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Typical contents of the ITT price schedules:

For an unambiguous and effective pricing, the section should contain:

  • A brief and bulleted narrative, containing the makeup of prices, various conditionalities and terms of payment;
  • All required tables appended, generally making up the Contract rates and Contract Price;

As far as practically possible, ITT conditions should clearly require prices to be inserted by Tenderers in the formats provided and, reproduction in a different format or any unauthorised alterations to these should be discouraged. This is done with a view to avoid unnecessary time and effort for review and conclusion.

Though the structure is largely dictated by the nature and Contract strategy a typical narrative should contain the following conditions as applicable:

Composition of Price: Tenderers prices should always include for costs of all items to meet its obligations under the Contract such as but not only limited to: all direct and indirect payroll costs, travel time, travel costs and expenses, visas, waiting time for issue of visas and security passes, medical and dental expenses, emergency or compassionate repatriation including replacement of personnel, benefits (such as personal insurance, pensions, payment during periods of sickness and holidays with pay etc.) mobilisation and demobilisation costs, labour, supervision, vehicles, hand tools, supply of all materials, equipment plant and consumables all Contractor's overheads and any other Contractor-related costs and contribution to profit.

Currency of the Contract: the Contract currency (the currency in which Client shall pay the Contractor for the Works/Services provided) should be clearly stated. Normally the currency in which the Client has its major income and expenditure is the currency adopted.

Price Variations: except in longer duration term Contracts and depending on the adopted strategy, rates and prices should be fixed and firm for the Contract duration and not subject to any variations such as escalation in input or other costs, currency exchange rate variations, etc.

In longer duration Contracts however, it is advisable to allow for adjustments to Contract rates and prices on a pre-agreed basis rather than entrusting the Contractor to cost for associated risks. In such situations rates / price adjustments could be based on the following methods:

A few methods of calculating Contract Price increases

  • An assessment of the actual cost increases based on examining what the quoted price was based on and what the prevailing prices are on the date of a claim by Contractor to determine the exact actual increase. This is often difficult, subjective and also prone to abuse.
  • The other option could be to renegotiate prices based on certain auditable parameters. This option is also often difficult, subjective and prone to abuse.
  • In term contracts however, that are let for longer durations it is natural for prices to vary over time. In such circumstances, as a deliberate strategy, the Contract could provide for increase in rates at the end of each year of the Contract.
  • The most preferred and accepted method of adjusting/escalating prices due to increased input costs or variations in currency exchange rates is the method of determining increases based on a certain formula containing known indices related to rates and prices of items.

For example if the works are labor intensive, depending on the labour content in the Contract, the increase could be, fairly assessed based on the differential increase in such index or indices on the date of offer or near-abouts and the index or indices on the date the Contractor claims to have increased, affecting price. Similarly with currency movements.

In very many countries a range of indices are published by the government or relevant bodies and authorities that give the price movements on a regular and periodic basis that can be relied upon to be the true reflection of price movements in that country. These include inter alia:s

  • Consumer price index.
  • Labour price index.
  • Plant and equipment price index.
  • Material price index (could include a whole separate range for metals such as ferrous, non ferrous, specifically copper prices, gold prices, silver prices, etc).

An example of a simple formula to calculate increase could be as follows:

NR
=
OR
X
(NI)
(OI)

Where:

NR – New rate
OR – Old rate
NI – New Index
OI – Old Index

Thus, ITT stipulations should be clear with respect to escalation in prices where admissible:

Price escalation

  • Formula applicable for calculating cost escalation;
  • Indices considered at the time of Tenderer submitting the price with numerical values of indices and corresponding dates when considered;
  • Weights of various components such as materials, labour and other components that make up the formula;
  • Thresholds upto which no escalation is payable (this a risk item for the Contractor and could have a potential cost attached to it).

Currency exchange rate variation

Based on the same principle as in price escalation, in Contracts that allow currency exchange rate variations, the following factors should be given consideration:

  • Base currency considered;
  • Base date of currency exchange considered in the Tender;
  • Date from which the variation shall be calculated;
  • Rate considered in the Tender;
  • Thresholds upto which no variation is payable (this a risk item for the Contractor and could have a potential cost attached to it)


Client’s sole right to add/delete prices:
Client should always retain the right to add/delete any item(s) in the price schedule without having an effect on the rates and prices of other items. However, in case of large construction and other Contracts that involve large quantities of variable items such as piping, ducting, cabling, cable trays, trenching, insulating, fireproofing, painting, manpower, labor and others, a provision could be made to re-negotiate rates/prices in case of variations in quantities beyond a certain limit or percentage.

