One of the wide ranging problems which construction industry is facing is the fluctuation in prices of construction inputs which is causing most of the projects to be completed at cost much higher than the original contract prices. In the recent past, we have seen significant price escalation occurring not only with the basic construction materials but also with the labor and fuel which creates uncertainty among the participants involved in a construction project.
To overcome the effect of price fluctuations, certain methods or contract clauses are desired to deal with this uncertainty. The main purpose of the price adjustment clauses is to allow the contractors and clients to adjust the increase or decrease in prices. In addition to this, it also encourages competitive bidding.
The objective of this research study is to study importance of price adjustment in construction contract and analyzing the response of the different stakeholders in construction contracts regarding FIDIC formula and suggesting for improvement. Similarly, identifying different cost element, weightings and determining contingency is also goal of research so that price adjustment contract administration becomes systematic, equitable and with less ambiguity. Recently, the price fluctuation of construction materials and services in Nepal has become severe and very much unpredictable.
Most of the contractors in Construction Industry, especially local contractors, are facing strong challenges during bid process due to the high uncertainty of predicting what would happen during the course of the execution of the project. Based on the above explained fact, the research problem has been addressed in this research by conducting diagnostic survey among ten contracting firms working on ADB project, collecting data with the help of questionnaire, distributed to contractors, consultant, client and conducting desk study on ADB projects, World bank projects, Midhill highway and RIP projects under department of Road whose construction were started after 2014 and construction progress was more than 80 %.
Table of Contents
CHAPTER ONE: INTRODUCTION
1.1 Study background
1.2 Problem Statement
1.3 Research Objective
1.4 Scope and Limitation
CHAPTER TWO: LITERATURE REVIEW
1.5 Concept of Project
1.6 Civil Engineering projects
1.7 Construction Industry
1.8 Price fluctuation and Inflation
1.8.1 How does Inflation Happen?
1.9 Effects of Price fluctuation
1.10Dealing with price escalation
1.10.1 Types of escalation clauses
1.11 Problems of Price Escalation and Adjustment
1.12 Price adjustment formula
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 General
3.2 Research Process
3.3 Sources of Data
3.4 Population and Participants
3.5 Sampling Technique
3.6 Sample Size
3.7 Data Collection Tools and Instruments
3.8 Questionnaire
3.9 Desk Study
3.10 Interview
3.11 Summary
CHAPTER 4: DATA ANALYSIS AND RESULT
4.1 Introduction
4.2 Comparison of Bid price
4.3 Characteristics of Respondent
4.3.1. Grouping of Respondent
4.3.2. Experience of Respondents in Construction Industry
4.3.3. Position of Respondents in Construction Industry
4.4 Statistical Analysis
4.4.1. Reliability of the Sample
4.4.2. Measurement of Normality of data
4.4.3. Kruskal Wallis test for Non-Parametric Data
4.4.4. Relative Importance index (RII)
4.5 Data Presentation
4.6 Desk Study
4.7 Summary
CHAPTER FIVE: FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1. Review of Research Objectives
5.2. Findings
5.2.1. Objective 1
5.2.2. Objective 2
5.2.3. Objective 3
5.2.4. Objective 4
5.3. Conclusions
5.4. Recommendation
5.5. Knowledge Contribution
5.6. Further Works
Research Goals and Themes
This research aims to analyze the impact of price adjustment clauses on road construction projects in Nepal. The primary research question centers on determining if existing price adjustment mechanisms and contingency budgets are sufficient to manage unpredictable price fluctuations, thereby ensuring fair outcomes for all stakeholders while minimizing disputes and cost overruns.
- Importance of price adjustment in construction contracts.
- Evaluation of FIDIC and PPMO price adjustment formulas.
- Identification of critical cost elements and their weightings.
- Assessment of current contingency budget adequacy (e.g., 10% provision).
- Stakeholder perception analysis regarding fairness and risks in the bidding process.
