Price Escalation in Project Business Flashcards
Aims of Price escalation clauses?
Avoid negative influences from cost fluctuations + share risks with customer
Indexation - Timing
Base timeline should be time of bid submission
Price escalation - basic principle seller buyer
Seller: As variable as possible
Buyer: As fixed as possible
Price escalation - threshold / ceiling
Threshold: Price increase below cannot be considered / Ceiling: Price increases above not considered
Which Consumer Price index have to be used (country)
The ones from the producing country
Price Formula from customer contract impact…
planned revenue
Price formula from supplier contracts impact…
Total planned costs
Checklist for the consideration of price increase in total planned revenue (4)
1) Only use current and valid indices issued by public authorities
2) Do not consider potential future trends
3) Do not consider price increases until threshold is achieved or exceeded
4) Consider price increase if the outcome of price formula can be calculated based on contractually defined points
Compensation Rate - calculation
Expected price increase on the rev side / expected price increase on cost side
Order Entry Price Calculation - Preconditions (2)
1) Price increase based on contractually defined point in time
2) It is highly probable that the calculated price factor will be at least sustainable till final payment - apply current price factor
When do price increases on the cost side have to be taken into account?
Immediately if there is no enforceable price escalation clause on the revenue side
Parallel approach - definition
In case of an enforceable price escalation clause on the revenue side, the consideration of the planned costs takes place in period of price increases on the revenue and not immediately - requires documentation
True or False - If specific conditions are fulfilled, the total planned revenue can be adjusted even though contractually defined points in time for the price escalation have not been reached yet.
True, it may be appropriate to increase total planned revenue to a certain amount even though contractually agreed point in time have not been reached. This is only admissible when: 1) Application of price escalation clause has to be contractually agreed 2) Indices used in the formula had an increasing trend in the past and based on the trend it’s highly probable that a negative turn will not occur
True or False - It is allowed to provide evidence that price increases on the cost side will be compensated by price increases on the revenue side within the Limits of Authority (LoA) process.
True, Consideration of price increases on the cost side requires documentation that price increases on the cost side will be at least largely compensated
Important clause index re-evaluation
To anticipate future rebasing by the publishing authorities, clause for re-evaluation has to be included in future bids and orders.
