Risk of Increase in Prices of Performance in Indian Construction Industry and Sufficiency of Contractual Provision to Mitigate the Same in EPC and Item Rate Contract

Abstract

Escalation is change in price levels driven by underlying economic conditions. From construction point of view, it is increase in price of cement, steel and other construction material used in construction industry for a defined period of project. Escalation in the construction industry in recent years has been extremely volatile and same scenario is expected to continue in future and also due to tremendous competition for resources like material and skilled workers which are the key factors to complete construction projects. Many contract these days are fixed price contract and it is expected that the risk of price escalation should be taken up by the contractor. It is very difficult for the contractor to take whole risk and in many cases quality delivery becomes difficult. Even the provision of escalation in contract does not cater all the aspects or the escalation in prices of work. Whatever the escalation clause is used outside India, cannot be directly applied in Indian scenario because of low inflation rate present there as compared to India. Therefor in present study, an attempt has been made to study and analyze the volatility of price. The objective of this research is to Study the escalation clauses presently used in construction contracts adopted by various Government departments/ agencies in India and to study the provision of existing contract & its sufficiency to cater the risk arising, its adequacy & coming up with proper solution so that risk can be mitigated and also to study how far cost escalation has an impact on the outcome of construction projects. For this, data has been collected from Economic advisory of India and Labour Union for estimation of percentage of price volatility of construction material and labors from 2012 to 2018 in the interval of 6 months. Years showing maximum fluctuation have been highlighted along with efficiency of present escalation clause with an example. Questionnaire survey will be conducted to highlight important factors related to escalation and come up with proper solution to mitigate the risk for above. And finally a case study will be conducted for the application of above solution.