Escalator Clauses Research Articles

Navigating Escalation Patterns in Road Construction Projects in Maharashtra

This research delves into the nuanced dynamics of escalation amounts in construction projects, differentiating their implications on residential versus road construction. Detailed analyses of four diverse projects expose distinctive patterns: Project No.1 witnesses peak steel escalation, while material, labour, and POL exhibit constancy. Project No.2 reveals material escalation as dominant, with recuperated steel and cement costs. Conversely, Project No.3 portrays negative escalations for material and POL, dominated by labour impacts. Project No.4 experiences negative escalations attributable to duration shifts. The study unveils a correlation between project duration and escalating costs, highlighting steel, material, and labour as pivotal in residential projects and labour, material, and POL in road projects. The research underscores the critical role of escalation clauses in contracts, elucidating their significance in mitigating direct impacts on project costs. The findings emphasize project-specific factors such as duration, material price fluctuations, project nature, client-contractor dynamics, and governmental policies shaping escalation outcomes.

Impact of Inflation on Construction Cost Estimation: Strategies to Account for Fluctuating Material Prices

Construction industry particularly the field of cost estimation is greatly impacted by inflation. Material costs are rising, supply chain disruptions increase, and labor expenses are growing with this making it increasingly risky to contract that budgets overruns will not occur. In particular, the inflation surge of 2021 to 2023 generated extreme price volatility with key materials like steel, concrete, and lumber, while making it difficult to estimate project costs accurately. This paper analyzes several methods used to compensate for the ill effects of inflation, such as early procurement, bulk buying, flexible budgeting, and the inclusion of escalation clauses in contracts. It also emphasizes the importance of creating and nurturing good supplier relationships and utilizing AI-driven predictive analytics that help identify market trends early enough so that by the time your company reacts to them, the financial impact of the price fluctuation has been minimized. Together they offer a construct for dealing with inflation risks and cost estimations in construction projects.

Investigation of Price Escalation and Its Mitigation Mechanisms on Selected Building Construction Projects of Jimma University

Fee escalation in construction refers to a boom in the price of an item inside the preliminary agreement or the bottom cost of an undertaking. racking production mission fees must be an ongoing procedure that must always be carried out on all projects, because the reasons for which the price will increase vary from project to project and due to the construction segment. The motive of this observation was to assess fee escalation, escalation factors and mitigation mechanisms in deciding on construction initiatives. From February 1 to 30, 2020, a questionnaire was administered to twelve workers and interviews with seven key informants were conducted for an in-depth look at four selected Jimma University construction projects, which were project A to project D. Relative importance index values were generated and ranked for the elements affecting fee escalation to see their relative significance. It was found that there has been a moderate degree of charge increase within the initiatives studied, from 12% to 21%. The mitigation modalities observed with the aid of the projects, particularly inserting escalation clauses in contractual agreements, making changes requiring funding and increasing time limits, seem to be inadequate, as they do not provide a foundation for choices and remedy of disputes instead of mitigating the escalation of tasks starting from 3.21% to 12%. KEYWORDS: Escalation, Mitigation, Price, Construction projects.

Effective management strategies for construction contract disputes

PurposeContract risk management has become a critical mission, as contract issues may lead to a loss of vast amounts of money to parties involved or cause project failure. This study sought to identify effective management strategies to mitigate construction contract issues that might emerge during construction.Design/methodology/approachA quantitative research approach was adopted for the study. Structured questionnaires made up of close-ended questions were distributed to construction professionals in South Africa via the SurveyMonkey platform. The data were then analysed using descriptive statistics.FindingsThe findings indicate that the critical sources of contract-related disputes are ambiguous definitions of the contract parties' scope of their rights and obligations, lack of precise arrangements regarding the calculation of contractual penalties for failure to meet the deadline, lack of detailed specification of the works and specific milestones, lack of provisions regulating changes to the project documentation during the construction stage, an excessive amount of contractual penalties on contractor's side and lack of provisions regarding the rules of performing additional and replacement works and their settlement. However, for these disputes to be effectively managed, strategies such as reduction uncertainties in project's phases, setting up contingency plans, construction guarantee, extension of time claims, payment guarantee, retention and escalation clause should be implemented by the parties involved.Research limitations/implicationsEven though the empirical study focused on construction professionals in South Africa, the findings could be applied to other countries outside of South Africa.Practical implicationsTo effectively manage and prevent contract disputes from averting project failures and losses to parties involved in the contract, construction professionals need to be aware of strategies that must be implemented before and during the project execution. If well implemented, these strategies will help a construction project be successful and experience fewer contractual disputes.Originality/valueThe study has identified the knowledge gap concerning suitable contract risk management strategies available for implementation to effectively prevent any contract parties from losing money, time and project failure.

