The contractor is not paying any escalation amounts within its interim or final payments to its subcontractors. The defined cost of subcontractors is therefore exclusive of any escalation amounts. The question is, when assessing the contractor’s price adjustment factor amounts under X1, should the amounts for these subcontractors not be included within the price for work done to date?
Option X1 is just a convenient way of calculating an assessment of what the inflation may be, but there are all sorts of ways that the actual inflation can vary from that assessment. However the risks, or rewards, of those variations are shared between the parties through the share mechanism.
In reality, just because there are no inflationary increases within a particular subcontract, it does not mean that the contractor will not be paying for inflation. In that case it could well be (and probably is) the case that there is an allowance for inflation within the subcontractor’s prices.