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2.6 Dealing with price escalation
Much can happen to the economy and to the prices in general in the time it takes a project from start to become fruitful to its users. Under such circumstances the victorious bidder who has overlooked likelihood of price increase will not apt to show much of the profit in his work. There will be incessant bickering, claim and perhaps even litigation before accounts are settled to say nothing of delays, shoddy, work and other evidences to save last penny in contractors cost. It is for this reason most contracts entered into for more than one year long duration to carry escalation/ price adjustment clause. An escalation clause can be defined as" An escalation clause is a clause in a contract that guarantees a change in the contract price once a particular factor beyond the control of either party results in an increase or decrease in the contractor's cost (Kinala & Roukema, 2011). A price escalation clause allows the parties to have an opportunity to plan for uncertainty and allocate how, who and to what extent the additional costs will be absorbed. Thus future increase in prices for major cost item is thus made employers risk whereas the owner not only to get the benefit of saving themselves from getting a "reluctant to perform contractor" under the circumstances, but also get competitive and more reliable bid. In the absence of an adjustment clause the bidders will estimate and bid possible future cost increase differently which may result in unrealistic prices. Moreover it will make sure to estimate the future cost increases being estimated not too high, which would otherwise results in higher bids.
Summary of Chapters
CHAPTER ONE: INTRODUCTION: This chapter provides the background on the importance of the construction industry in Nepal, defines the research problem regarding price fluctuations, and outlines the objectives and scope of the study.
CHAPTER TWO: LITERATURE REVIEW: This chapter reviews concepts related to project management, civil engineering projects, the construction industry, and existing theories on inflation and price adjustment methods.
CHAPTER THREE: RESEARCH METHODOLOGY: This chapter describes the research design, including the data collection methods, sampling techniques, and statistical tools used for the study.
CHAPTER 4: DATA ANALYSIS AND RESULT: This chapter presents the analysis of bid price comparisons and the perception of stakeholders based on the questionnaire and desk study results.
CHAPTER FIVE: FINDINGS, CONCLUSIONS AND RECOMMENDATIONS: This chapter reviews the research objectives, presents the final findings and conclusions drawn from the data, and offers recommendations for future improvements in contract administration.
Keywords
Standard Bidding Document, Asian Development Bank, Contract Administration, Price Adjustment, World Bank, Procurement, Road Construction, FIDIC, Inflation, Risk Management, Price Escalation, Construction Costs, Nepal, Contingency, Stakeholder Analysis
Frequently Asked Questions
What is the core focus of this research?
The research examines the administration of price adjustment contracts in the Nepalese road construction sector to mitigate the risks associated with unpredictable price fluctuations of labor, materials, and fuel.
What are the primary themes addressed?
The study focuses on price escalation risks, the use of FIDIC and PPMO adjustment formulas, the adequacy of contingency budgets, and the perceptions of clients, consultants, and contractors.
What is the main objective of this study?
The main objective is to evaluate how price adjustment provisions affect bid prices and to propose improvements to contract administration to make it more systematic, equitable, and less ambiguous.
Which research methodology was utilized?
The study employed a descriptive and exploratory research design using both primary data from a questionnaire survey among 160 industry professionals and secondary data from 22 completed road projects.
What does the main body of the research cover?
The main body covers literature on price fluctuations, statistical analysis of stakeholder responses using SPSS/Excel, and an assessment of actual project performance regarding cost overruns and contingency usage.
Which keywords characterize this work?
Key terms include Price Adjustment, Contract Administration, FIDIC, Road Construction, Construction Costs, Risk Management, and Public Procurement.
How does the research evaluate the 10% contingency budget?
The study compares the actual usage of price adjustment funds across different project types, concluding that while 10% is sufficient for FIDIC and PPMO-based contracts, it is insufficient for MDB Harmonized small work contracts.
What is the primary conclusion regarding contractor behavior?
The research concludes that in the absence of clear price adjustment clauses, contractors add a significant risk premium to their bid prices, which hinders fair competition and can lead to project failure.
- Quote paper
- Sabin Koirala (Author), 2019, Study of Price Adjustment Contract Administration In Nepalese Construction Contracts (Road), Munich, GRIN Verlag, https://www.grin.com/document/913028