The Microstructure of the U.S. Housing Market: Evidence from Millions of Bargaining Interactions

We study the microstructure of the U.S. housing market using a novel data set comprising housing search and bargaining behavior for millions of interactions between sellers and buyers. We first establish a number of stylized facts, the most prominent being a nearly 50--50 split between houses that sold below final listing price and those that sold above final listing price. Second, we compare observed behavior with predictions from a large theoretical housing literature. Many predictions on the relationship between sales price, time on the market, listing price and atypicality are borne out in the data. However, existing models do not adequately explain the spread of the sales price around the final listing price. Using a modeling strategy that treats listing price changes as revisions of expectations about the sales price, we find sellers under-react to information shocks in estimating the sales price. Last, we find that the bargaining outcomes are influenced by previously undocumented buyers' bid characteristics, e.g., financing contingencies and escalation clauses, that signal a buyer's ability to complete or expedite the transaction. This suggests an important role for buyer bid characteristics, which are not explained by existing theories, in affecting bargaining power and surplus allocation in bilateral bargaining in housing transactions.

Construction contracts expenses and revenues reporting

According to the Conceptual Framework of the International Accounting Standards, expenses are recognized when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. Under the matching principle between revenue and expenses, the latter are recognized based on the direct relation between the actually paid expenses and the earned revenue during the reporting period. In this context, expenses forming the value of finished goods are recognized when the revenue received from the sale of such goods is earned. In cases when the economic benefits are expected to be acquired during several reporting periods, expenses should be deferred and recognized during different reporting periods within which the acquisition of economic benefits is converted to cash. To defer them, a certain allocation base which is an item of the accounting policy followed by the entity should be applied. The key issue in the accounting of expenses and revenues under construction contracts is related to the allocation of the contract revenues and expenses between the reporting periods during which such works have been executed. Accounting standards outline the criteria for when to recognize expenses and revenue so that to identify the correct time when they should be recognized in the financial statements of the entity carrying out the works. The main concept underlying the accounting standards is that contract revenues and expenses associated with a construction contract are to be recognized as revenues and expenses by reference to the stage of completion of the contract activity at the end of the reporting period. Construction contracts applied in practice are classified as fixed-price contracts and cost-plus contracts. A fixed-price contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses. A cost-plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of these costs or a fixed fee.

Zustimmungsfiktionsklauseln: Das nächste Kapitel

Should the European Court of Justice follow his Advocate General‘ s opinion, the Austrian Supreme Court’s case-law on silent consent clauses could be contrary to Union Law and, more specifically, contrary to PSD II. At the same time, such a decision could tighten the legal situation: Silent consent of the consumer might no longer suffice to alter essentialia negotii. In combination with the Austrian Supreme Court’s case-law, according to which PSD II disallows escalation clauses for fees, entirely new approaches would need to be taken in order to change fees in mass business.

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

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.

The Value Relevance Of Straight-Lining Lease Expenses

The International Accounting Standards Board envisions the global acceptance of International Financial Reporting Standards (IFRS). Despite attempting convergence with IFRS, some national accounting standard setters, such as in India allow for certain carve-outs in their own accounting standards so as to meet country-specific requirements for fair presentation. Indian Accounting Standards allow for operating leases with fixed inflationary linked escalations to be accounted for on an as-incurred basis in contrast to the existing requirement in IFRS to straight-line such leases. This study explores whether operating lease expenses with fixed inflationary linked escalations and accounted for on a straight-line basis provide incremental value relevance beyond the as-incurred basis.This study exploits an occurrence in South Africa, where listed companies that previously accounted for operating leases with fixed inflationary-linked escalation clauses on an as-incurred basis, were required to straight-line those leases. Using the Ohlson (1995) valuation model this empirical study investigates the incremental value relevance of the straight-line basis over the as-incurred basis.Results show a significant change in the association between property-related operating lease expenses and market value indicators after the effect of straight-lining is introduced. This suggests that the straight-line basis provide investors with more value relevant information than when accounting for the expense as-incurred.Findings from this study prompt national accounting setters that allow for operating leases with fixed inflationary linked escalations to be accounted for on an as-incurred basis to consider first whether the straight-line basis do not provide more relevant information. Limiting the choice of accounting treatment may enhance comparability of financial statements.

