Walinchiti Bofa Projects June 2023.pptx

progress report for monthly. quarterly and annually

1. ENGINEERING CORPORATION OF OROMIA WBEIP, YADOT, MOJO, KELECHA, SEDIKA, MECHITU, GOROCHAN & GOLOLCHA IRR. PROJECT Consultancy Service CACS PRICE ADJUSTMENT PROPOSAL June, 2023 Finfinnee/ Addis Ababa

2. The Three Parties Client:- Oromia Irrigation and Pastoralist development Bureau (OIPDB) Consultant:- Engineering Corporation of Oromia (ECO) Contractor:- Oromia Construction Corporation (OCC) 02/40

3. CONTENTS OF THE PRESENTATION 03/40 Introduction Requirement of Price Adjustment Contextual information on price escalation Contractual Provisions for price Adjustment Approach and Methodology Conclusion and Recommendation

4. 1. Introduction 4/40 1.1. General The construction works of Walinchiti Bofa Extension, irrigation Projects have been under construction as per contract signed between Oromia Irrigation & Pastoralist Development Bureau and each contractors. The initial Contract date and amount as well as intended completion date for each project is s tated in this report. In due course of the projects, amendment have been signed to incorporate the changes against the principal Contract agreement.

5. 1. Introduction 5.40 1.2 Basic Contractual information

6. 2.0 Requirement of Price Adjustment 6/40 The construction industry of Ethiopia has been challenged with price escalation of construction material, fuel and delivery cost Therefore, government / the Public Body gave direction to tackle the problem of price escalation which is significantly affecting the construction industry especially irrigation projects as a whole. Even though price adjustment is restricted and stated as “not applicable” in especial Condition of Contract (SCC) agreement documents, government / Public Body gave direction to alleviate the problem. Accordingly, the client has requested to carry out price adjustment and submit urgently, via letter Ref. No. BMJHBO/4-3/7619 dated:23/09/2015. based on the direction given by the Public Body. So, this PA proposal is prepared based on government and Client’s direction

7. 7/40 2.0 Requirement of Price Adjustment ----- Cont’d Construction inputs such as E quipment, Fuel, Cement and Reinforcement bar are highly increasing form time to time and be coming beyond the control of contractor’s capacity. It is unfortunate that this problem is continually getting worse and reached far beyond the Contractor’s reasonable forecast and risks mitigation mechanisms considered during the tender stage of the project. The effect of aforesaid problem is Delay of the project Termination of the project Termination of the project courses highly increase cost of the project So, it is better to adjust price than terminate contract agreement

8. \ 3 .0 . Contextual information on price Escalation 8/40 T he contract agreement, the provision of price adjustment has not been allowed as clearly indicated under Special Condition of Contract (SCC ). So, there is no any article or Clauses in contract agreement which can support or enforce to make price adjustment The Public Procurement and Property Authority has given direction to tackle the problem of price escalation which is significantly affecting the construction industry especially irrigation projects as a whole. via dated 13/8/2014 Accordingly, the client has requested to carry out price adjustment and submit urgently, via letter Ref. No. BMJHBO/4-3/7619 dated:23/09/2015. based on the direction given by the Public Body. So, those are the bases for our this PA proposal

9. 9/40 3 .0 . Contextual information on price Escalation– cont’d 3.1. Trends of the price changes The ongoing trend of price increment of construction materials could not be forecasted. The following tables show how prices are rising since the commencement of the Project a). Cement ------- (Dangote)

10. 10/40 3 .0 . Contextual information on price Escalation– cont’d 3 .1. Trends of the price changes ------- cont’d

11. 11/40 3 .0 . Contextual information on price Escalation– cont’d 4.1. Trends of the price changes ------ Cont’d

12. 13/40 4.1 Legal bases or frame work for PA 4.0 Contractual Provisions for price Adjustment In T he contract agreement, the provision of price adjustment has not been allowed as clearly indicated under Special Condition of Contract (SCC ). So, there is no any article or Clauses in contract agreement which can support or enforce to make price adjustment. However, direction is given from government & based on this client has written a letter. The Government of the FDRE understood the market situation in the country and passed the decree in April 2022 to share the financial burdens of the Contractors and allowed to exercise price escalation as it was heralded on various news channels. T he client has requested to carry out price adjustment and submit urgently, via letter Ref. No. BMJHBO/4-3/7619 dated:23/09/2015 based on the direction given by the government . The following article and Clauses help the government and client to amend the contract.

