JBCC contract price adjustment provisions (CPAP)

June 24th, 2011, Published in Articles: Vector

Background and objective

This article is a simplified guide, not a legal document.

The Joint Building Contracts Committee (JBCC) accepted responsibility in 1995 for the administration of CPAP as published by Stats SA with the signing of a copyright licence agreement between the Government of South Africa and JBCC. In 1998 the provision of the indices to the building industry changed to an annual subscription to cover Stats SA’s fee and JBCC’s administration costs.

The formula adjustment provisions provide for the needs of contractors who require a clear-cut, agreed escalation recovery formula method to avoid dissension and disputes with employers and subcontractors and to provide reasonable reimbursement of price fluctuations. A workable formula method of contract price adjustment simplifies accounting procedures and generally provides for acceptable reimbursement.
 
JBCC has designed the CPAP to reflect price changes as closely as possible within the philosophy of an index-based system. Users must bear in mind that a formula cannot precisely reflect actual cost fluctuations on a contract or any particular element of work. The CPAP is designed to simplify adjustment procedures while providing a level of recompense accepted as fair to employer, contractor and subcontractor.

Section 1: Definitions and interpretation

  • Adjustment amount: The amount calculated in terms of the applicable adjustment formula using the tax exclusive method

  • Agreement: The principal building agreement

  • Base month: The calendar month during which tenders closed

  • Contractor: The party contracting with the employer for the execution of the works

  • Contract value: A monetary value initially equal to the contract sum that is subject to adjustment

  • CPAP: These contract price adjustment provisions used for the adjustment of fluctuations in the cost of labour, plant and materials and goods

  • Index: A work group index published in a Stats SA statistical release or any index calculated from a selected set of sub-indices

  • Payment certificate: A document issued monthly, or at shorter regular intervals, by the principal agent certifying the amount due and payable by the employer to the contractor or vice versa in terms of the JBCC Payment Certificate format

  • Practical completion date: The initial or actual date of practical completion of the works in terms of the agreement. The date of practical completion as certified by the principal agent where the works, or a section thereof, is substantially complete and can effectively be used for the intended purpose (from PBA). The initial or revised date of practical completion of the works in terms of the agreement provided that if the actual date of practical completion of the works is earlier such earlier date shall be deemed to be the practical completion date

  • Principal agent: The party appointed by the employer with full authority and obligation to act in terms of the agreement

  • Stats SA: Statistics South Africa as the provider of the indices used for CPAP

  • Valuation period: The contractual period between two payment certificates or the period from acceptance of tender up to the first payment certificate issued

  • Work completed: The work value executed up to the practical completion date

  • Work completed late: The work value executed after the practical completion date

  • Work group: A group for which an index is available or determined

  • Work value: The value of work executed that qualifies for adjustment in terms of these provisions

Numbers, generally preceded by “in terms of”, indicate references to clause numbers of this document.

The headings of clauses are for reference purposes only and shall not be used in its interpretation.

Section 2: How the CPAP provisions work

The CPAP provides for reimbursement of price fluctuations on an average basis with the proportions and indices applied being indicative of average price movements. Such fluctuations in costs shall be for the contractor’s account subject to the contract value being adjusted by the sum of the amounts calculated in respect of each payment certificate according to the conditions described below.

The CPAP provides for the adjustment of contracts in respect of:

  • General and industrialised building work.

  • Subcontract work carried out by nominated, selected and the contractor’s domestic subcontractors.

  • Direct contractor’s work comprising specialist and engineering installations related to building projects.

Standard composite indices are compiled in consultation with Stats SA to include the weighted labour, material and plant components applicable to defined work groups. These indices are published each month.

