Cost Adjustment Guidelines

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COST ADJUSTMENT

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COST ADJUSTMENT GUIDELINES

CONTENTS

CONTENTS.................................................................................................................................. 1

1 Introduction.............................................................................................................................. 3

1.1 Risks of Rise and Fall in Costs............................................................................................ ............ 3

1.2 Items to which cost adjustment might apply........................................................... ...................... 3

1.3 Purpose of these guidelines .......................................................... ................................................... 3

1.4 NSW Government requirements........................................................... ......................................... 3

1.5 ABS Indexes and proportions for common categories of work .................................................. .. 4

2. Contractual provisions for cost adjustment for labour and material ................................ 4

2.1 Cost Adjustment for Construction Contracts ......................................................... ...................... 4

2.2 Cost Adjustment for Long Term Service Contracts........ ........................................................... .. 4

2.3 Application of cost adjustment to specific subcontracts or work packages, and to multiple

categories of work.................... ............................................................ ................................................... 4

2.4 Dates for Base Index Number and Current Index Number............................................. ............ 5

2.5 Contractors' claims for cost adjustment................. ........................................................... ............ 5

2.6. Administration of cost adjustment claims ..................................................... ............................... 5

2.7. Worked examples of cost adjustment for labour and materials............................................... .. 5

3. Cost adjustment for other than labour and materials ......................................................... 6

3.1 Cost adjustment for fluctuations in currency exchange rates ................................................... .. 6

3.2 Cost adjustment for duties and taxes.................................................... ......................................... 6

3.3 Other cost adjustment ......................................................... ........................................................... .. 6

Appendix A - INDEXES AND PROPORTIONS FOR COMMON CATEGORIES OF

WORK....................................................................................................................................7

Appendix B - COST ADJUSTMENT PROVISIONS...........................................................8

Appendix C - COST ADJUSTMENT TABLE - ARCHITECTURAL (BUILDING) WORKS

................................................................................................................................................9

Appendix D - COST ADJUSTMENT TABLE - CIVIL WORKS ......................................10

Appendix E - COST ADJUSTMENT TABLE - MECHANICAL SERVICES INVOLVING

MAINLY PROPRIETARY OR PREFABRICATED COMPONENTS, SUCH AS

COMMUNICATIONS, PABX AND AIR CONDITIONING ............................................11

Appendix F - COST ADJUSTMENT TABLE - MECHANICAL SERVICES OTHER THAN

THOSE INVOLVING MAINLY PROPRIETARY OR PREFABRICATED COMPONENTS

..............................................................................................................................................12

Appendix G - COST ADJUSTMENT TABLE - ELECTRICAL ENGINEERING WORK13


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Appendix H - COST ADJUSTMENT TABLE - MAINTENANCE INVOLVING

EXTENSIVE MAJOR COMPONENT REPLACEMENT SUCH AS LIFT MAINTENANCE

..............................................................................................................................................14

Appendix I - COST ADJUSTMENT TABLE - MAINTENANCE NOT INVOLVING

EXTENSIVE MAJOR COMPONENT REPLACEMENT .................................................15

Appendix J - COST ADJUSTMENT TABLE - CONSTRUCTION OR PROJECT

MANAGEMENT.................................................................................................................16

Appendix K - EXAMPLE COST ADJUSTMENT TABLE - COMBINATION OF CIVIL

WORKS AND PREFABRICATED ARTICLES ................................................................17

Appendix L - EXAMPLE COST ADJUSTMENT TABLE - TWO CATEGORIES OF

WORK - CIVIL WORKS AND ELECTRICAL ENGINEERING WORKS......................18

Appendix M - LONG TERM SERVICE CONTRACT - ANNUAL COST ADJUSTMENT

TO RATES PRELIMINARIES CLAUSE...........................................................................20

Appendix N - WORKED EXAMPLE OF COST ADJUSTMENT.....................................21

Introduction................................................................................................................................ 21

Tender and Contract Details..................................................................................................... 21

CA Details Derived from Contract Details and Relevant ABS Indexes................................ 21

Claims and Cost Adjustment .................................................................................................... 22

Appendix O - SAMPLE COPIES OF ABS INDEXES .......................................................24

ABS 6345.0 Labour Cost Index Table 11 September Quarter 2004 ..................................... 24

ABS 6345.0 Labour Cost Index Table 11 June Quarter 2005................................................ 24

ABS 6427.0 Producer Price Index Table 17 September Quarter 2005 ................................. 25


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1 Introduction

1.1 Risks of Rise and Fall in Costs

There is a risk that, during the course of a contract, the costs of performing a contract will change fromthose initially estimated. This risk is not directly controllable by either the Principal or the contractor.

