices of Labour, equipment and material for period n in the
relevant currencies.
𝐿𝑜 , 𝐸𝑜 , 𝑀𝑜 the base cost indices of labour, equipment and material normally determined at the
base date.
In this example, the cost indexes are taken from http://cso.gov.af/en/page/ict/5555/5353 p

4.1 Application of Price Adjustment on a Virtual project

A virtual project having some adjustable and non-adjustable cost items have been considered
for applying the price adjustment it is required to make some assumption such as start date of
project, BoQ and non-adjustable cost items.

4.1.1 Assumption
➢ In this project, the non-adjustable cost items are:
• Mobilization
• De-mobilization
• Environment precaution and protection
• Any additional variation to the project made during the execution of project
(none in this example)

In the meantime, the price adjustment is not applicable for the extension time period. For the
time extension period 49 days before the last days of time for completion or the indices
during extended time, whichever is applicable for the employer.

➢ Start date of project is considered 1st Apr-2016 and the receiving invoice time, will be
stipulated in calculation process. And the bid submission date (bid opening) has been
2nd of Mar-2016
➢ Other items are considered adjustable cost item. The BoQ of the projects are
considered as of the following table 1.1

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Example of Price Adjustment as of FIDIC RED BOOK M. Hanif ZAKI

TABLE 4.1.1 VIRTUAL PROJECT’S BOQ CONSIDERED FOR ANALYSIS

Item Item Name Unit QTY Price Total Unit
Total Cost
Material Equipment Labour Cost
Lump
1 Mobilization at site 1
sum 522500.00 237500.00 190000.00 950000.00 950000.00
Lump
2 Demobilization from site 1
sum 357500.00 162500.00 130000.00 650000.00 650000.00
Environment precaution and Lump
3 1
protection Sum 220000.00 100000.00 80000.00 400000.00 400000.00
Excavation of Structure
4 Cum 5710
foundation 785086.50 356857.50 285486.00 250.00 1427430.00
Excavation In hilly area or along
5 Cum 56700
the road 7796250.00 3543750.00 2835000.00 250.00 14175000.00
6 Hard material Cum 6000 1980000.00 900000.00 720000.00 600.00 3600000.00
Embankment backfilling behind
7 Cum 1819
the structure 250170.25 113713.75 90971.00 250.00 454855.00
8 Road way embankment. Cum 40740 6722100.00 3055500.00 2444400.00 300.00 12222000.00
9 Sub-grade preparation Sqm 55680 918720.00 417600.00 334080.00 30.00 1670400.00
11 The gravel wearing coarse Cum 18000 5940000.00 2700000.00 2160000.00 600.00 10800000.00
100 mm thick grouted stone
12 pitching in culvert floor and Sqm 1142
apron. 329761.16 149891.44 119913.15 525.00 599565.75
Stone masonry walls
13 Cum 3705
constructed with stones. 5094746.25 2315793.75 1852635.00 2500.00 9263175.00
Furnish and place mild steel
14 Tonne 50
deformed reinforcing Bars 1726656.25 784843.75 627875.00 62500.00 3139375.00
Concrete in Culverts wall, Roof
15 Cum 399
slab, Wing walls 1644348.75 747431.25 597945.00 7500.00 2989725.00
Grand Total 33187839.16 15085381.44 12068305.15 62341525.75

4.1.2 Calculation and Procedure

The sum of coefficients a + b + c + d = 1. And the cumulative sum of non-adjustable items
are 2,000,000.00 (two millions). So the weight of each coefficients are derived as follow,

2000000
𝑎= = 0.0321
62341525.75

12068305.15
𝑏= = 0.1936
62341525.75

15085381.44
𝑐= = 0.2420
62341525.75

33187839.16
𝑑= = 0.5324
62341525.75

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Example of Price Adjustment as of FIDIC RED BOOK M. Hanif ZAKI

Besides the start date of project, it is required to make assumption regarding the invoice’s
time and amount as well. Thus for each bill a submission date will be inserted. Herein the
project is to be completed in less than1 year and 4 invoice considered to be made by the
contractor as follow.

TABLE 4.1.2 INVOICE DATE AND AMOUNT (ASSUMPTION)

Description Bill No 1 Bill No 2 Bill No 3 Bill No 4 Contract Price
Amounts 11994509.55 19674985.53 20728557.31 8665472.079 61063524.47
Payment 5-Jun-2016 1-Sep-2016 29-Nov-2016 2-Feb-2017
Date

the base indices as of the CSO website shall be considered for Feb-2016, because it is
assumed that the tender submission date is 2-Mar-2016. So the base date which is defined to
be 28 days before tender submission date correspond to Feb-2016.

