Price Adjustment Policy (PPMO)

  Overview

Sometime a case may arise in a multi-year contract where the estimated price at the time of tender bidding might fluctuate by a certain amount during the execution or implementation period due to a sudden change or fluctuation in various cost components like materials, workers, equipment, and others. This price adjustment is only applicable if it's mentioned in the bid document. For a single-year project, it's not applicable.

 

Price Adjustment Table

In the standard bidding document, you can find a price adjustment table in Section IV inside the bidding forms after the letter of bid in the following format:.

Price Adjustment Table

Code	Index Description	Source of Index*	Base Value and Date	Base Value and Date	Bidder's Proposed Weighting (coefficient)**
1	2	3	4	5	6
	Non - adjustable (A)			0.15	0.15
	Labor (b)				0.3
	Materials (c)				0.4
	Equipment usage (d)				0.15
		Total

 

Generally, the client proposes a weight for the non-adjustable (A) factor of 0.15. The bidder has to propose their weightage for labor, material, and equipment, and the total of all has to be 1. Normally, the total cost of the material is high as compared to labor and equipment, so bidders propose a higher weight for the material. In some cases, if you get a clue about the price hike of fuel, you can give higher weight to equipment uses.

 

In clause 53 of the bid document, under the price adjustment heading, there is a standard formula for price adjustment as follows:

𝑝𝑛 = A+b(Ln/Lo)+c(Mn/Mo)+d(En/Eo)+ etc.

Where

Pn = price adjustment factor

A,b,c,d = cost element coefficients in the price adjustment table.

L_n, M_n, E_n = current cost index at time of running bill placement

L_o, M_o, E_o = base cost indices at the time of bidding procurement

On the home page of Nepal Rastra Bank (https://www.nrb.org.np/), under the title Current Macro-Economic and Financial Situation, you can find the index values in Excel format.

Let's consider an example now.

Suppose

We have a running bill of Rs. 10,00,000/- without price adjustment.

The base time for contract bidding is March 2021.

The running bill placement date is April 2024.

Now,

Let's take the value of the indices from the current macro-economic and financial situation provided by Nepal Rastra Bank.

During the contract bidding period, i.e., March 2021

National Salary and Wage Rate Index for Construction Labor (L_o) = 541.77

National Wholesale Price Index for Construction Materials (M_o) = 136.84

National Wholesale Price Index for Machinery and Equipment(N_o) = 122.93

At the time of the placement of the running bill, i.e., April 2024

National Salary and Wage Rate Index for Construction Labor (L_n) = 592.29

National Wholesale Price Index for Construction Materials (M_n) = 134.78

National Wholesale Price Index for Machinery and Equipment (Nn) = 136.46

Again,

Applying the price adjustment formula as follows:

𝑝𝑛 = A+b(Ln/Lo)+c(Mn/Mo)+d(En/Eo)

      =0.15+0.3*(592.29/541.77)+0.4*(134.78/136.84)+0.15*(136.46/122.93)

 𝑝𝑛 = 1.04

 

Thus, the final bill amount = Rs.10,00,000* 𝑝𝑛

                                          =1000000*1.04

                                          = 1040000

So, the final bill amount will increase by Rs. 40,000.

 

Special Case

Just in case the price adjustment table is not applicable or is not given for a multi-year project, you can claim the price adjustment following clause 53.6 in the bid documents. But the price fluctuation should be more than 10%; otherwise, it's not applicable.

You have to keep in mind that this case will only cover price increments for construction materials.

Let's consider an example now.

Suppose

Price of reinforcement steel during the base time of contract bidding (R_o) = Rs. 100 per KG.

At the time of running bill placement, reinforcement steel cost (R₁) = Rs. 115 per KG.

Let the quantity of steel in the running bill = 10000 KG.

Now,

Price adjustment amount

P =[R1 -(R0 ×1.10)]× Q

    =(115-(100*1.10)]*10000

    =500000

Again.

Percentage increment in price =100*(R1-R0)/R0

                                                           =100*(115-100)/100

                                                            =15% < 10% (Thus, a price adjustment is applicable.)

As per clause 53.6, a 10% rise in price is not liable for price adjustment.

Thus,

Price of reinforcement steel after 10% increment in price =  R_o+10% of R_o

                                                                                                                =100+10% of 100

                                                                                             =Rs. 110

Price adjustment amount per unit steel reinforcement = 115-110

                                                                                      =5

Thus, the final price after adjustment = quantity of steel * price adjustment per unit quantity.

                                                    =10000*5

                                                     =50000

This will be the price increment in the running bill for material. Equipment and labor cost increments shall not be included in this category.

Others

Price adjustments are applicable each time you place the running bill with the adjustment price calculated. Otherwise, you will receive only the running bill amount, excluding the adjusted price.