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Contractors encouraged to set price hike clauses

Fixed-price deals could be a thing of the past as lawyers call for protection against escalating costs

Contractors are being urged to negotiate price escalation clauses into contracts before signing deals that could see them lose millions of dollars due to fluctuating material and labour costs.

The move could prompt a shift away from fixed-price contracts, which fail to protect contractors from rising construction costs and can potentially affect the quality of projects.

Sachin Kerur, senior associate at Pinsent Masons’ International Construction & Energy Group, believes that part of the contractor’s bargaining power at the tender stage should be getting a price escalation clause into the contract.

“Any contractor is going to find life difficult unless it is prepared to negotiate a price escalation clause,” he said. “One or two clients have said that had contractors raised the issue at the tender stage they would have considered it — in return, contractors would have to show a real bid price saving for the client.”

Although some companies have embraced price escalation clauses in exchange for a reduction in bid prices, others have been hesitant to negotiate contract changes through fear of conditions being abused.

“Clients haven’t agreed to it because they feel there would be a temptation for contractors to claim that prices were going up when they weren’t, or to a higher extent than they actually are,” added Kerur.

The Dubai Electricity & Water Authority (DEWA) only mitigates price escalation risk for spare part products over a ten-year period.

“We have different price structures for different contracts — some are based on a fixed lump sum, and others according to the price of metal and products like cables,” said Khaled Lootah, executive vice president of project and engineering, DEWA.

Contractors argue that attempts to negotiate construction cost deals have so far been unsuccessful.

“We’re not in a position to be able to negotiate at the tender stage, which is very painful as it affects our bottom line. We try but it’s useless,” said Pulakesh Chatterjee, general manager, ETA Star Engineering.

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