X1 for steel NEC Option A

NEC3 and NEC4 Contracts Secondary X, W and Y options
1

Hi

Was wondering if I could get clarification on the X1 clause under the Option A option.

We have steel material which is subject to the X1 Price Adjustment for Inflation secondary option clause.

We have whole batches of steel, different members, suppliers, that are all ordered at different dates and subsequently delivered on different dates.

Using SBB Steel Prices by S&P Global Inc as the indices, which are split up accordingly to the different type of Steel sections and include steel price per day for each day of the period of the report you run.

I believe the correct approach to is to identify the indices each batch of steel closely relates to i.e. Long Products, Flat Products etc. and use the correct indice accordingly together with the ORDER PLACED date and check for the indices average for that date.

The following uses example data to illustrate understanding. So, now I have the following:

  • Agreed indices (SBB Steel),
  • Material Order Date from Subcontractor (26/09/2022 / from indices £1,080.50 per tonne),
  • A Base Date Rate (R) from the Subcontract CDP1 (£1,800 per tonne) used in activity schedule price,
  • Base Date for indices from the Subcontract CDP1 (10th Jan 2022 / from indices £834.30 per tonne) (B)

Price Adjustment Factor is (L-B)/B
PAF = (£1,080.50 - £834.30) / £834.30 = 0.2951

R x PAF = £1,800 x 0.2951 = £531.17

So for each tonne off material ordered on 26/09/2022 the Subcontractor gets an additional £531.17 due to X1 Inflation?

Would my understanding/calculation be correct? What throws me a little is the Base Date Indices used vs the Price in Activity Schedule. If the Subcontractor has priced using a higher rate i.e. £1,800 per tonne - shall we not get a negative change if the order was placed on a date which it was cheaper, say £1,080.50? Hope that makes sense and can be followed. Thanks.

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Abul, your calculation seems correct. I do not agree in principle with the use of the rate R - although the end result would probably be the same for the specific assessment - and I explain the reasons below. The amount for price adjustment for each assessment should be:

Price adjustment included in the amount due = [The change in the Price for Work Done to Date (PWDD) multiplied by the PAF which applies at the assessment date] + [price adjustment amount included in the previous assessment] + [corrections arising from changes in the indices used in previous assessments]

(see the three bullet points in cl. X1.4 of secondary Option X1)

Three things to note are i) the change in the PWDD is used ii) the PAF applies at the assessment date, not the order date, and iii) the calculation is repeated in subsequent assessments if the relevant indices change even if you have no change in the PWDD (see also cl. X1.2).

Regarding your question and based on the above, the “rate” used in the Activity Schedule (or R as you refer to it) is not relevant (it also seems more likely that you would be using BoQ for Option B); what matters is if you have inflation or deflation for the relevant indices. However, because the price adjustment is cumulative, even if you have one deflationary period the overall result would normally still be positive.

I hope the above helps.

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Thanks Peter. Appreciate the response it is of great help.

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