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Escalation - Part 2

The second part to "Escalation" is being posted a little over 2 years after the first post, so in case you'd want to refresh on part one, please find appended the link:

Escalation - Part 1

The second method is based on PAN India details, basically the RBI's Wholesale Price Indices.

Firstly, RBI stands for Reserve Bank of India, the RBI as part of inflation control and monitoring has set up an index, called the Wholesale Price Index (WPI), which provides a means to monitor an increase/decrease in commodity prices. It is a very exhaustive list and covers all most all commodities in circulation within India and some export commodities as well.

The WPI essentially tracks the commodities with respect to a clear baseline. This baseline is always indicated at the top of the monthly bulletin/circular, which is published on the RBI website, appended is a link to one such bulletin:

https://www.rbi.org.in

It would also be nice to note that by using this method of calculation both predictive escalation (forecast trends) and historical escalation (previous trends) can be accessed.

WPI as calculated and indicated by the RBI is fairly complex manner, there are groups and these groups have a percentage compositions, for these very reasons there is a possibility of mismatch since the prices are arrived by a weighted average method. The accuracy of the indexed prices will also be defined by the number of quotes collected during the assimilation of the data by RBI.

The formula used for this calculation is appended below:

V=W ×(X/100) ×[(CL - CB)/CB ]

V is the calculated variation in rate/price.

W is the value of work done during the period of escalation being requested/calculated.

X is the percentage/weightage component of the item for which escalation/variation is being calculated considering the overall scope of work (construction material group needs to be considered here).

CL is the All India Wholesale Price Index for the item under consideration, for the period under consideration as published by RBI.

CB is the All India Wholesale Price Index for the item under consideration, as valid on the date receipt of final tenders

Concluding notes:

This method is tricky, if the mode of operation is not clearly defined the understanding for each of the parties may be different, hence while drafting the contract it becomes essential to list the period of operation, the baseline WPI to be considered and the value of works beyond the exact period this formula will be operable.

On a personal note, it is best to define how escalation will be calculated in detail as part of the tender/contract documents itself, this avoids any/all disputes when it comes to finalization.

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