Contractors may have difficulty in estimating the long term effects of changes in costs and may:

price tenders conservatively, leading to unnecessarily high contract prices; or

guess or gamble on the effects of changes in costs, leading to tender prices that are either

excessive, or uneconomically low (with consequent risk of financial failure of the contractor).

Cost adjustment provisions in contracts address this risk by providing mechanisms for adjusting

contract payments to reflect changes in costs.

Cost adjustment provisions apply only to long term costs and some specific costs. Contractors retain

the risk of short term fluctuations in costs, and the risk of the calculated cost adjustment not reflecting

actual changes in costs.

1.2 Items to which cost adjustment might apply

Cost adjustment may be applied to the following:

labour and materials costs,

currency exchange rates for goods purchased in foreign currency,

other costs, including

- duties and taxes,

- shipping and transport.In normal contracting strategies, cost adjustment provisions should only be applicable to costs,

typically long term costs, that might cause tenderers to overestimate or uneconomically underestimate

contract prices.

1.3 Purpose of these guidelines

The purpose of these guidelines is to briefly explain cost adjustment, and provide sample Cost

Adjustment provisions for inclusion in contracts where required.

1.4 NSW Government requirements

For consistency, the following should apply to all contracts used by NSW Government agencies:

Cost adjustment for labour and material should normally not apply in construction contracts less

than 52 weeks in duration, and desirably not apply in contracts of less than 75 weeks duration

Cost adjustment may be provided in construction contracts of less than 52 weeks duration in

special circumstances, for example if the contract involves substantial materials or plant

incorporating price sensitive metals or minerals, such as copper.

Cost adjustment provisions for labour and materials should be based on the National Cost

Adjustment Provision Edition 2 (NCAP2).

Australian Bureau of Statistics (ABS) indices should be employed.


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Separate provisions are required for adjustment to take account of changes in foreign exchange

rate, customs duty, dumping duty, sales tax, ocean freight, marine insurance, overseas labour and

materials indices.

The total proportion of the amounts payable under the contract with is subject to cost adjustment

should be limited to 90%, the remaining 10%, representing profit and overheads, being fixed.

1.5 ABS Indexes and proportions for common categories of work

A table showing the appropriate ABS indexes and proportions for labour and materials for selected

common categories of work is atAppendix A. Sample copies of ABS indexes for labour and materials

are shown atAppendix O.

2. Contractual provisions for cost adjustment for labour andmaterial

2.1 Cost Adjustment for Construction ContractsSample contract clauses, based on NCAP2 for each of the categories shown inAppendix A, are

provided in the Appendices. These clauses may be incorporated as Preliminaries, or in the case of

GC21, as Schedule 8 to the General Conditions of Contract.

If cost adjustment is to be used, include the text shown inAppendix B, followed by an appropriate

table selected from or based on those shown inAppendices CtoL

NCAP2 and the attached provisions allow for cost adjustment in respect of each progress payment, or

final payment. Note that this will lead keenly pricing contractors to tender lower prices for work in the

first 52 or 75 weeks of the contract than for a contract without cost adjustment, when the contractor

must take the risk of cost increases.

2.2 Cost Adjustment for Long Term Service Contracts

In long term services contracts, cost adjustment may be applied to rates or prices shown in the contract

on an annual or other periodic basis. For contracts of this nature it may be convenient to avoid cost

adjustment by contracting only for periods up to two years and omitting cost adjustment provisions.

Sample cost adjustment provisions for annual adjustment are shown atAppendix M.

2.3 Application of cost adjustment to specific subcontracts or work packages,and to multiple categories of work

It may be that cost adjustment is appropriate only for some specific subcontracts or work packages, or

that different cost adjustment provisions are applicable to different subcontracts or work packages.This is only appropriate where the subcontracts or work packages are of relatively large scale and long

term.

It may also be appropriate to use different materials indexes where two or more substantial portions of

the work under the contract belong to different categories of work, but it is not convenient to specify

them as separate work packages.

