How to optimize the price review process in Civil Construction
Posted: Thu Dec 26, 2024 3:38 am
Recent global developments, including the war in Ukraine, the energy crisis and the COVID-19 pandemic, have had a negative impact on all markets. Inflation has been rising and the construction and real estate sectors have also suffered from this unfavorable economic situation.
The increase in the prices of construction materials and the lack of qualified labor have been suffocating the sector that is responsible for more than 50.5% of investment at a national level and, therefore, in this article, we will address the impact of inflation on the construction sector as well as the importance of the price review process in the management of a construction project.
The importance of price review in the management of a project
The price review regime constitutes an essential guarantee of trust india whatsapp number database the parties to the public works contract – owner of the work and contractor –, allowing them to review the compensation to which they are entitled based on the variation in costs inherent in the implementation of the contractual object.
Thus, the price review in construction contracts consists of a mechanism for updating the price initially contracted , based on the principle that, in the period between the start date of the contract and the moment of its effective execution, there will be significant variations in the costs of the main production factors of the works .
Exceptional situations require exceptional measures
In order to respond to the inflationary scenario that has been worsening the prices of raw materials, the Portuguese Government has created a new exceptional and temporary regime that will allow the price of contracts to be reviewed until the end of the year. This measure "aims to create a response that allows us to mitigate the effects resulting from the increase in the prices of raw materials, materials and labor, in order to guarantee the conditions for the execution and completion of public works", reads the statement published on the Government's website on May 5, 2022.
In short, this new decree-law establishes that the contractor may submit a request for an extraordinary price review when a construction material, labor or support equipment, which "represents at least 3% of the contract price", undergoes a price variation "equal to or greater than 20% per year, compared to the same period, either upwards or downwards".
What is the purpose of the exceptional price review regime for public works?
Created to "respond to the abrupt and exceptional increase in costs for raw materials, materials, labor and support equipment, with an impact on public contracts, especially public works contracts", this new exceptional and temporary price review regime aims to accommodate the increases felt in construction costs.
In what types of contracts is it possible to review the prices of public works?
Public contracts for the acquisition of goods;
Service acquisition contracts: in this case, their application depends on the categories of contracts determined by order of the members of the Government responsible for the area of finance and the area of infrastructure and housing;
Contracts subject to public procurement rules regardless of the legal nature of the owner of the work.
This price review scheme does not apply to sectors whose co-contractors have been covered by specific support measures provided to offset the increase in construction prices.
Furthermore, the regime was designed for public works, however, private companies may apply it if they so wish.
What are the requirements to be met to request a price review?
In order for contractors to be able to submit a request for an extraordinary review of public works prices, a specific material, type of labor or support equipment must cumulatively present the following, according to the diploma:
Represents, or will represent during the execution, at least 3% of the contract price;
Year-on-year cost variation rate is equal to or greater than 20%.
Until when is it possible to request an extraordinary review of public works prices?
The regime is applicable to all requests for price reviews of public works made up until December 31, 2022 , so all proposals received by the owners of the works after that date will not apply to this regime even if they meet the necessary requirements.
How to deal with the increase in prices of raw materials, materials and labor?
Taking into account that "the increase in prices (undetermined in view of economic instability) may mean that at the time of submitting proposals it is no longer possible to present prices that fall within the base price, it is advisable that contracting authorities provide for this possibility in the procedure programme".
According to the set of good practices published by IMPIC, there are ways to combat this price increase:
Exceptional award above the base price
The extraordinary price review diploma for public works allows the award of a proposal that exceeds the base price presented, as long as certain assumptions are met, such as:
All submitted proposals have been excluded;
There is a clear public interest that justifies acceptance;
The price of the submitted proposal does not exceed the amount of the base price by more than 20%.
Forecasts in the work specifications
It is through the specifications that the contracting authority sets the clauses to be included in the contract to be concluded. To mitigate any problems in reviewing the prices of the works, the following should be taken into account:
Definition of the base price : "when determining the base price, contracting authorities must take into account the values presented by the author of the execution project, an amount to which an update rate of up to 20% may be applied, taking into account the period of time elapsed between the presentation of the project and the expected date of submission of proposals and the variation in the latest published price review indexes”.
Exception to the definition of the base price : the setting of the base price is mandatory, but an exception is provided for provided that the contracting authority provides a justification, the procedure allows contracts of any value to be concluded and the competent body is not subject to maximum expenditure authorisation limits.
Price review formula : "the author of the execution project must be asked which is the most appropriate method of calculating price reviews and their respective frequency, since at this stage the materials and labor required to carry out the work in question are already known”.
