5 PROBLEMS EVERYONE HAS WITH CONSTRUCTION PRICE ADJUSTMENT IN ETHIOPIA – HOW TO SOLVE THEM

In recent years Ethiopian Construction become taken the lion’s share in the Country’s yearly budget. For more than a decade Ethiopia has passed through an intensive construction phase in Roads, bridges, buildings, and hydraulic structures. This creates good opportunities for the people in boosting MSE and lowering unemployment. Also, this accelerated construction phase created a new supply and demand in the construction material market. This created a high fluctuation of the market price. In recent, we have witnessed a skyrocket in the price of cement just within a month from 400birr/quintal to 750 birr/quintal. However, still, the factories’ prices do not show a significant price increase it is just in the Addis Ababa market.

In most on General Condition Contract (GCC) to stabilize the effect of such market fluctuation a clause so-called Price Adjustment stated. This is usually stated in form of imperial formula having an adjustable portion and nonadjustable portion.

One can notice how Ethiopian construction material price changed over time in this link https://constructioninethiopia.com/construction-materials-in-ethiopia/

Conditions of contracts

If we take a look at FIDIC 1987 amended in 1992, Clause 70.1 stated that ” There shall be added to or deducted from the Contract Price such sums in respect of rising or fall in the cost of labor and/or materials or any other matters affecting the cost of the execution of the Works as may be determined in accordance with Part II of these Conditions.” then mostly the formula stated in Part II (particular applications)

Pn = a + (b*Fn/Fo) + (c*Bn/Bo) + (d*Sn/So) + (e*Cn/Co)*zo/zn , where Pn is multiplier factor for each bill item, A is non adjustable portion of each bill and others factor multiplied by current price of respective material to its base price set in the contract document. More or less, the same formula is used in Ethiopia’s local contract provision (PPA condition of contract). However, mostly deleted in particular applications.

Applicable Law

Most regional and Federal laws of Ethiopia consider price adjustment for the construction industry and in some cases have further provisions to support or another way. 

Federal and Addis Ababa City procurement stated on consideration of price adjustment for the project have more than 18 months construction period and to all the price adjustment shall be started to be the effect after 12 months. With this regard, most of the building projects that have an original contract period of fewer than 18 months are deleted from the contract provided for the price adjustment, some just delete the price adjustment provision considering complications on contract administration. However, the Current construction material price is not stable for 12 months also one couldn’t forecast the market at the time of tender.     

Current situations 

Currently, there are many construction projects without price adjustment as a provision, but the project ends up extending due to various reasons mostly forcing major and employer’s default.

Moreover, as we have witnessed the price of construction materials especially reinforcement steel and cement so vibrant and unpredictable. To make it worse, nowhere to find testimony/price index or invoice mostly. 

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Government Decisions

Ministry of finance forwarded a letter to PPA and the Ministry of Construction and Urban aimed to address the current construction material price escalation by bulkily allowing all the finishing materials to be considered in a price adjustment. However, only     

Consideration of Price Adjustment as a change in cost

The so-called PPA general condition of contract requested prior approval of the price adjustment before incorporation into the forthcoming interim payments. This will create a whole new procedure and additional time for the Contractor more for all parties involved.

Absence of Base/current price

For consideration of base price, some items such as Cement and Steel are hard to find reliable a company that can provide a base price and current prices in the time of Construction. The other big hope was Central Statistical Agency [https://www.statsethiopia.gov.et/?s=construction] with a good start but not yet there.

What Would be the solution then!

Cost management in construction has never been easy, especially in times like this. Central statics should have a base price for all items, also those base and current prices shall be reflective of actual market price, not the paper price. All public bodies shall consider the price adjustment clause in their contract document and shall include as many adjustable items they can such as labor, equipment, bitumen, cement, steel, aggregate, sand, ceramic, paint, etc.

Involvement of institutions and organizations such as Contractor association, consultant association, Construction management associations, etc, in assessment and such very vital issue to discuss and let them draw solutions.