Theories and concepts for an increased cost adjustment (ICA) formula for optimum cost escalation recovery

Abstract

Purpose – Rising construction input costs have an adverse impact with regard to optimum cost reimbursement to contractors where contracts allow for increased cost adjustments on some basis. This paper has a two-fold aim, namely to establish the shortcomings of increased cost adjustment methods and to introduce an alternative method. Methodology/Scope – The literature on the shortcomings of existing increased cost adjustment methods was reviewed. The ICA formula was developed based upon a set of assumptions derived from a comprehensive breakdown of contract costs. Findings – After the development of the ICA formula, an illustrative case study comparing the ICA formula over other methods was done. The adjusted amount using the ICA formula was between the amounts obtained using the traditional method and the Haylett formula, hence the optimality of the ICA formula with regard to cost recovery. Research limitations – Given that this paper solely establishes theoretical concepts of the ICA formula. No field work was done, only an illustrative case study was done. Practical implications - The study recommends the use of ICA formula as an alternative method for valuation of fluctuating contracts given its suitability within the current macroeconomic situation. Value/Originality - The study contributes to the existing body of knowledge of both practitioners and academia. It is a scientific demonstration that theoretically and practically recognises the uniqueness of each construction contract with regards to increased cost adjustment. It is anticipated that the adoption of the ICA formula as an alternative method for price adjustment will result in balanced cost recovery/reimbursement between the client and the contractor.