The CPI is given generally for a few items. But in this example for the three
components of material, equipment and labour, we only consider the nearest corresponding
items as of the following table 4.1.3 (please note that the CPI doesn’t match exactly the
materials, equipment, and labour indices. Since the CPI data for the three mentioned items
are not available we consider the Non-Food for materials, Transportation for Equipment and
Miscellaneous for Labour. This assumptions are just for better demonstration of the issue.
However it is possible to consider only Non-Food indices for all the three mentioned items)

T ABLE – 4.1.3 : KABUL PROVINCIAL CAPITAL CONSUMER PRICE INDEX

Mar 2015 = 100
2016 2017
Items
Feb-16 Jun-16 Sep-16 Nov-16 Feb-17
Non-Food Items, Tobacco &
106.0
Services (Materials) 107.0 109.5 110.7 109.9
Transportation (Equipment) 104.7 104.5 107.7 113.9 111.5
Miscellaneous (Labour) 119.2 120.1 133.2 134.2 134.5

The following graph indicate the general trend of CPI from Feb-2016 to Feb-2017.

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Example of Price Adjustment as of FIDIC RED BOOK M. Hanif ZAKI

140.0
Transportation (Equipments)
135.0
Msicellenaeous (Labour)
130.0 Overal (Material)

125.0
CPI

120.0

115.0

110.0

105.0

100.0
Dec-15 Jan-16 Mar-16 May-16 Jun-16 Aug-16 Oct-16 Nov-16 Jan-17 Mar-17 Apr-17
Time (Month)

FIGURE 4.1.1 CPI FOR THREE ITEMS FROM FEB-2016 TO FEB-2017

Considering these values now we derive the cost adjustment factor for every invoice the

• The First Invoice Adjustment factor

𝐿𝑛 𝐸𝑛 𝑀𝑛
𝑃𝑛−𝐽𝑢𝑛 = 𝑎 + 𝑏 + 𝑐 + 𝑑
𝐿𝑂 𝐸𝑂 𝑀𝑂
120.1 104.5 107
= 0.0321 + 0.1936 + 0.2420 + 0.5324 = 1.0061
119.2 104.7 106
The adjusted amount of 1st invoice 𝑃1 = 𝑃𝑛−𝐽𝑢𝑛 ∗ 𝑃 = 1.0061 ∗ 11994509.55 =
12067941.3

• The Second Invoice Adjustment factor

133.2 107.7 109.5

𝑃𝑛−𝑆𝑒𝑝 = 0.0321 + 0.1936 + 0.2420 + 0.5324 = 1.047
119.2 104.7 106
The adjusted amount of 2nd invoice 𝑃2 = 𝑃𝑛−𝑆𝑒𝑝 ∗ 𝑃 = 1.047 ∗ 19674985.53 =
20606627.5

• The Third Invoice Adjustment factor

134.2 113.9 110.7

𝑃𝑛−𝑁𝑜𝑣 = 0.0321 + 0.1936 + 0.2420 + 0.5324 = 1.069
119.2 104.7 106
The adjusted amount of 3rd invoice 𝑃3 = 𝑃𝑛−𝑁𝑜𝑣 ∗ 𝑃 = 1.069 ∗ 20728557.31 =
22165738.6

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Example of Price Adjustment as of FIDIC RED BOOK M. Hanif ZAKI

• The fourth Invoice Adjustment factor

134.5 111.5 109.9

𝑃𝑛−𝐹𝑒𝑏 = 0.0321 + 0.1936 + 0.2420 + 0.5324 = 1.060
119.2 104.7 106
The adjusted amount of 4th invoice 𝑃4 = 𝑃𝑛−𝐹𝑒𝑏 ∗ 𝑃 = 1.069 ∗ 8665472.079 =
9187612.3

4.2. Summary of Calculations

Summary of the above calculation based on the indices derived from the CSO Afghanistan
website for each corresponding date is displayed in the following table and figure
TABLE 4.2.1 SUMMERY OF NORMAL PRICE AND ADJUSTED PRICE AS OF FIDIC RED BOOK AND NPA, SBD
Date 05-Jun-16 01-Sep-16 29-Nov-16 02-Feb-17 Total
Normal Price 11994509.55 19674985.53 20728557.31 8665472.079 61,063,524.50
Adjusted Price 12067941.3 20606627.5 22165738.6 9187612.3 64,027,919.70
Difference Amount 73431.7 931642.0 1437181.3 522140.2 2,964,395.30
Diff (%) 0.612% 4.735% 6.933% 6.026% 4.855 %

The following figure represent graphically the above scenario

Normal Price Adjusted Price

25000000

20000000

15000000

10000000

5000000 Adjusted Price

Normal Price
0
05-Jun-16 01-Sep-16 29-Nov-16 02-Feb-17
Normal Price 11994509.55 19674985.53 20728557.31 8665472.079
Adjusted Price 12067941.3 20606627.5 22165738.6 9187612.3

FIGURE 4.2.1 GRAPHICAL REPRESENTATION OF NORMAL PRICE AND ADJUSTED PRICE

5.0 Conclusions:
The contract price and payments changes to the favour of contractor in this case
study. And that is due to increase of consumer price indices, taken from central statistic
organization of Afghanistan. As such the normal price is 61,063,524.50 AFN which after
adjustment it becomes 64,027,919.70. indicates to increase amount of 2,964,395.30.
(+4.855%)

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