Each of these approaches may be accomplished by adding additional items into the table attached to

the attached cost adjustment clauses as shown in the following examples:

Multiple Materials Indexes without creating different categories of work: Appendix K

Multiple categories of work: Appendix L


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3. Cost adjustment for other than labour and materials

3.1 Cost adjustment for fluctuations in currency exchange rates

The NSW Government Procurement System for Constructionstandard form contracts provide for cost

adjustment for fluctuations in foreign currency exchange rates in respect of substantial itemspurchased overseas. The provisions may be omitted if desired. There is no reason why the Principal

should be in any better position to control this price risk than the contractor.

3.2 Cost adjustment for duties and taxes

The NSW Government Procurement System for Constructionstandard form contracts provide for cost

adjustment for customs duties or tariffs in respect of substantial items purchased overseas. The

provisions may be omitted if desired. There is no reason why the Principal should be in any better

position to control this price risk than the contractor.

3.3 Other cost adjustment

While it is possible to provide for cost adjustment in respect of other costs such as shipping and

transport, this generally provides no advantage to the Principal because the Principal is in no better

position that the contractor to control these risks. Cost adjustment is only beneficial where it controls

the risk of tender prices being either excessive or uneconomically low as a result of the contractor's

difficulty in estimating the effect of change in some cost component.


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Appendix A - INDEXES AND PROPORTIONS FOR COMMONCATEGORIES OF WORKABS Index to be used for Labour:

Labour Price Index(Australian Bureau of Statistics (ABS) Catalogue 6345.0), Table 11, Private

Sector, ConstructionABS Index to be used for Materials:

Producer Price Indexes Australia(ABS Catalogue 6427.0)

Description %

Labour

%

Materials

Materials Index Table Materials

Table

Column

Architectural Works 35 55 Table 17, Materials

Used in House Building

Sydney

Civil Works 40 50 Table 17, Materials


Sydney

Mechanical Services - involving

mainly proprietary or

prefabricated components, such

as communications, PABX and

air conditioning

35 55 Table 11 Articles

Produced by

Manufacturing

Industries

Electronic

equipment and

other

machinery

Mechanical Services - other 45 45 Table 11 Articles

Produced by

Manufacturing

Industries

Electronic

equipment and

other

machinery

Electrical Engineering Work 45 45 Table 11 Articles

Produced by

Manufacturing

Industries

Electronic

equipment and

other

machinery

Maintenance - involving

extensive major component

replacement such as lift

maintenance

80 10 Table 17, Materials


Sydney

Maintenance - other 90

Construction Managers 90


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COST ADJUSTMENT Appendix B

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Appendix B - COST ADJUSTMENT PROVISIONSDO NOT USE FOR PROJECTS OF LESS THAN 75 WEEKS DURATION

(EXCLUDING OPERATIONAL MAINTENANCE) OR MORE. INCLUDE AFTER THIS

TEXT A COST ADJUSTMENT TABLE SELECTED FROM THE FOLLOWING, OR

SPECIALLY DRAFTED FOLLOWING THE EXAMPLES

1.1 CONTRACT PRICE AND COST ADJUSTMENT

The Contract Price may be increased or decreased for cost adjustment in accordance with these clauses

and the table attached.

1.2 EFFECTIVE VALUE

The Effective Value in respect of each progress payment or final payment is the value of work

included in the progress valuation or the fina1 value less:

- the value of any work included therein valued on the basis of actual cost or current prices;- the value of any increases due to variations;

- the value of any work which the Contract provides is not subject to adjustment for rise and fall incosts;- the value of any work which is subject to adjustment for rise and fall in costs on a different basis

from that provided for by these clauses;

- the Effective Value in respect of previous progress payments;

and disregarding any increase or decrease under these clauses.

1.3 BASE INDEX NUMBER

"Base Index Number" means the index number appropriate to the index referred to in Column 1 of the

table attached, applicable to the date in Column 3.

1.4 CURRENT INDEX NUMBER

Current Index Number" means the index number appropriate to the index referred to in Column 1 of

the table attached, applicable to the earlier of the date in Column 4 or Column 5 but if the date for the

Current Index Number is earlier than the date for the Base Index Number, the date for the Current

Index Number shall be the latter date.

1.5 CLAIMS FOR COST ADJUSTMENT

The Contractor may submit claims for cost adjustment in respect of progress payments progressively,

but must not submit claims for cost adjustment until the Current Index Numbers for the period to

which the valuation of the progress payment that is to be adjusted relates have been published.

