NEC PSC: Option X1, Price Adjustment for Inflation

We have an NEC3 Professional Services Contract with a major client that runs over several years and contains Option X1: Price Adjustment for Inflation.

We have just passed the annivarsary of the Contract and we are looking to apply the price adjutment.

Using the Contract as a Framework we are typically awarded individual tasks that last between 3 months and 3 years.

A task is awarded on the basis of a ceiling fee made up from tendered rates and a maximum agreed number of hours. Rates are calculated on an individual basis but, in some instances, are capped at a maximum figure depending on the grade of the individual.

We are allowed to amend our rates, subject to not exceeding the cap, if there is a change in salary.

To apply Option X1 am I correct in thinking the effects of inflation would lift the ceiling fee (for that part of the fee left for this year) and lift caps on the fee for each grade.

However, it would not change the rates themselves in this instance as we apply any changes that come about from a change in salary or other circumstance anyway.

It’s very hard to answer this one as the option X1 in NEC3 PSC is essentially tow options in one as :

  • the first half is for “staff rates” which “are fixed at the Contract Date and are not variable with changes in salary paid to individuals”. This sounds similar to what you are saying for the cap; while …
  • the second half is for “staff rates” which “are variable with changes in salary paid to individuals”, which sounds like the your" rates calculated on an individual basis.

Consequently, I am assuming your contract is amended in some way which, as I do not know exactly how, I cannot give an informed response to.


Thank you for your help as always.

You are correct in that the contract is amended such that our hourly rates are calculated in a complicated way (including an element for salary) set out by the Employer, and there is a cap per grade. However, for all intents and purposes it then operates as if rates “are variable with changes in salary…” and we adjust our rates from time to time following pay awards. This is our risk as it results in less available hours as we cannot exceed the original ceiling fee agreed at award (calculated from agreed hours x the original rates plus an allowance for expenses such as travel).

Ignoring the cap for a moment, we think the rates themselves would not increase because of X1 in this instance as they have already been increased once for “inflation” by us following a cost of living change to salaries.

Increasing the rates twice for two different reasons seems incorrect.

However, we think the agreed ceiling, at least for the unexpended element of the fee for this year, should be increased by the application of X1. This would make more “hours” available to offset the reduction following the (inflation driven annual) pay award.

Similarly, we think the caps should also go up by a similar percentage or these individuals would never see their rates increased because of inflation.

Does anyone have a view?