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Technical Paper
Transportation Profess ional
M ay 2 0 1 2
The price is right with new
industry led adjustment indicies
Cost of materials in the construction industry has become increasingly volatile and unpredictable over
the last few years. This is particularly so in the case of hydrocarbon derived products such as bitumen.
But industry is working hard to take control of the situation.
Introduction
Inflationary pressures since the 2008
downturn are clear to see and industry,
construction and infrastructure services
have been hit hard.
CIHT members and their organisations
together with the Highways Term
Maintenance Association (HTMA) and
Civil Engineering Contractors Association
are championing proposals to closely
monitor price fluctuations to allow better
management of risk and present better
value to the public purse. They have
come together as a pan industry working
group to deliver the most appropriate
adjustment mechanisms that are
beneficial to both provider and client.
“There is great cost uncertainty in not
just our market but in all markets,” says
CIHT Council Member and managing
director of Ringway Infrastructure
Services Chris Connor. “The combination
of domestic and international fiscal
instability has created an environment
that is not conducive to accurately
predicting the price and availability of
materials and resources.
“In particular we have seen the price of
bitumen increase substantially over the
last two years in the region of 36% and in
the calendar year of 2011 alone by 23%.
This, together with the impact of other
materials price increases, results in
tighter budgets for our clients and makes
our job of accurately predicting our
costs to them very difficult.” He adds
that this can put unnecessary strain on
close partnership relationships and
could ultimately result in reduced levels
of service and benefits to the road
using public.
The need for new indices
Concerns felt by many CIHT members
led the HTMA to take the lead in
developing a new ‘price fluctuation
mechanism’ which seeks to resolve, as
Price of raw materials used in road construction and maintenance has risen sharply in recent years
best as possible, the inconsistent
inflationary nature of various key
elements required throughout a term
maintenance contract.
The current Baxter or RPI derived
systems which are in place for the
majority of contracts have been found to
be inflexible and not truly representative
of price reality given the wide scope of
some maintenance commissions, says
Mr Connor. In addition the majority of
contracts use annual indexation that can
provide large cost fluctuations at the
indexation date. The new mechanism is
applied monthly and allows better and
simpler budgetary control and planning
for the provider and client alike.
Road Surface Treatments Association
chairman Rob Gillespie says: “The new
indexation mechanics developed by
industry and the HTMA will allow our
members to work in a more cost
predictable manner with clients and
main contractors. It will avoid the
distraction of concerns over hydrocarbon
price volatility and the often drawn out
processes of discussing how such
damaging impacts can be mitigated and
resolved.”
The new indices achieve greater
accuracy in the tailored and detailed
breakdown of the inflationary variables
involved, specifically in term
maintenance. They range from materials
(aggregates, bitumen, concrete), human
resources (management and labour),
fleet maintenance (insurance and cost of
parts) and are further sub categorised
into two sections: Resource Cost Indices
and Work Category Indices.
Having a specific and detailed set of
indices for term maintenance addresses
some major inadequacies in the process
of costing, budgeting and execution for
both client and provider. What everyone
requires in today’s business environment
is stability – stability in both spending
and remuneration.
With the new indices contractors are
able to offer a more accurate and lowest
achievable bid price in the knowledge
that most inflationary effects will be
May 2 0 12
Transportation Professional
Technical Paper
catered for accurately. In doing this it
fairly allocates risk between the parties
and implements a system of accurate
cost profiling. Fewer unplanned
variables mean less unforeseen
fluctuations on price and ultimately
the standard of service.
Increased harmony
The indexation proposals also seek to
achieve increased harmony throughout
each stage of a contract. With a more
detailed quote, planned possible
adjustments and fair risk allocations, the
removal of time lost to debating
inflationary pressures is designed out of
the process which leads to a better,
smoother service to keep focus on the
needs and expectations of road users.
HTMA Procurement Group chairman
Steve Ashley says: “The Price Adjustment
Formulae Indices (Highway
Maintenance) 2010 series not only
accurately reflects the inflation
applicable to highway maintenance
contracts, it allows closer working
relationships, gives the opportunity to
take advantage of market trends and
provides visibility of operational
efficiencies.”
The two categories (Work and
Resource Category Indices) are
calculated, produced and applied
monthly to keep a finger on the pulse of
all costings and variables. The first (Work
Category) is published by the Building
Cost Information Services and in the
interests of transparency does not
include a non adjust/efficiency category.
As such, a 10% non adjustment figure is
applied, leaving the final adjustment
factored by 90%.
The second set of indices (the
Resource Category) are compiled from
detailed evaluations of live projects and
are also published on a monthly basis.
This leaves two possible means of
calculating price fluctuations: either the
Work category or Resource indices.
• Option 1 – Using the appropriate
published Work Category Indices for
adjustments to the relevant priced
items
• Option 2 – Calculating bespoke Work
Category Indices by weighting the
published Resource Cost Indices by
proportions chosen by the end user to
suit particular circumstances and
applying to the relevant priced items
New indicies have been introduced to test prices and allow contractors to offer more accurate bids
Term maintenance contracts recently
awarded to Shropshire and Cheshire West
& Chester councils were the first to
employ the new adjustment indices as
recommended by the industry. These
contracts will be good reference projects
for the new indexation. Use of the new
mechanism by the two councils has
allowed successful tenderer Ringway to
deliver a more efficient and productive
tender for the combined package of
contracts.
Cheshire West & Chester Council’s
director of community and environment
(and chairman of the ADEPT Engineering
Committee) Steve Kent says: “The Price
Adjustment Indexation mechanism is a
straightforward yet flexible system that
enables the supply chain to price
contracts with greater confidence.
Clients can be more assured of lower
price bids and contracts can be extended
with greater confidence that future costs
will be appropriate.”
A new way of working
Recovery of inflationary costs within
contracts where a traditional mechanism
is in place can hamper good service
delivery. Where cost pressures on
contractors or their second tier providers
cannot be normalised through the
contract this can lead to reductions in
quality, or for some smaller contractors
may represent the difference between
providing the service or stopping entirely
such is the potential scale of some
inflationary elements.
Asphalt Industry Alliance chairman
Alan Mackenzie says: “Despite the cost
pressures facing our industry we do not
believe that service levels have decreased
within the asphalt industry, quite the
contrary. However as inflation continues
to be less predictable across various
material types this will inevitably cause
providers to price risks that may turn out
to be unnecessary. This can ultimately
affect the overall value of works to clients
and customers.”
The aim of the new indexation
guidelines is to establish a new way of
working in what is an extremely
challenging period for businesses and
the industry. The new price adjustment
indices are for the benefit of both the
client and provider and reinforce the new
ideology of transparency, stability and
predictability.
By employing a system whereby cost
variables are closely monitored and
planned for, both client and contractor
can again work as a partnership to
present the best service to the taxpayer,
allowing good lifecycle investment and
leaving road networks in a condition
where they are truly valuable and are
valued assets.
The Price Adjustment Formulae
Indices (Highway Maintenance) 2010
series can be found at the Building Cost
Information Service website.
This paper was produced and peer
reviewed on behalf of the CIHT
Procurement & Development Panel.
An extended version of the paper appears
on the CIHT website www.ciht.org.uk
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