Price Adjustment Provisions – An Update
Tuesday, July 1, 2008
Over the course of the last several months, MITA has received a number of calls and inquiries concerning the industry’s position on price adjustment (escalator) provisions, particularly as it related to fuel. In response to those inquiries MITA held an open meeting in it’s Okemos office to hear and learn more about the membership’s concerns, issues, and opinions as they relate to price adjustment provisions.
At that meeting it quickly became evident, based on the comments of the 30+ attendees, that the rising price of fuel was not the only concern. Steel products, iron castings, pipe, and resin-derived products were cited as other materials experiencing significant price instability. It was stated that suppliers are now often quoting materials with prices that are good for only 30 days, and in some cases only 24 hours. In other cited instances suppliers are requiring that the contractor take delivery within a specified timeframe, say 30 or 60 days to insure the quoted price. A few of the attendees indicated that they have elected not to bid on some projects due to the inability to get firm quotes on some materials.
In terms of the implementation of price adjustment provisions, the following key points were discussed:
- Public agencies remain steadfast in their position that price adjustment provisions cannot be imposed retroactively …. i.e. no relief on existing contracts.
- Owners generally will only agree to price adjustment provisions that benefit both parties …. i.e. if the price goes up, the contractor may gain; if the price goes down, the owner may gain.
- Price adjustment provisions revolve around an agreed to at-bid “index”. Some question the validity of an index and how well it might represent the price a contractor or supplier pays for the respective commodity.
- Many look at price adjustment provisions as “price control provisions” as those entities that control the “index”, then control the price.
- Most price adjustment provisions include a "+/-“ band around the index within which no adjustments for increased or decreased prices are made.
- Most price adjustment provisions include a “+/-“ adjustment limit to cap the increase or decrease that will be allowed.
- Contractors may favor a price adjustment provision that would allow for “opting in” or “ opting out” …. owners may not.
- How does the prime contractor assure subcontractors and/or suppliers appropriately share both the upside and the downside of a price increase or decrease?
The following price adjustment provision examples are provided for information to help all MITA members better understand these types of contract provisions:
Ohio’s Fuel Price Adjustment Provision Virginia’s Adjustment for Fuel Provision
Virginia’s Fuel Adjustment Bid Item Eligibility List
Wisconsin’s Fuel Cost Adjustment Provision
Ohio’s Steel Price Adjustment Provision
As the discussions of that meeting concluded it appeared that the initial support for broad implementation of price adjustment provisions had waned. However, two key areas were identified where MITA will focus its efforts that might help contractors and suppliers better manage their risk and react to a market driven by significant price instability. Those two areas of focus are:
Timeliness of Contract Award: MITA will work with owner agencies at all levels to ensure that they understand the dynamics of today’s market and the potential cost implications that a 60, 90, or 120-day contract award timeframe could have on a low bidder. Owner agencies will be encouraged to expedite their contract award procedures.
Stockpiled Materials: MITA will encourage owner agencies at all levels to immediately implement contract provisions that will allow for the stockpiling of, and payment for, materials specifically produced or fabricated for a project.
MITA has not taken an official position to support price adjustment provisions.
If you have any questions or comments contact Glenn Bukoski at firstname.lastname@example.org or Doug Needham at email@example.com or call them at the MITA office at 517-347-8336.