Stats needed to put clause into effect

by Conrad Egbert

A lack of government indices and statistics for the UAE construction sector is making it difficult to incorporate ‘escalation clauses’ into contracts, according to industry experts.

While contractors are turning their backs on contracts that do not include escalation clauses, developers argue that a lack of indices has prevented them from including clauses that mitigate price risk.

“If there’s ever been a need for escalation clauses in contracts, then it’s now,” Melvyn Ford, general manager at CSHK Dubai Contracting said at MEED’s Arabian Construction Summit.

“We can’t even make up for the inflation with exaggerated quotes anymore. Even a 15% quote above the norm would only get us a five or six per cent profit, which was the same four years ago.

“Contractors now very rarely take on work where contracts do not include escalation clauses. Clients think they’re kings, and that’s wrong – they need to change their mentality and work together.

In markets such as the UK and US, contracts that include escalation clauses and other risk-lowering clauses are incorporated based on government

indices and statistics.

But in the UAE, government statistics are largely inadequate, if available at all.

“Escalation clauses in contracts need indices and there are none here,” said Ali Kolaghassi, vice president, Saudi Oger.

“Indices have to come from the government. We don’t mind including escalation clauses because it would help us as well.

“Contractors sometimes overestimate material prices and quote more than the actual cost, meaning we end up paying more than we would have done. At the end of the day an escalation clause would be better for us all, but we need something to base it on.

According to Michelle Nelson, a partner in legal firm Masons Galadari, while government indices are important in assisting with escalation clauses, their absence doesn’t prevent contracts from including them either.

“Indices do go a long way in helping to understand the market, but that can be done via other sources as well,” she said.

“But their absence does not in any way restrict developers from including escalation clauses in contracts. In fact, it would protect both the client and the contractor.

  1. All parties involve in the construction contract should begin to realize that the escalation clause or Variation of Price VOP, if need to be incorporated into the contract will not only siding a single party, i.e. the contaractor but to certain extend offer a very competative pricing and give fair justification to the parties in the contract.
    Many clients do not realize that by the absence of such clause, most of the contractors will put certain % of factor during the pricing of the tender in order to reduce the risk of price increase in materials that usually create unnecessary additional cost to the project.
    A lack of government indices and statistics does not mean a restriction for implementing and adapting such clause into the contract. As price escalation is mostly applied only to some major materials namely steel bar, cement based items, diesel and bitumen (for general contracting), a simple approach in implementing this clause is by ensuring that all parties i.e. client, contractor and consultant should create a monthly market price database for these few items in order to manage the escalation. Every month, the contractor will require to submit the prices of the said items, to be verified by the consultant with the approval of the client.
    We should also understand that such variation of prices not only required to be adjusted when the material price increase but vise-versa, when the material price decrease, which definitely will have big advantage to the client as well.
    Another solution to the absence of government statistic or indices, is to request the corporation from all contractors to submit the basic material prices to UAE Contractor Association on monthly or quarterly basis, so that the Association could generate a proper database.

    Zack Ali,

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