- Secondary option X1 on price adjustment for inflation can be used in NEC4 ECC, PSC and TSC. It can also be included as an additional condition of contract in the shorter NEC contracts.
- X1 involves setting a base date before the tender date, then calculating the priceadjustment before each assessment date based on the changing value of an agreed prices index or indices.
- Clients need to choose the prices index or indices with care to ensure the model of inflation is appropriate for the contract.
After many years of low inflation when bidders were happy to make a small allowance for inflation in their bids, things have changed. Inflation is now a serious issue and, if contracts do not include protection for inflation, bidders will have to guess at significant allowances, pushing tendered prices up. Alternatively, they might simply refuse to bid.
So, should the client take the risk of inflation? If they want to, for NEC users the answer is simple: use secondary option X1 on price adjustment for inflation. This is an option in all the main NEC4 contracts: the Engineering and Construction Contract (ECC), Professional Service Contract (PSC) and Term Service Contract (TSC). It could also be relatively easily added in as an additional condition of contract in the short versions of these contracts.
Price adjustment factorOption X1 sets a ‘base date’, normally set to be a couple of weeks before the tender submission date. It then calculates a ‘Price Adjustment Factor (PAF)’ based on the changing values of a prices index or a series of indices and weightings set out in the contract data. These are normally chosen by the client.
The contract then pays an extra amount for inflation in each assessment in the case of priced contracts (Options A and B); adds an amount for inflation to the total of the prices (the target) in target contracts (Options C and D); and deals with the impact on inflation on the assessment of compensation events.
Choosing a prices index or indicesThe client might choose to use a simple published prices index, such as the UK consumer prices index or retail prices index. But these indices are not designed to reflect construction inflation. The client may therefore opt for a specialised index or indices for the construction industry.
On a significant project the client might take the trouble to make an estimate of the cost of, for example, people, equipment, materials and fuel. It would then choose focused indices for each cost type weighted by their estimate of the proportion of that cost type in the contractor’s overall cost. This would give a better model of inflation.
An enlightened client might also ask bidders to comment on the appropriateness of the proposed indices.