How the price adjustment formula works
Most construction contracts executed over more than a few months include a price adjustment clause. Without one, the contractor carries the entire risk of inflation in labour, materials and fuel; with one, both parties share it through a formula fixed at contract award. The weighted-index method — FIDIC Clause 13.7 — is the international default:
| Symbol | Meaning |
|---|---|
| P0 | Base price — the contract price (or unit price) before adjustment |
| P1 | Adjusted price payable for work in the current period |
| A | Fixed portion: overheads, profit and other non-adjustable costs, as a weight |
| Bi | Weight of adjustable factor i (labour, steel, cement, fuel, equipment…) |
| Mi0 | Index of factor i at the base date (the tender date named in the contract) |
| Mi1 | Index of factor i for the current period |
The weights must satisfy A + ΣBi = 1 (100%). If indices are unchanged (Mi1 = Mi0), the formula returns exactly P0 — a useful sanity check. If a factor's index rises, its weighted contribution raises P1 proportionally; the fixed portion A never moves, which is what limits the contractor's recovery to the genuinely variable part of the cost base.
Adjustment clauses in standard contract forms
| Source | Mechanism | Notes |
|---|---|---|
| FIDIC 1999 Red Book, Clause 13.7 | Weighted-index formula with weights fixed in the contract; applies to amounts payable under the contract | If no formula is inserted, adjustment falls back to 13.8 actual cost substantiation |
| World Bank / ADB Standard Procurement Documents | Price adjustment clause with published national indices, a fixed portion and a cap (commonly 10–15%) | Formula and indices are named in the particular conditions; the employer's engineer applies them monthly |
| China GF-2017 construction contract model text | Adjustment range fixed in the special conditions — commonly a ±5% or ±10% band around the base price using government-published price information | Within the band the contractor absorbs movement; beyond it, adjustment applies per the named index or price file |
| UK NEC4 X1 | Price adjustment factor applied to the Price for each period using named indices (CPI and a defined cost index) | Used where the contractor is paid on a cost-reimbursable basis |
Typical cost weights by project type
Weights are negotiated at award and vary by contract, market and duration. The presets in the calculator are indicative starting points compiled from published examples in standard tender documents and industry references — always use the weights in your own contract.
| Project type | Fixed A | Largest adjustable factors |
|---|---|---|
| Building / residential | ~25% | Labour ~30%, steel ~18%, cement & concrete ~12%, fuel ~8% |
| Roads & bridges | ~20% | Labour ~22%, aggregates ~15%, bitumen ~12%, fuel ~13% |
| Water & hydropower | ~22% | Labour ~25%, cement ~15%, steel ~15%, fuel & power ~12% |
Frequently asked questions
What is a contract price adjustment formula?
A price adjustment formula recalculates the contract price when input costs move after the base date. The most common form is the weighted-index method from FIDIC Clause 13.7: P1 = P0 × (A + Σ Bi·Mi1/Mi0), where P0 is the base price, A is the fixed (non-adjustable) portion for overhead and profit, each Bi is the weight of a cost factor such as labour or steel, and Mi0 and Mi1 are that factor's index at the base date and the current date. The adjusted price P1 is paid for work executed in the current period.
How does the FIDIC price adjustment clause work?
Under FIDIC Clause 13.7 the parties fix a formula with weights at contract award. The weights must sum to one (100%): the fixed portion A plus every adjustable factor weight Bi. Each month the engineer applies the formula using the published source indices named in the contract — not indices of the contractor's choosing. If the contract omits a formula, price adjustment under FIDIC falls back to actual cost substantiation: reasonable proven increases in the cost of labour, materials and equipment are reimbursed with supporting records.
What is the difference between the weighted-index and actual-cost methods?
The weighted-index method is mechanical: you apply fixed weights to published index movements, so both parties can verify the arithmetic without disclosing anyone's books. The actual-cost method reimburses proven increases in labour, material and equipment costs against invoices and payroll records. Index-based adjustment is faster, more predictable and the default in international tenders; actual-cost adjustment needs records and audit, and is usually the fallback when no formula was agreed.
Should a price adjustment clause have a cap?
Most employers insist on one. A cap limits the total adjustment — commonly 10% to 15% of the contract price over the whole works, or a per-period ceiling — and a floor (sometimes zero, sometimes negative) limits downward adjustment. Caps protect the employer in hyperinflation and protect the contractor from absorbing unbounded risk; the negotiated level depends on contract length, market volatility and how much cost risk the tender asked bidders to carry. Whatever the clause says, the arithmetic in this tool applies it exactly.
Which price indices should I use?
Use the source, base period and lag written into your contract. National statistical offices publish producer price and construction cost indices; many contracts name a specific series (for example a producer price index for materials or an official construction cost index). The base period should match the tender date, and the index series must be one neither party controls. Never substitute a spot quote or a supplier's own price list for the named index — the tender document governs.