Contract: Un-amended NEC3

Option: C

Query: Price Adjustment Factor calculation Proportions

Example:

Price Adjustment factors stated in Contract data:

POWDD increase in month = £10,000

Direct Staff - 10% - BCIS Inflation Index

Labour - 20% BCIS 3E1

Material - 5% BCIS Material Cost Index

SC - 55% - Not adjusted

When working out the proportions do Price Adjustment Factor how do the proportions come in to play in the forumla. I am confused to how you apply these. Do you take the (L-B)/B for each of these and add them together i.e.

1:

Direct Staff - 10% - BCIS Inflation Index B = 10 L =12 = (12-10)/10=0.2 @ 10% = 0.02

Labour - 20% BCIS 3E1 B=15 L=20 = (20-15)/15 = 0.33 @ 20% = 0.06

Material - 5% BCIS Material Cost Index B=5 L=7 (7-5)/5= 0.4 @ 5% = 0.02

PAF = 0.02+0.06+0.02= 0.1

PWDD x PAF / 1 + PAF = £10,000 x 0.1 / 1+0.1 = £909.09

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You have applied the correct calculation, although I came up with an adjustment amount of £963.86, due to the number of decimal places, that is 20% x 0,33 (a third) is actually 6.67%.

I usually have a 2 step calculation on an excel spreadsheet, with the first calculation listing the elements in column 1, the stated proportions in column 2, the base indice in column 3 and the latest indice in column 4.

The next step I calculate the increase in the indices as a percentage (L-B)/B for each element and then multiply by the proportion, totalling these to give the PAF (as a percentage)

The Net PWDD is then mulitplied by PAF/(1+PAF) to give the adjustment amount.

In your case it is;

Direct Staff - 2.00%

Labour - 6.67%

Material - 2.00%

Totalling 10.67%

£10,000.00 x 10.67%/110.67% = £963.86

Under NEC3 you also repeat the calculation where an Index changes (often an index is provisional before being firmed up at a later date), although this doesn’t occur under NEC4.

3 Likes

Thanks Andrew. I am back dating a calculation that hasn’t been done for quite a sum so wanted to be sure of the calculation proceeding as the previous team had carried this calc out in different manor not applying the proportions just linking the index value totally to that element of cost in month I.e running through line by line of the application and separating out staff, labour and material costs and using them as POWDD in the calculation with the full index PAF not proportioned.

One issue I noted was that your percentages added up to 90%, (10+20+5+55) so I assume you also have a stated ‘non-adjustable element’ of 10%, so that it adds up to 100%.

Hi thanks for illustration!! I am however slightly confused, the figure (10,000) appears to include non adjustable items (55%). should that portion not be removed from the calc. so that inflation is only added to items that are truly adjustable?

regards,

George

No. The PAF calculation is applied to the entire ‘net’ PWDD. You don’t separate out the applicable part of the PWDD (staff, labour etc) and apply a separate PAF adjustment to that part only.

From the calculation there is a total of 55 + 10 = 65% which is effectively non-adjustable, hence the PAF calculation is ‘weighted’ to 35%.

Thanks for the quick response!! I understand it clearly now.

Good morning Andrew,

Please is it possible you can show us how you do your calculations? I am lost how you arrived at 10.67%.

Can you please share your excel sheet with as, please?

Also, where no base date is provided in the contract- how do you deal with such a situation.

Good morning,

Please where are those percentages you applied coming from?

```
Date Index Status On year On quarter On month
```

Apr2021 458.0 Firm 0.0% 0.1% 0.1%

May2021 458.0 Firm 0.0% 0.1% 0.0%

Jun2021 458.0 Firm 0.0% 0.1% 0.0%

Jul2021 465.9 Firm 1.7% 1.7% 1.7%

Aug2021 465.9 Firm 1.7% 1.7% 0.0%

Sep2021 465.9 Firm 1.7% 1.7% 0.0%

Oct2021 467.5 Firm 2.0% 0.3% 0.3%

Please which of the indices is appropriate for calculating PAF

Thank you