07 Sep 2017
Crossrail, Battersea Power Station and Hinkley point have all been in the news because of reports of increased costs. It is important to understand the causes of increased costs, many of which may be part of the planned delivery and contracting process for the project.
As Crossrail has pointed out, their tier-one contracts were not awarded as fixed-price jobs and the contract value at award did not reflect the risks that were retained by Crossrail Limited for which a risk allowance was allocated.
Identification of risk
The risks come in many forms, but RICS guidance* identifies and defines:
- inflation risk
- design development risk
- construction risk
- employer change risk
- employers’ other risk
Inflation risk also comes in various forms as well, including changes in tendering climate and changes in the cost of resources.
It is important to identify who will carry the risks and how they will be accounted for. BCIS provides project-based forecasts for the impact of both market conditions and resource costs, and methodologies for accounting for inflation on contracts containing an inflation adjustment clause.
In addition to its published forecasts BCIS produces forecasts for clients on individual projects, sectors or locations.
The Price Adjustment Formulae Indices (PAFI) have been designed to be used for allowing for price adjustment on contracts, such as NEC (Option X1 Price adjustment for inflation). BCIS and Crossrail produced a case study on how they were applied on the Crossrail contracts.
Further details on the PAFI are available here.
*NRM1, RICS new rules of measurement – order of cost estimating and cost planning for capital building works, 2nd edition, April 2012, RICS.
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