Dynamics of New Building Construction Costs: Implications for Forecasting Escalation Allowances

Construction projects often require multiple years to complete and the costs of supplies, materials, and labor may increase substantially during a project’s time span. As a result, construction contracts often include an escalation clause to account for cost increases. This article examines the time-series properties of new building construction costs using several producer price indexes. Using a battery of unit root tests, we find substantial evidence that construction cost indexes are generally nonstationary. This finding has implications for the proper specification and use of these series in contract escalation clauses and their respective use in forecasting construction cost increases.

Exploring the market for third-party-owned residential photovoltaic systems: insights from lease and power-purchase agreement contract structures and costs in California

Over the past several years, third-party-ownership (TPO) structures for residential photovoltaic (PV) systems have become the predominant ownership model in the US residential market. Under a TPO contract, the PV system host typically makes payments to the third-party owner of the system. Anecdotal evidence suggests that the total TPO contract payments made by the customer can differ significantly from payments in which the system host directly purchases the system. Furthermore, payments can vary depending on TPO contract structure. To date, a paucity of data on TPO contracts has precluded studies evaluating trends in TPO contract cost. This study relies on a sample of 1113 contracts for residential PV systems installed in 2010–2012 under the California Solar Initiative to evaluate how the timing of payments under a TPO contract impacts the ultimate cost of the system to the customer. Furthermore, we evaluate how the total cost of TPO systems to customers has changed through time, and the degree to which contract costs have tracked trends in the installed costs of a PV system. We find that the structure of the contract and the timing of the payments have financial implications for the customer: (1) power-purchase contracts, on average, cost more than leases, (2) no-money-down contracts are more costly than prepaid contracts, assuming a customer’s discount rate is lower than 17% and (3) contracts that include escalator clauses cost more, for both power-purchase agreements and leases, at most plausible discount rates. In addition, all contract costs exhibit a wide range, and do not parallel trends in installed costs over time.

Environmentally friendly cost efficient and effective sea transport outsourcing strategy: The case of Statoil

Statoil is a completely integrated oil and gas Norwegian company which established in 1972. The company is one of the most technology-intensive world’s leading energy producers and covers more than 35 countries across the globe. This study proposes how Statoil coordinate with environmentally friendly, cost efficient and effective sea transport supplier. The study used the theories of supply chain management such as model of industrial purchasing process, model of strategic triangle and Kraljic purchasing portfolio model. The result of the study identified that the emission of environmentally harmful gases from sea transport are dependent on the size and the speed of the ships, and the type of fuel they consume. The best solution for Statoil to get environmentally friendly sea transport service is using suppliers that are certified by the preferred standard of ITTC 7.5-04-01-01.2 or ISO 15016:2002. The requirement of environmentally friendly sea transport supplier by Statoil maximizes the suppliers’ risk. Therefore, making partnership with the supplier is the effective and giving the contract with a cost reimbursable agreement of fuel price adjustment (escalation clause) is the cost efficient coordination of Statoil.

Application of neural networks in resolution of disputes for escalation clause using neuro-solutions

Increasing scope and complexity of construction industry, results into clashes of interests among the parties to the contract. Clashes lead to claims which may culminate into disputes. Project duration being considerable, escalation forms one of the reasons for occurrence of disputes. Dispute resolution consumes valuable time and money of the parties involved. Hence a faster, convenient and cheaper method needs to be evolved. This study throws light on the possibility of implementing neural networks in resolving disputes arising out of escalation claims. For this, factors influencing the decisions for escalation claims are identified and Neuro-solutions is implemented for network building. Various iterations help to assess the effect of change in network parameters. Comparison of their results is made in the study giving an optimum combination of parameters for effective resolution of escalation disputes using neural network. The approach is demonstrated to be a feasible alternative and the network is able to give a very high prediction rate.

