We are a project manager on an ECC Option C contract and have a query about the use of option X1 on price adjustment for inflation. We understand how the total of the prices is updated for inflation, but are struggling with the update to the schedule of cost components element of defined cost.
In accordance with clause X1.5, the total of the prices is updated every time the amount due is assessed, which ensures the target cost remains in line with inflation and the defined cost that the contractor is being paid. In the case of subcontractor work, which will be based on current costs (i.e. including inflation), this makes sense, as you would assume that the rate at which subcontractor’s quotes increase due to inflation would be matched by the price adjustment factor (PAF) update to the total of the prices.
However, as part of the defined cost, the contractor’s schedule of cost components is also used, which is priced at the base date. We are struggling to understand how this element is updated for inflation, if it is? Or is it covered within the fee?
The schedule of cost components is not a list of rates or prices. It just sets out what the contractor will be paid for and how that is calculated. And nearly all the items in the schedule of cost components are paid for at what they have actually cost the contractor. So, those costs will, by the very nature, include for any inflation that has occurred to those costs.
The only exceptions to this are item 24 and sections 5 and 6 of the schedule of cost components, which are based on quoted rates. These usually form only a very small part of the contractor’s cost and they know that these will not be increased for inflation and can make their allowances accordingly in the rates they quote.