Prime Costs / Provisional Sums / Star Rate Items

In practical situations where an early start of work is required due to schedule reasons, a mechanism of paying Contractors their reasonable costs towards works performed prior to complete definitions of works is employed, known as Prime Costs and in cases where it is not possible to confirm with a fair degree if at all a certain part of the work would be carried out in part or in full or at all is known as Provisional Sums. This mechanism is commonly used in the construction industry so as to ensure progress of Work pending full definition of the scope and specification.

Prime Costs

Prime Costs are generally used where the cost of an item is known but it is not known with certainty if it would be used under the Contract or it is possible if a variant of such item could be used.

For example; under a Contract for house construction, Contractor could provide cost for A “Door” or A set of “Tiles” specified by the Contractor. Upon Client’s finalization of the design / specifications to be used, the final cost to be paid to Contractor could be adjusted on an agreed basis.

Provisional Sums

Provisional sums are costs for items of work included in a Contract for which the scope and design is not fully defined/developed at the time of Contract award and an early start is needed pending its full definition. In these cases the Contractor is required to cost for the requirement based on available scope and design and provide a reasonable estimate of such costs for reimbursement for work done. Upon definition of full requirements for such items the price adjustment carried out.

Star Rate Items

In large construction Contracts, one could find requirements for certain items of work for which rates are either unavailable or are difficult to establish. Hence rates for such items of work would need to be developed and established prior to approving its use in the Contract. Usually the cost of the “new” requirement is derived from the existing costs/rates of other items similar to the requirement.

In shankce.in no standard contract conditions such as FIDIC or ICE or JCT are discussed, it is possible that these terms are used interchangeably. However any and all such issues concerning Prime Costs, Provisional Sums and Star Items should be qualified to the extent needed and appropriate conditions inserted in the Contract so as to avoid any disputes during execution.

Optional price items: very similar to Prime Costs and Provisional Sums, items for which the extent is known but whether they are required or not is not known at Contract award, such items are generally termed as Optional Items in a broader context.

For example, in a PMC Contract for FEED, Client could foresee an option to engage the services of the PMC during the construction (EPC) Phase as well. In such a case, the ITT provisions should request Tenderers to provide rates for the EPC phase as an option, to be exercised at Client’s sole discretion. In case the PMC is engaged for the EPC phase of the project, the Contract price could be amended automatically, without having to go thru a potentially cumbersome approval process, though some form of management endorsements could still be needed.

Another example of an option frequently included is that of extending term maintenance Contracts for further periods, upon the expiry of the initial duration (of say 1/2/3 years). Where services are required on a continuous basis and there is little if no benefit of re-tendering (an expensive and time consuming process), in such situations Tenders are invited with rates for the proposed extension durations (which normally come with an increase to beat inflation).

In construction Contracts, supply of Spare Parts could be an optional item of supply by Contractor which option could be exercised by the Client upto the expiry of the Contract.

Estimated Sums: Estimated sums are used where the requirement is known but the exact extent is not known at Contract award. For example typically in a FEED or an EPC Contract, Client personnel could be based in the Contractors offices for certain duration for review of Contractors work. For such duration, Client could require Contractor to provide various facilities such as office space, seating, telephone facilities, computers, printers, fax machines, etc. In such situations, cost of facilities should be included in the Contract price as an estimated sum, based on a certain estimated usage.

Retention Money related stipulations, (mainly applicable to construction Contracts):

The practice of retaining monies from Contractors invoices can be found predominantly in construction Contracts where monies equivalent to a certain percentage (usually 2.5/5/10%) from each of Contractors’ invoices are retained as an appropriate security towards Contractors potential lack of performance or default in rectifying defective work that could arise during the execution phase. Such security extends beyond Work completion duration also to cover defects that could manifest upto the expiry of the Warranty Period.

Hence, from the point of view of pricing, the thing to remember is to include clear stipulations in the pricing section of the ITT on the percentage / amount of retentions to be made from Contractors invoices.

To the above narratives, complete breakdown of price tables along with tables for various unit rates and prices as appropriate should be attached.


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