Escalation Mechanism

Dear Raj,

This is a standard practice. What you want to do is to prepare your original invoice as per approved BOQ in Contract.

In a different section, you will calculate the amounts due to approved escalation formula.

In the cover page of the Invoice, you apply the required deductions:
a)Recovery of Down Payment, Retention and Discounts to the Original Contract.
b)Retention % to the amounts of Variation Orders.
c)Retention % to the amounts of Escalation paid.

This is done for every Interim Payment Certification on a Monthly basis or when the value of the works completed reach the minium payment amount is reached.

Regarding the purchase of Material and the associated compensation due to escalation or prices, if you have the cash flow required to buy the complete quantities of material, then it is recommended to buy them after the approval of material is secured and store them at site and invoice for Material on site (80% of invoice amount).

If the cash flow is not strong enough to buy all the material after is is approved by the Engineer, then the market fluctuation in prices will be absorbed by the Contractor.

Buying the material, storing it at site and invoicing 80% of its value, can be done for the majority of material except Concrete, which has to be mixed and poured within 90 minutes, hence you can not fix it’s price.

If you have more detailed question, please let us know.

Good luck,

Samer

Hi Raj,

I have a similar experience with you. But I am on the contractor side and you are on the client side. Here is what I did and it worked somehow.

I issue my payment cert to the client every month as per the contract payment terms and conditions. I have my actual quantities with the approved BOQ rates in the contract as basis in determining the value of my claim. This is your "A".

During the interim, we have faced sudden increase in price for steel. And as per the contract, we have an agreed rate for escalation. I simply raised variation order for these items so I can easily monitor what quantities/items were utilised for this claim. This claim is then submitted in the next monthly payment application. However, similar to your case, if my escalation cost does not exceed 10%, as per contract, I cannot claim it.

If you have claimed for "A" already, and you have a VO for "B" for the same item/material, then the value of your claim "C" is simply the difference of the two. However, if you haven’t claimed for "B" yet, then your "C" value is the full value of "B".

As a client, require your contractor to submit original invoice as proof. If they cannot provide one, let them submit a certified-true-copy of the invoice. So your worry of receiving fake invoices is gone.

Lastly, as a client, you also know when prices of steel or other materials are increasing in the market. You might as well can predict this prior to contracting, that is why you have that 10% margin. Again for you to have backup data, require your contractor to submit their PO then simply check its date and the current market price.

Hope this helps you somehow.

Cheers.

Thanks Mr Carlito Ogoy
very much useful information

Take care
Bye