Comparison between Price Adjustment Indices and real costs of construction materials to calculate escalation: a case study

Abstract

Construction materials have been experiencing significant price increases, and these prices are causing a rise of construction costs of buildings and other construction structures. The rise in material prices is causing construction managers to undertake cost control mechanism to adjust the escalation of construction costs.

Price adjustment applied to construction works considers the updating of prices based on the current index values of construction material, labour and plant, which do not sometimes reflect the actual market prices.

The recent legislation (Decree-Law nº 36/2022) that amended the regime of price adjustment of construction contracts considers the possibility of interested contractors to present proposals for amending the price adjustment formulae, when these do not either reflect the changes in the costs of inputs or are omitted in the contract documents.

The object of the paper involves the simulation of a real case of a construction contract, where price adjustment provisions were used to account for the changes of construction costs. A comparison was, then, made between the recompense given to the contractor based on the price adjustment format agreed in the construction contract, and that derived from the application of different adjustment provisions contained in the aforementioned Decree-Law.

The results of the study show that the use of the original price adjustment indices was generally suitable to account for the increase in construction costs. On the other hand, the application of some adjustment provisions contained in the recent legislation resulted in the overvaluation of the actual costs of construction materials.