The CPAP operates as follows:

  • A number of work groups is defined into which the work contained in a building contract can be subdivided

  • Each work group consists of a number of sub-indices reflecting price movements of labour, material and plant

  • The principal agent values the work executed for payment certificate purposes and in addition allocates the value of the work to the respective work groups

  • Each month the work value certified in each work group is adjusted in relation to the movement in the index value for the month compared to the index applicable to the base month. Thus the work executed in a particular period is adjusted in relation to the index value for approximately the same period

The number of work groups is limited to simplify the work required at the time of payment certification.

Reference is made to a work group rather than “trade” as is customary in the building industry as certain materials lend themselves to grouping for costing purposes. Typically, steel windows, steel door frames and suspended steel ceilings are assembled to limit the number of groups, as the materials originate from the same basic source and the percentage fluctuation in labour costs are likely to be similar.

The provisions are best suited to contracts based on bills of quantities from which the measured items can readily be extracted and allocated to work groups for adjustment purposes.

In engineering subcontracts within a building contract, specialisation often lends itself to grouping. Typically, a high mast lighting contract could be divided into the following work groups:

  • Structural steel (the tower)

  • Concrete and other sundry builder’s work

  • Electrical installation

  • Equipment

Provision is made for unusual weightings for exceptional specialist work.

Lump sum contracts (specification or without quantities contracts) are dealt with as a whole, using one index, since the subdivision of value into work groups for payment certification causes practical problems. The contractor is required to accept an average reimbursement and settles subcontractors’ accounts on either proven cost or work group adjustment methods as mutually agreed. Provision can also be made for the work group system to apply by the tender enquiry documents providing specifically for the separate pricing of work in work group subdivisions.

Section 3: Adjustment allocation to work groups

The work value executed during each valuation period shall be allocated to the appropriate work groups at the time of valuation.

The value of unfixed materials included in any payment certificate shall be allocated to their respective work groups and adjusted.

The work value shall include:

  • Variations priced at or based on contract prices

  • Variations not based on contract prices but adjusted back to the base month by means of the formula

  • Variations not based on contract prices which, by agreement, are subject to adjustment with a base month applicable to each such variation

  • Work carried out by nominated or selected subcontractors that, unless tendered for or priced at fixed prices or based on any other adjustment procedure, shall be subject to adjustment with a base month applicable to each subcontract

The work value shall exclude:

  • Day work calculated at current costs

  • Credit allowed by the contractor for old material that is derived from demolitions and other works

  • Materials supplied against prime cost amounts which shall be adjusted in terms of the agreement

  • Equipment in specialist work and imported materials listed in the tender enquiry documents stating the specific method of adjustment of each item and the procedure for obtaining the information necessary for the application thereof. Items not listed in the tender enquiry documents may be listed by the tenderer with their values and methods of adjustment at the time of tender; provided that the principal agent is assisted in negotiating forward cover or any other options which shall be treated as variations to any existing terms

  • Non-imported equipment in specialist work listed in the tender enquiry documents stating the specific method of adjustment in respect of each item and the procedure for obtaining the information necessary for the application thereof

  • Work executed by local authorities or other public bodies, which shall be adjusted based on net cost to the contractor, substantiated by satisfactory documentary evidence where necessary

  • Variations priced at current prices or based on current costs in work group 190 the proportion of the preliminaries prorated to such amount of work shall be excluded from the adjustment

  • Contractor’s profit and attendance on provisional sums and the like where the profit and attendance is priced separately and is prorated to the final value of such sums

Section 4: Industrialised building work

In the tender enquiry documents, where the work is shown as industrialised building work, the tenderer shall include the allocation of the work value to the applicable work groups, and separately list provisional sums, contingencies and work designated to be excluded from adjustment.

The total work value shall equal the tender amount, failing which the principal agent shall require adjustment of any amount to eliminate such errors or discrepancies.

In allocating work to work groups in terms of Section 3 the principal agent shall use the agreed amounts subject to the provisions of the value of work included or excluded.

