01472657

Component

Project owners, bidders, and construction supervision engineers continue to grapple with questions on the price adjustment clause in the Conditions of Contract developed by the International Federation of Consulting Engineers for Multilateral Development Banks. The first question faced by a project owner is whether the adjustment provision should be retained, and if not, why? If retained, the questions that ensue have to be dealt with by both the project owner and the bidders. These are about the adjustment terms and conditions—start date, base date, thresholds, and the adjustment formula parameters such as cost elements, indices, and weightings. Although answers to these questions are available from different sources and been legislated in some countries, clear, empirical evidence of the benefits of providing for adjustment—increased competition, lower bid prices, market stability, and less risk of contractors defaulting—is lacking. Also, the effect of changing default adjustment parameters is largely unknown. This paper first examines literature and experts’ views on the above questions in relation to Asian Development Bank financed road construction contracts in Central Asia and the Caucuses. Then, Monte Carlo simulation is used to evaluate alternative answers to the questions. Simulation results show that project owners and bidders can both benefit from the adjustment provision. Bidders can increase their competitiveness by not adding an inflation risk premium while the owner can expect more realistic bid prices and benefit from price drops during construction unlike in fixed price contracts. However, neither party will gain from changing the default parameters, which increases uncertainty and cause bidders to add risk premiums.

This paper was sponsored by TRB committee AFH15 Project Delivery Methods.

01470560

13-2312

English

20p

2013

Transportation Research Board 92nd Annual Meeting

Digital/other

Figures; References; Tables

Benefit cost analysis; Contracts; Cost indexes; Costs; Prices; Road construction

International Federation of Consulting Engineers

Construction; Finance; Highways; I10: Economics and Administration

Transportation Research Board Annual Meeting 2013 Paper #13-2312

TRIS, TRB, ATRI

Feb 5 2013 12:30PM