At finalisation of the contract, the Contractor must submit a claim for cost adjustment in respect of thevalue of any work executed under the Contract for which cost adjustment has not previously been

claimed in respect of a progress payment. The claim must be submitted in accordance with the

contract requirements for claims at finalisation of the contract.

1.6 DISCONTINUED OR ALTERED INDEXES

If an index is discontinued or the basis on which an index is calculated is altered, there shall be

substituted the nearest index consistent with the intention of these clauses so as to give effect to it.

1.7 ACCESS TO INDEXES

Australian Bureau of Statistics indexes are published on the ABS website at

http://www.abs.gov.au/ausstats


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Appendix D - COST ADJUSTMENT TABLE - CIVIL WORKSTABLE OF COST ADJUSTMENT DETAILS

CALCULATION

So much of the value of work in each category In Column A as is Included In the Effective Value shall be separately increased or decreased by multiplying it by theindex shown in Column 1 as applicable to the category;

Applicable Proportion in Column 2

NumberIndexBaseNumberIndexBaseNumberIndexCurrent

A B 1 2 3 Category of Work Value (if

applicable)Index or Indexes

ApplicableProportionApplicable

to each Index

Date for BaseIndex Number

The whole of the workunder the contract

NotApplicable

Labour Price Index(AustralianBureau of Statistics (ABS) Catalogue6345.0), Table 11, Private Sector,Construction

.40 14 days beforetenders closedor the date ofthe Contractoroffer.


NotApplicable

The Materials Index -Producer PriceIndexes Australia(ABS Catalogue6427.0), Table 17, Materials Used inHouse Building , Sydney



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Appendix E - COST ADJUSTMENT TABLE - MECHANICAL SERVICEPROPRIETARY OR PREFABRICATED COMPONENTS, SUCH AS COMAND AIR CONDITIONING

TABLE OF COST ADJUSTMENT DETAILS

CALCULATION



NumberIndexBase

NumberIndexBaseNumberIndexCurrent




to each Index



NotApplicable

Labour Price Index(AustralianBureau of Statistics (ABS) Catalogue6345.0), Table 11, Private Sector,

Construction

.35 14 days beforetenders closedor the date of

the Contractoroffer.


NotApplicable

The Materials Index -Producer PriceIndexes Australia(ABS Catalogue6427.0), Table 11, Articles Producedby Manufacturing Industries,Electronic Equipment and other

machinery



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Appendix F - COST ADJUSTMENT TABLE - MECHANICAL SERVICESINVOLVING MAINLY PROPRIETARY OR PREFABRICATED COMPONE


CALCULATION



NumberIndexBase





to each Index



NotApplicable


.45 14 days beforetenders closedor the date ofthe Contractor

offer.


NotApplicable

The Materials Index -Producer PriceIndexes Australia(ABS Catalogue6427.0), Table 11, Articles Producedby Manufacturing Industries,Electronic Equipment and othermachinery



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Appendix H - COST ADJUSTMENT TABLE - MAINTENANCE INMAJOR COMPONENT REPLACEMENT SUCH AS LIFT MAINTENANCE


CALCULATION



NumberIndexBase





to each Index



NotApplicable


.80 14 days beforetenders closedor the date ofthe Contractor

offer.


NotApplicable

The Materials Index -Producer PriceIndexes Australia(ABS Catalogue6427.0), Table 17, Materials Used inHouse Building , Sydney



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Appendix I - COST ADJUSTMENT TABLE - MAINTENANCE NOT INMAJOR COMPONENT REPLACEMENT


A B 1 2 3

Category of Work Value (ifapplicable)

Index or IndexesApplicable

ProportionApplicable

to each Index



NotApplicable




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Appendix J - COST ADJUSTMENT TABLE - CONSTRUCTION OR PROTABLE OF COST ADJUSTMENT DETAILS

CALCULATION



NumberIndexBaseNumberIndexBaseNumberIndexCurrent




to each Index



NotApplicable




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Appendix L - EXAMPLE COST ADJUSTMENT TABLE - TWO CATEGOWORKS AND ELECTRICAL ENGINEERING WORKS

IN THIS EXAMPLE IT IS TAKEN THAT THE TWO CATEGORIES OF WORKS COMPRISE ALL OF THE WORKS UNDBETWEEN THE CATEGORIES OF WORKS WILL BE BASED ON THE VALUE OF WORK COMPLETED.