Price Escalation Clause of Letter of Credit

Price Escalation Clause of Letter of Credit

Study and Rate Analysis of Escalation in Construction industry

The project is said to be successful when it is completed in desired time and cost. The construction delays are common problems in private residential projects in Chennai city. This problem occurs frequently during life time leading to dispute and litigations. Therefore it is essential to study and analyse .causes of construction delay. The construction industry is large, volatile and requires tremendous capital outlays. Delay of the project is a main factor and major cause of construction claims. There is an acute necessity for a detailed investigation to identify the delay factors and choose correct actions to minimize the adverse effect of delay on time, within cost and for high quality output I. General The construction industry has a major role in the development of the Indian economy. This industry consumes 40 to 50% of the national five year plan outlay and contributes 20% of gross domestic product. Medium to large construction projects take over a year for completion and the cost of materials and labour often increase, which leads to major problems in administration of the contract. Over the past few years the construction industry has been facing several problems due to rapid increase in the price of construction materials, labour, interest charges and equipment cost. Rate escalation is defined as changes in the cost or price of specific goods or services in a given economy over a period. This is a similar to the concepts of inflation and deflation except that escalation is specific to an item or class of items, it is often not primarily driven by changes in the money supply, and it tends to be less sustained. While escalation includes general inflation related to the money supply, it is also driven by changes in technology, practices, and particularly supply and demand imbalances that are specific to a good or service in a given economy. For example, while general inflation in the US was less than 5% in the 2003-2007 time period, steel prices increased by over 50% because of supply-demand imbalance. Cost escalation may contribute to a project cost overrun. In particular, this increase has been a major problem to the construction industry. In order to find out the percentage increase in cost of construction, a study and analysis has been done in this project Problems And Issues Due To Rate Escalation Price escalations have been affecting the construction industry during the last year causing many problems and many developers to rethink projects. Price escalation produces delays in construction projects, reduced scope projects or projects being cancelled. Escalation clauses could also impact public projects adversely due to the fact that prices being submitted are not being guaranteed during long period of time. In the past, general contractors were able to hold subcontractors and suppliers to their quotes for 60 days, 90 days or 120 days. Because of escalation fears, owners are finding fewer bidders for their projects, some projects need to find alternatives funding sources or canceling the project if additional money is not available. Contractor and supplier fears regarding potential, future price escalation, and the absence of price escalation clauses in most construction contracts, often leads to higher contract prices and larger project costs. 1.3 SCOPE

Alternative Preisbildungsmodelle – eine realitätsnahe Option?

Alternative pricing models – a realistic option? The use of alternative pricing models as a means to automatize or at least facilitate the pricing of timber and thereby also reduce the volatility of timber prices has been under consideration for the past several years. The possibilities and limitations of such alternative pricing models are examined in this article using a retrospective comparative analysis. Overall, the results of six pricing models (these are: annual contract, quarterly contract, attenuation of the rate of change, mixed pricing, regression analysis derived price escalation clause, and self-fulfilling contract) are compared with the development of real timber prices between 2000 and 2010 of the state forest enterprise of Baden-Württemberg (Germany) and analyzed using a set of performance measures. It turns out that there is a conflict of objectives between determining the exact figure of the market price by alternative pricing models and reducing the volatility of timber prices. Thus, quarterly contracts show the market price well, though display no relevant volatility reduction effect; conversely, contracts with a defined attenuation rate lead to a substantial reduction of volatility but also to maximizing deviations from the market price. It is also questionable in how far price escalation clauses, that is, models which were calibrated from regression analysis on the basis of historical data, are able to predict the future development of market prices. At the moment, alternative pricing models can therefore hardly replace the real market-negotiated timber price. They can though support pricing negotiations between buyers and sellers, but primarily in time periods not characterized by a pronounced dynamic.

Material cost and escalation clauses in Indian construction contracts

The construction industry has a major role in the development of the Indian economy. This industry consumes 40 to 50% of the national five-year plan outlay and contributes 20% of gross domestic product. Medium to large construction projects take over a year for completion and the cost of materials and labour often increase, which leads to major problems in administration of the contract. The objectives of the present study were to study (a) the escalation clauses presently used in construction contracts adopted by various government departments/agencies in India, (b) the adequacy of compensation paid to the contractor based on currently used escalation clauses in government contracts, and (c) how far cost escalation has an impact on the construction projects. Personal interviews and questionnaire surveys were conducted among the clients and contractors of major government organisations and the data were analysed. This study revealed that (a) the contractor is not adequately compensated based on the currently used escalation clauses in government contracts, (b) the wholesale price index currently used in the escalation formula of many contracts does not adequately reflect the escalation in costs in building construction projects, (c) a building cost index needs to be used for calculating escalation payment in the building contracts instead of wholesale price index, (d) an escalation clause should be included in the government contracts where the project duration is more than 6 months and (e) cost escalation affects the quality, delays project completion and causes dispute between clients and contractors.

