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Global demand for steel, oil and rubber are impacting the cost of construction, evidenced by the rising price of fuel, lubricants and bitumen products, and the cost of reinforcing and structural steel has risen significantly. Other materials and parts have also shown considerable price increases. This presents an accounting difficulty as contract tenders are often submitted for evaluation and award several months in advance of when work actually starts. Projects are often spread over many months and for larger projects, including maintenance contracts, the duration may be measured in years. Fortunately, clients recognise on long-term projects, cost increases will occur and cost fluctuation clauses are included in the contract to allow for these. NZS 3910 has a standard cost fluctuation clause including a formula as to how cost increases are to be accommodated. This is by indexation using Statistics New Zealand’s producers price index and labour cost index. The indices are updated on a three monthly basis by Statistics NZ, meaning any cost fluctuation that may apply should be paid quarterly and in arrears. The formula is used to determine the cost of the work by adjusting rates or values of the work completed during the quarter being considered. The mechanics of the formula compares the current index in each case with the index from the previous quarter to determine a percentage increase that applies to the work (refer to appendix A of NZS 3910).
This is clearly incorrect as, by applying the formula in this manner, the rate adjusted does not reflect the cost increases incurred by the contractor, referring only to the previous quarter and not recording the historic increase in valuation as the work proceeds. The correct application of the formula is shown in Table Two. Compare the bottom line with the previous example, the results differ significantly. The application of the cost fluctuation formula should be used as written in NZS 3910 by cumulatively adjusting the rate as the project progresses. This is an example only – for calculation of cost fluctuation and the latest indices, refer to www.stats.govt.nz.
Contractor Vol.31 No.7 August 2007 All articles on this website are copyright to Contrafed Publishing Co. Ltd. |
I have recently seen contract documents that refer to the quarter under consideration and the previous quarter and this is to be applied only to the originally tendered rate. An example of this approach is shown in Table One.