Section 5: Calculation of adjustment

The principal agent shall calculate an adjustment amount for each valuation period in respect of each work group by the application of the formula:

A = 0,85 x V x (Xe / Xo – 1)

where:

A = the adjustment amount
0,85 = a constant which provides for a 15% non-adjustable element.
V = the work value in such work group and the valuation period.
Xe = the value of the index applicable to such work group and the valuation period shall be the value for the calendar month during which the payment certificate is dated.
Xo = the value of the index applicable to such work group for the base month.

The adjustment amount shall be:

  • Shown separately in a statement supporting a payment certificate issued according to the agreement

  • The net amount to be added to or deducted from the contract value

  • The work carried out by nominated, selected or any other subcontractors. This shall be irrespective of whether or not the agreement provides for a cash discount to the contractor in respect of any amounts due. Payment to such subcontractors shall not be subject to any such discount

  • Subject to the same conditions in respect of retention, any other form of security or any other monies due to or from the contractor in terms of the agreement.

Section 6: Unfixed materials

The value of unfixed materials included in a payment certificate shall be:

  • Allocated to work groups

  • Added to the work value in the same work group

  • Adjusted in terms of the formula

Any unfixed materials valued at current rates shall not be subject to adjustment.

Section 7: Averaging of indices

Should any interval between consecutive payment certificates include more than one index value following the last one used for the earlier payment certificate, the adjustment amount shall be calculated using the average of all such index values for each work group.

Section 8: Late payment certificates

Adjustments in respect of payment certificates issued after the practical completion date shall, despite the provisions of sections 3, 5 and 13,5 of this document, be dealt with as set out hereunder:

The work value shall include the revaluation, correction and updating of such values with such values adjusted if necessary to the base month of the principal agreement

The work value included in each payment certificate issued after the practical completion date less the work value included in previous payment certificates, shall be allocated based on a reasonable estimate to categories of work completed and work completed late

The work value and amounts of adjustment in respect of the contractor and each nominated and selected subcontractor shall be calculated separately using the base month appropriate to each. In respect of the contractor the values and amounts of nominated and selected subcontracts shall be excluded from the calculations

The adjustment amount in respect of the value of work completed shall be calculated as a single sum for each payment certificate by the application of the formula:

A = V x Af / Vf

where:

A = the adjustment amount to be paid to or recovered from the contractor.
V = the net work value in terms of Section 8.
Vf =the total work value in the principal agreement, each nominated or selected subcontract estimated at the practical completion date.
Af = the theoretical adjustment amount relating to Vf calculated in terms of Sections 5 and 13 using index values Xe applicable to the practical completion date.

The adjustment amount in respect of work completed late shall be calculated as a single sum for each payment certificate by the application of the following formula:

A = V x Af/Vf x 0,55

Where V results in a negative amount, the factor of 0,55 shall be substituted by 1,45.

Section 9: Provisional adjustments

Provisional adjustments shall be calculated and corrected as follows:

Provided all indices required for the adjustment of the first payment certificate have been published, provisional adjustments shall be calculated in respect of each succeeding interim payment certificate at the time the certificate is prepared, but using the latest published index value applicable to Xe
 
Subject to the proviso above, provisional adjustments shall be calculated in respect of each succeeding interim payment certificate, at the time the certificate is prepared, by the application of the formula

A = V x An/Vn

where:

A = the provisional adjustment amount to be paid to or recovered from the contractor.
V = the net work value.
An = the adjustment amount calculated in respect of the last payment certificate for which all the indices for adjustment have been published.
Vn = the work value on which An was calculated.

This alternative provisional adjustment procedure shall apply only where specifically stated in the tender enquiry documents and shall not apply to work carried out by a nominated or selected subcontractor.

The provisional adjustments for each interim payment certificate shall be corrected in the next payment certificate following the publication of the indices required for adjustment of such interim payment certificate.