물가변동제도 운영방식 개선방안

공공건설공사의 계약금액조정사유로서 물가변동제도는 1969년 시설공사계약일반조건으로 처음 도입되었다. 조정요건은 계약일로부터 90일 경과 및 입찰일로부터 등락률 3%이상을 동시에 충족하여야 하는데 이 때 적용하는 등락률 산정방식은 품목조정과 지수조정의 단 두 가지뿐이다. 4개 공공기관의 163개 사업장을 조사한 결과 모두 지수조정방식을 적용하고 있었고, 조정기준일부터 계약금액조정 승인일까지 6개월을 초과하는 사업장이 전체의 90%를 상회하였다. 계약금액조정까지의 장기간 소요는 복잡한 등락률 산정방식이 주원인이므로 이를 다양화하여 시공자의 선택권을 확보하는 것이 필요하다. 현행 발표되는 한국은행의 생산자/소비자물가지수의 평균지수, 건설공사비지수에 대한 보정계수를 적용하는 방식을 추가한다면 별도의 추가비용 없이도 다양화를 만족시켜 조정신청지연을 최소화할 수 있다. 따라서 본 연구에서는 물가변동으로 인한 계약금액조정을 신속하고 효율적으로 이행할 수 있도록 물가변동률 산정방식의 다양화와 시공자의 선택권 확장 등의 물가변동제도 운영방식 개선방안을 제시하였다. There are several causes to recalculate the contract amount in public construction projects. Among them, the escalation clause was introduced in 1969 and now the condition to recalculate the cost is effective after 90 days from the date of contract and the rate of fluctuation should be more than 3% from the date of bidding. The two calculation methods for the rate of fluctuation are item-adjustment and index-adjustment. According to the results of investigation into 4 public institutions and 163 projects, all of them have used the method of index-adjustment and the rate of projects that spend over 6 months obtaining the approval of contract amount adjustment is more than 90%. The reason for spending lots of time is caused by problems of the calculation method on the price fluctuation rate. Therefore, it is necessary that the calculation method should be diversified to cope with the problems and a option of the builder should be expanded as well. Furthermore, if the way to apply correction factors to construction price index and average index based on the producer and consumer price index made by the bank of Korea is added, then the duration will be reduced without additional expenses. This study proposed the diversification of the calculation method using price fluctuation rate and builders' expanded options as improvement on the managerial method of Price Fluctuation System for the prompt and efficient contract amount adjustment.

Information, Monitoring, and Manipulation: The Economic Role of Covenant Measurement

I document the variation in measurement of financial covenants, focusing on three measurement rules: earnings (EBITDA vs. EBIT), firm value (including or excluding intangible assets) and inclusion of escalator clauses (provisions that increase the threshold of net worth covenants). I find that the selection of earnings and firm value measure is associated with the creditors’ demand for monitoring and that inclusion of escalators is driven by the risk of underinvestment. There is also evidence consistent with borrowers using discretion to lower depreciation and amortization and to inflate goodwill to avoid covenant violation. I draw two conclusions. First, earnings and firm value measurements are designed to aid the creditor in monitoring; however, borrowers use discretion to manipulate the reported figures. Second, escalator clauses encourage capital expenditures, and do so effectively. This evidence collectively supports an economic role for covenant measurement: the choice of measure facilitates efficient monitoring and limits underinvestment.

Law and Practice of Escalation Clauses

ESCALATION CLAUSES are also known as ‘multi-tiered’, ‘multi-step’ or ‘ADR-first clauses’. They are being increasingly used in international construction1 and engineering contracts.2 Escalation clauses provide that, in the event of a dispute between the parties, dispute resolution is to proceed through a sequence of ‘multi-step levels’ of dispute resolution processes. Arbitral proceedings will not be initiated until the end of such sequence.3 As a preliminary phase to arbitral proceedings, informal discussions or formal negotiations between technicians or decision-makers at management level, mediation proceedings, expert adjudication by a ‘Dispute Review Expert’ (DRE), a ‘Dispute Adjudication Board’ (DAB) or a ‘Dispute Review Board’ (DRB) will usually be agreed upon. The clauses thereby combine adversarial procedures with proceedings derived from the artillery of Alternative Dispute Resolution (ADR),4 resulting in a system of multi-tiered dispute resolution tailor-made for each contract. Arbitration as the ultimate level should only be reached as...