X1 - Price Adjustment for Inflation - Can you offer advice on a cap on the index rates used?

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In light of today’s decision to come out of the EU I doubt you are the only person thinking about how to protect yourself from dramatic increases in the rate of inflation. The RICS were already predicting 25% tender price increases over the next 5 years but this was without factoring in leaving the EU. They haven’t yet offered a view of the impact of leaving the EU so we’re likely to live in a period of great uncertainty which will make life difficult for those of us involved with tendering contracts. In principle we have to decide whether the Employer should retain the risk or pass it on to the Contractor. With so much uncertainty we’ll likely see tenderers either resist taking on the risk, or taking it on and gambling on how much to include in their tender prices for it.

Capping inflation is a way sharing the risk albeit only to a defined point, say +/- 10 to 20% after which the risk would be entirely the Contractors for which they would still need to gamble on how much to allow for in their tenders.

Under X1, in order to cap the amount of any adjustment you would need to use Z clauses to create a cap as using the X1 methodology in the standard contract it isn’t possible. The idea being that by including X1 the Employer is either retaining 100% of the risk or by using the proportions sharing the risk with the Contractor. This sharing is in effect ad infinitum i.e. it doesn’t matter how great the inflationary percentage is the proportions will always be the same.

Before drafting a cap you need to think through both (1) your motivations for wanting one and (2) how the market is likely to respond to it. By making the contract more risk averse you will no doubt have to pay a premium, so you need to think about if you willing to pay an increased price for something that currently we have no evidence to know will happen. In the short term tenderers might respond by walking away, especially since the market is currently buoyant, but also because you are seeking protection from the extreme effects of inflation no doubt which is a risk that tenders may think is unattractive.