Material cost and escalation clauses in Indian construction contracts

The construction industry has a major role in the development of the Indian economy. This industry consumes 40 to 50% of the national five-year plan outlay and contributes 20% of gross domestic product. Medium to large construction projects take over a year for completion and the cost of materials and labour often increase, which leads to major problems in administration of the contract. The objectives of the present study were to study (a) the escalation clauses presently used in construction contracts adopted by various government departments/agencies in India, (b) the adequacy of compensation paid to the contractor based on currently used escalation clauses in government contracts, and (c) how far cost escalation has an impact on the construction projects. Personal interviews and questionnaire surveys were conducted among the clients and contractors of major government organisations and the data were analysed. This study revealed that (a) the contractor is not adequately compensated based on the currently used escalation clauses in government contracts, (b) the wholesale price index currently used in the escalation formula of many contracts does not adequately reflect the escalation in costs in building construction projects, (c) a building cost index needs to be used for calculating escalation payment in the building contracts instead of wholesale price index, (d) an escalation clause should be included in the government contracts where the project duration is more than 6 months and (e) cost escalation affects the quality, delays project completion and causes dispute between clients and contractors.