Advance payment clause : contractors may lack liquidity to make the respective payment due to the increase in material prices. For this reason, it is recommended that "the specifications contain a clause allowing for advance payment of prices".
The increase in the prices of construction materials and the lack of qualified labor have been suffocating the sector that is responsible for more than 50.5% of investment at a national level and, therefore, in this article, we will address the impact of inflation on the construction sector as well as the importance of the price review process in the management of a construction project.
The importance of price review in the management of a project
The price review regime constitutes an essential guarantee of trust india whatsapp number database the parties to the public works contract – owner of the work and contractor –, allowing them to review the compensation to which they are entitled based on the variation in costs inherent in the implementation of the contractual object.
Thus, the price review in construction contracts consists of a mechanism for updating the price initially contracted , based on the principle that, in the period between the start date of the contract and the moment of its effective execution, there will be significant variations in the costs of the main production factors of the works .
Exceptional situations require exceptional measures
In order to respond to the inflationary scenario that has been worsening the prices of raw materials, the Portuguese Government has created a new exceptional and temporary regime that will allow the price of contracts to be reviewed until the end of the year. This measure "aims to create a response that allows us to mitigate the effects resulting from the increase in the prices of raw materials, materials and labor, in order to guarantee the conditions for the execution and completion of public works", reads the statement published on the Government's website on May 5, 2022.
In short, this new decree-law establishes that the contractor may submit a request for an extraordinary price review when a construction material, labor or support equipment, which "represents at least 3% of the contract price", undergoes a price variation "equal to or greater than 20% per year, compared to the same period, either upwards or downwards".
What is the purpose of the exceptional price review regime for public works?
Created to "respond to the abrupt and exceptional increase in costs for raw materials, materials, labor and support equipment, with an impact on public contracts, especially public works contracts", this new exceptional and temporary price review regime aims to accommodate the increases felt in construction costs.
In what types of contracts is it possible to review the prices of public works?
Public contracts for the acquisition of goods;
Service acquisition contracts: in this case, their application depends on the categories of contracts determined by order of the members of the Government responsible for the area of finance and the area of infrastructure and housing;
Contracts subject to public procurement rules regardless of the legal nature of the owner of the work.
This price review scheme does not apply to sectors whose co-contractors have been covered by specific support measures provided to offset the increase in construction prices.
Furthermore, the regime was designed for public works, however, private companies may apply it if they so wish.
What are the requirements to be met to request a price review?
In order for contractors to be able to submit a request for an extraordinary review of public works prices, a specific material, type of labor or support equipment must cumulatively present the following, according to the diploma:
Represents, or will represent during the execution, at least 3% of the contract price;
Year-on-year cost variation rate is equal to or greater than 20%.
Until when is it possible to request an extraordinary review of public works prices?
The regime is applicable to all requests for price reviews of public works made up until December 31, 2022 , so all proposals received by the owners of the works after that date will not apply to this regime even if they meet the necessary requirements.
How to deal with the increase in prices of raw materials, materials and labor?
Taking into account that "the increase in prices (undetermined in view of economic instability) may mean that at the time of submitting proposals it is no longer possible to present prices that fall within the base price, it is advisable that contracting authorities provide for this possibility in the procedure programme".
According to the set of good practices published by IMPIC, there are ways to combat this price increase:
Exceptional award above the base price
The extraordinary price review diploma for public works allows the award of a proposal that exceeds the base price presented, as long as certain assumptions are met, such as:
All submitted proposals have been excluded;
There is a clear public interest that justifies acceptance;
The price of the submitted proposal does not exceed the amount of the base price by more than 20%.
Forecasts in the work specifications
It is through the specifications that the contracting authority sets the clauses to be included in the contract to be concluded. To mitigate any problems in reviewing the prices of the works, the following should be taken into account:
Definition of the base price : "when determining the base price, contracting authorities must take into account the values presented by the author of the execution project, an amount to which an update rate of up to 20% may be applied, taking into account the period of time elapsed between the presentation of the project and the expected date of submission of proposals and the variation in the latest published price review indexes”.
Exception to the definition of the base price : the setting of the base price is mandatory, but an exception is provided for provided that the contracting authority provides a justification, the procedure allows contracts of any value to be concluded and the competent body is not subject to maximum expenditure authorisation limits.
Price review formula : "the author of the execution project must be asked which is the most appropriate method of calculating price reviews and their respective frequency, since at this stage the materials and labor required to carry out the work in question are already known”.
Advance payment clause : contractors may lack liquidity to make the respective payment due to the increase in material prices. For this reason, it is recommended that "the specifications contain a clause allowing for advance payment of prices".