This video details Price Adjustment and circumstances borrowers should consider to properly apply this mechanism under ADB funded projects.
How does ADB define price adjustment?
Price adjustment is a risk management mechanism that allows for changes in major cost components of a contract.
It usually applies to contracts that involve the procurement of price-sensitive commodities, services, equipment, or materials, or contracts with long implementation periods.
Requirements for price adjustment must be assessed during procurement planning, and the methodology should be clearly identified in the bidding documents.
What does price adjustment aim to address?
Price adjustments aim to protect the borrower from overpricing by contractors, who may propose high prices to account for sudden or unexpected cost increases.
By establishing a clear price adjustment formula, bidders are able to propose realistic prices at the time of bidding, while providing a mechanism for compensation should the market experience any volatility for the agreed cost components.
These formulas are put in place to protect all parties involved and vary depending on the nature, scope, and duration of the contract, and the price index applied.
When can price adjustment be applied?
In general, the longer the delivery or completion period, the more likely that market prices for components will change, which can affect the winning bidder’s costs to complete the contract.
ADB advises that provisions for price adjustments be included in contracts with a delivery or completion period beyond 18 months, or in contracts that involve materials such as cement, fuel, or steel, whose prices fluctuate over short periods of time.
ADB’s Guidance Note aims to help users understand when and how to apply price adjustment formulas in contracts to help contribute toward Value for Money in ADB-financed projects.