CALCULATION



NumberIndexBase





to each Index


Civil Works Labour Price Index(AustralianBureau of Statistics (ABS) Catalogue

6345.0), Table 11, Private Sector,Construction

.40 14 days beforetenders closed

or the date ofthe Contractoroffer.

Civil Works The Materials Index -Producer PriceIndexes Australia(ABS Catalogue6427.0), Table 17, Materials Used inHouse Building , Sydney


Electrical EngineeringWorks

Labour Price Index(AustralianBureau of Statistics (ABS) Catalogue

.35 14 days beforetenders closed


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6345.0), Table 11, Private Sector,Construction

or the date ofthe Contractoroffer.

Electrical EngineeringWorks

The Materials Index -Producer PriceIndexes Australia(ABS Catalogue6427.0), Table 11, Articles Producedby Manufacturing Industries,Electronic Equipment and othermachinery


Note If any work is not included in a category of work it shall be included in the most closely related category.


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Appendix M - LONG TERM SERVICE CONTRACT - ANNUALCOST ADJUSTMENT TO RATES PRELIMINARIES CLAUSE

COST ADJUSTMENT - LABOUR AND MATERIALS

In determining the rates and lump sums applicable during any financial year each rate and lump sum

accepted by the Principal shall be adjusted in accordance with this clause. With the first paymentclaim made in any financial year the Contractor must submit detailed calculations used to determine

the adjustment factor applicable to the rates and lump sums for that financial year.

'Base Index Number' means the index number applicable to the date 14 days prior to the date on which

tenders closed.

'Current Index Number' means the index number applicable at the Date for Current Index Number.

'Date for Current Index Number' means the 1st May of the financial year before the period in which

the rate or lump sum is applicable.

If an index is discontinued or the basis on which an index is calculated is altered, there shall be

substituted the nearest index consistent with the intention of these clauses so as to give effect to it.

Rates and lump sums shall be adjusted by multiplying the adjustment factor calculated in accordance

with the following formula using the Labour and Materials indexes applicable to each rate or lump

sum as shown in the table

PMBIM

BIMCIMPL

BIL

BILCILFactorAdjustment

+

+=1

Where CIL is the Current Index Number for Labour

BIL is the Base Index Number for Labour

PL is the Proportion Applicable to Labour

CIM is the Current Index Number for Material

BIM is the Base Index Number for Material

PM is the Proportion Applicable to Material

All items in the Schedule of Rates and

Lump Sums where an hourly labour rate

is shown

All other rates and lump sums

Labour Index Labour Price Index (Australian Bureau of Statistics (ABS) Catalogue 6345.0) Table

11, Private Sector, Construction

PL 0.90 0.35

Materials Index Not applicable Producer Price Indexes Australia (ABSCatalogue 6427.0) Table 11 Articles

Produced by Manufacturing Industries,

Electronic equipment and other

machinery

PM Not applicable 0.55


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Appendix N - WORKED EXAMPLE OF COST ADJUSTMENT

Introduction

Shown below is a worked example of cost adjustment (CA) calculations for claims for a hypothetical contract. Copies

at Appendix O.

Tender and Contract Details CA Details Derived from Relevant ABS Indexes

Date Tenders Closed 30 August 2003 Labour Index Labour PrStatistics (Private Se

Contract Price at award of contract $3,080,000 Proportion applicable toLabour Index

0.35

Contractual Completion Date at award of

contract

31 October 2004 Materials Index Producer

CatalogueHouse Bu

Date of month for submission of PaymentClaims

7th Proportion applicable toMaterials Index

0.55

Category of Work for CA purposes (Thetable in the Appendices to these Guidelineswhich was included in the Contract)

Architectural (Building) Work(Appendix C)

Date for Base IndexNumber (14 days beforetenders closed)

16 August

Variations approved September 2004 $200,000, adjusted ContractPrice $3,280,000

Base Index Number forLabour, from the LabourIndex (Sep 2003

Quarter)

98.8

Extension of Time approved September2004

61 days, adjusted ContractualCompletion Date 31 December2004

Base Index Number forMaterials, from theMaterials Index

140.7

Actual Completion Date 30 April 2005


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Appendix O - SAMPLE COPIES OF ABS INDEXES

ABS 6345.0 Labour Cost Index Table 11 September Quarter 2004

ABS 6345.0 Labour Cost Index Table 11 June Quarter 2005


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