Section 10: Adjustment back to the base month

To de-escalate a price to the base month, each component price shall be adjusted separately by the application of the formula:

Ro = Re/{1 + 0,85 (Xe/Xo -1)}

Where:

Ro = the base month price.
Re = the price to be de-escalated.
Xe = the value of the index applicable to such work group and the valuation period shall be the value for the calendar month during which the payment certificate is dated.
Xo = the value of the index applicable to such work group for the base month.

Section 11: Corrections

The principal agent shall make corrections to the adjustment amount effected in an interim payment certificate resulting from of any of the following:

  • Arithmetical errors in the calculation of the adjustment amount

  • Incorrect allocation of work value to work groups

  • Revision of an index value by the publishing authority prior to the settlement of the final account

  • Use of an incorrect index value.

Section 12: Undue delay

Where the calculation of the adjustment of the final payment certificate is not possible due to a delay in or cessation of the publication of the indices, the principal agent shall calculate the adjustment amount for inclusion in payment certificates on a fair and reasonable basis. Should the publication of the indices be resumed before the issue of the final certificate, the correct indices shall be substituted for those used and the amounts of adjustment recalculated.

Section 13: General

Limitation on application of the CPAP

CPAP can be applied to any building contract. However it is deemed inappropriate where the anticipated contract value is low and the contract period is less than a year.

Bills of quantities contracts

The allocation of work to a work group is to be in terms of Section 2.

Lump sum contracts

  • To provide for price adjustment the appropriate lump sum indices shall be quoted in the tender document. Equipment to be excluded from adjustment must be identified and provision made for pricing such equipment separately. The method of adjustment, whether on a basis of net costs to the contractor or by specified recognised formula are to be stated in each case.

  • Where more than one work group may be applicable the tender documents must state the proportions of the total work to be allocated to such work groups or contain provisions for pricing the work in summary form, and subdividing work into work groups, equipment, other amounts and provisions suitable for adjustment purposes.

Allocation of work to work groups

For building work the trade groupings set out in the Standard System of Measuring Builder’s Work are generally to be followed. Where these rules are insufficient in determining allocation:

  • The work groups are intended to be more material-orientated than trade-orientated, except where applied to alterations, formwork, plumbing and drainage.

  • Composite items should be allocated to the most appropriate work group in relation to the material content.

  • Due to the wide range of options in planking, strutting, shoring and fencing it is considered inappropriate to compile an average index. Such work should be subdivided and each subdivision allocated to the appropriate work group as determined by its content.

A detailed allocation of work to work groups must be provided in support of a payment certificate.

Exceptional work groups

Formula adjustment in respect of exceptional cases where work clearly does not fall within a defined work group, a composite work group may be defined in the tender enquiry documents stating the component work groups and their ratios for the calculation of an index applicable to such work. Examples include:

  • Engineering projects containing constructional steelwork which vary considerably in respect of labour, material and plant components.

  • Major electrical reticulation work. Minor reticulation work in a building project should not be excluded from the listed work group.

Before resorting to the calculation of an additional work group index a solution to an apparently unusual contract should first be sought by using the defined work groups or combinations thereof.
 
Where an additional work group must be created for a specific project, the tender enquiry documents shall make reference to this clause and include a schedule of the weights and component sub-indices.

CPAP adjustments

Monies arising out of the application of CPAP are considered to be part of the contract value and shall be subject to the same conditions as any other monies due to or from the contractor.

Work excluded from adjustment

Various exclusions from the work group adjustment procedure are set out in the schedule.
 
Subcontractors/suppliers

Work group indices relate to the work value as executed under a building contract. It would therefore be incorrect to link supply-only contracts or material prices to the work group indices. The parties may agree to act on this basis or on a work group index specifically compiled by the principal agent.

Industrialised building contracts
 
Since industrialised building contracts are generally based on “design and construct” documentation methods, where the materials to be used could vary considerably, it would be impracticable to prescribe one or a fixed combination of work groups for adjustment purposes. ln such cases the provisions in terms of 4 will apply.

Lucas Bowles