An Increased Cost Adjustment Formula (ICA) for Optimum Cost Escalation Recovery for Construction Projects in South AfricaThe South African Council for Quantity Surveying Profession Conference (2008)
AbstractPurpose – Rising construction input costs in South Africa have an adverse impact with regard to optimum cost reimbursement to contractors where contracts allow for increased cost adjustments on some basis. This paper has a two-fold aim, namely to establish the shortcomings of increased cost adjustment methods currently used in South Africa, and to introduce an alternative method. Methodology/Scope – The literature on the shortcomings of existing increased cost adjustment methods was reviewed. The ICA formula was developed based on the breakdown of contract costs. The increase cost of construction materials for a period of 20 years was analysed. A quantitative survey method consisting of closed-ended questions was used to investigate the current increased cost adjustment methods used in South Africa with regard to cost recovery. Findings – After the development of the ICA formula, an illustrative case study comparing the ICA formula over other methods was done. The adjusted amount using the ICA formula was between the amounts obtained using the traditional method and the Haylett formula, hence the optimality of ICA formula with regard to cost recovery. It was revealed that prices for major construction input items such as diesel, petrol, cement, bricks, steel and wood products have risen considerably in South Africa. This suggests that increased cost adjustment methods will be challenging with respect to cost recovery. The survey involved the participation of 8 knowledgeable respondents from contracting and consultant companies. While at least two-third respondents believed the traditional method for increased cost adjustment achieved the optimum cost recovery, several respondents doubted whether the calculated amount using the Haylett formula tallied with the real incurred losses. Research limitations – Given that the study was exploratory, only a limited number of quantitative questions were designed and posed. Future investigations would need to include a qualitative method to gain deeper insight of the situation. Practical implications - The study recommends the use of an alternative method for valuation of fluctuating contracts given its suitability within the current macroeconomic situation. Value/Originality - The study contributes to the existing body of knowledge of both practitioners and academia. It is a scientific demonstration that theoretically and practically recognises the uniqueness of each construction contract with regards to increased cost adjustment. It is anticipated that the adoption of the ICA formula as an alternative method for price adjustment will result in balanced cost recovery/reimbursement between the client and the contractor.
- ICA formula,
- increased cost adjustment methods,
- South Africa
Publication DateSpring October 9, 2008
Citation InformationRuben Ndihokubwayo and Theo Haupt. "An Increased Cost Adjustment Formula (ICA) for Optimum Cost Escalation Recovery for Construction Projects in South Africa" The South African Council for Quantity Surveying Profession Conference (2008)
Available at: http://works.bepress.com/ruben_ndihokubwayo/8/