Price escalation in Qatar
Chandana Jayalath on what to do when faced with price escalation
Chandana Jayalath discusses what to do when faced with price escalation in Qatar.
The majority of contractors in Qatar have been locked into lumpsum fixed-priced contracts where there is no provision for price escalation. Open market vacillations are a risk to the contractors, even in contracts having long durations.
But a surge in material costs has considerably affected the bottom line where profit margins are not as high as they once were.
For example, in Qatar, during the last ten months steel prices went up by an average of 65%, Red Meranti timber by 70% and asphalt by 40%. As a result, contractors have been searching for recovery means through claims on their own basis.
Many contractors use consumer price index (CPI) as the basis for claims although the purpose of the index is far different.
However, contractors will have a difficult, if not impossible task in getting respite from such increases. Even if the contract has become economically burdensome, it is unlikely to be sufficient to excuse performance.
The only way to get rid of this issue is to compensate the additional cost on an ex-gratia basis in existing contracts and share the risk on a contractual basis in future contracts.
The aim behind any strategy should be to reasonably reimburse the contractor for changes in input prices over which they have no control at all.
This means the contractor can be eligible if he could not foresee in advance. On the other hand, it may be cheaper in the long run for the employer to pay for what happened rather than what the contractor thought might happen in those areas of doubt, which the contractor cannot influence. The benefit of the doubt would then be passed on to the employer.
Albeit contract provisions do not provide for claims that are not capable of being contractually supported, the employer may well be in a position to consider them at corporate level since it is a macro economic global crisis that has been unprecedented.
The foregoing is not only limited to contractors; consultants also face a similar situation in their contracts.
PSA which stands for professional services agreement has been extensively adopted in the procurement of consultancy services in public infrastructure projects in Qatar, although it is relatively an old version that goes far back to 1984.
Typically, the contracts for professional services, be them design or supervision, include a project brief prepared by the employer describing what he intends to obtain or the scope of service. In addition to the project brief, there are three separate schedules forming part of many consultancy contracts in Qatar.
A clause in schedule B of the memorandum of agreement states that “should there be any extension to the contract period, the consultant must continue the services at the same monthly rates and prices” so that it expressly forbids any fee adjustment in the contract and shall pass the pricing risk onto the consultants for an indefinite period of extension.
It further contradicts the clauses 7.6 and 7.7 of the PSA which says that “service during longer periods shall be deemed to involve additional services” and “the government and the consultants shall agree any additional or reduced fees prior to beginning any additional or changed services”.
This provides an opportunity to agree on new rates for longer periods than shown in schedule C in the contract. Optionally, the engineer may treat each case individually by recommending compatible rates.
A consistent criteria is important, particularly when the professional service market is so volatile in nature that prediction on the fee structures for longer periods is hard, requests for the period is beyond the original completion date, reasons for extension is no fault of the consultant and when uninterrupted service is critical to finish.
In these circumstances, a ‘reasonable’ compensation within a ‘contractual’ framework is imperative for the well-being of the industry as a whole.
Who is Dr Chandana Jayalath?
Dr Chandana Jayalath is a Member of the Royal Institution of Chartered Surveyors and a senior contracts specialist for the Public Works Authority (PWA) in Qatar. His latest industrial exposure has been sidelined in the settlement of various commercial and contractual issues, claims and disputes arising in the infrastructure projects spearheaded by the PWA.