Question

How does the type of contractual agreement influence the potential for cost escalation?

Answer 1

The most common use of this type of contractual agreement influence the potential for cost escalation is an inflation adjustment fee. In some countries, the value of the local currency can fluctuate dramatically over months, affecting the cost of domestic materials and labor. During high inflation, customers conclude the risk of high costs due to inflation, and contract prices are adjusted based on the inflation index. Instability of some commodities can also be reported in price adjustment contracts. For example, if the oil price significantly affects the project price, the customer may take the risk of fluctuations in the oil price and include in the contract an offer that may allow the contract price to be adjusted based on the price change.