13. 13/40 4.2 General statement for interpretation of the contract Interpreting the contract in accordance with good faith, having regard to the loyalty and confidence which should exist between the parties according to [usages and] business practice (article 1732 of the Ethiopian Civil Code) Interpreting the contract so as to give effect to all terms rather than to deprive some of them of effect contract (article 1736(1) of the Ethiopian Civil Code) Interpreting contract provision in light of the whole contract (article 1736(2) of the Ethiopian Civil Code) etc. -------- But this part needs interpretation higher experts of PPPA OCA -- 4.0 Contractual Provisions for price Adjustment

14. 14/40 4.3 Relevant Contractual Provisions Clause 62.1 of general condition of contract, states as “ adjustment of contract price shall be allowed after twelve (12) months from the effective date of the contract where it is verified that the performance of the contract requires more than 18 months ”. Clause 62.5 of general condition of contract, states as “the price adjustment shall be applicable as payable in full for the original schedule’s completion period. . Though, the aforesaid relevant contractual provisions are mentioned in the contract agreement, the price adjustment has not been allowed as clearly indicated under SCC which states as “ note applicable” . However, the contract agreement can be modified based on aforesaid articles. 4.0. Contractual Provisions for price Adjustment ---- Cont’d

15. 15/40 4.0 Approach and Methodology ----- cont’d 4.1 Methods for Price Adjustment There are a number of methods of calculating Price adjustments (PA). Whichever method is used it usually provides for both increases and decreases in prices and can accordingly result in either an increase or a decrease in the contract price. There are two alternative methods commonly employed in the local context to determine such variations practiced in the construction industry. The first adjustment method is “Basic Prices” or proven cost method and the second are based upon “Price Indices” or adjustment method. Adjustments in compensation may be either plus or minus depending on the differences between the Benchmark Price Index and the Monthly Price Index . To determine the adjustment on each item any such price variation is calculated in accordance with

16. 16/40 4.0 Approach and Methodology ----- cont’d 4.2 Formula used for Price Adjustment T he following formula by applying the combination of above-said criteria: PA =[ NV + A ((MLI-BLI)/BLI) +B(MMI-BMI/BMI)+C((MEI-BEI)/BEI) +D((MFI-BFI)/BFI)](BC)Q

17. 17/40

18. 18/40 4.3 Approaches used to Compute Price Adjustment in detail Construction inputs such as E quipment, Fuel, Cement and Reinforcement bar are major cost components of the permanent works of the project which are deemed to be legitimate for price adjustment. No labor adjustment has been considered in this submission as the total effect is difficult to figure out and deemed to have relatively less significance. We hereby put forward the assumption and computations to which the price adjustment is calculated 4.0 Approach and Methodology ----- cont’d

19. 19/40 The indices for the major items in this submission are taken from the following sources: Cement - factory prices for Cement are almost standard and the Dangote Cement Factories was taken as a source for Cement. The average price has been considered for cement as prices for PPC and OPC are slightly different. Reinforcement Bar - prices of high-yield strength reinforcement bars were taken from deferent companies and the average price has been considered. The fuel prices are normally fixed by the Government of Ethiopia and the compiled sources are taken from OLA ENERGY ETHIOPIA LIMITED etc . Equipment indices are not available in the country. Moreover; most of the spare parts, service items, as well as the equipment themselves are imported ones. The US Bureau of Labor Statistics (USBLS) is a reputable source whereby any one can easily access and verify online. For this reason, we have used this source in our proposal for the Price Adjustment nt. The website of the USBLS is www.bls.gov . 4.0 Approach and Methodology ----- cont’d 4.4. Sources of Base Data

20. 20/40 4.5. Base, Current and Provisional Indices The base cost indices or prices are those prevailing on the day 28 days prior to the latest date for submission of bids . Current indices or prices are those prevailing on the day 28 days prior to the last day of the period to which a particular Interim Payment Certificate is related. 4.6 Fixing of weighting The price adjustments subjected in this submission are basically for Equipment, fuel, cement and reinforcement bar The weightings for each of the factors subjected for the adjustment are for Equipment, fuel, cement and reinforcement bar . Thus, we hereby put forth as to how the weightings are fixed. 4.0 Approach and Methodology ----- cont’d

21. 21/40 First , the major work items that are subjected for price adjustment have been classifie d under similar bills and nonadjustable are excluded or classified under Nonadjustable Second , cost breakdowns of each item of works under those Bills which were established during bidding have been dissociated into the applicable equipment, fuel, cement and reinforcement bar costs Inputs of equipment for materials productions such as sand, coarse aggregate, borrow pits, etc., were also proportionally calculated and taken into account in the cost dissociation processes. The total values of those dissociated costs were summed up and proportions from the total contract price (before VAT) have been calculated to fix the weightings. 4.0 Approach and Methodology ----- cont’d

22. 22/40 4.0 Approach and Methodology ----- cont’d In the breakdowns, proportion of the input materials, fuel and equipment utilized are extracted from each unit price. By doing so, the fuel portion is being taken from the equipment total portion, by computing hourly rental rate and hourly fuel consumption. Thus, percentage of the net equipment cost and percentage of fuel net costs are computed separately. By the same manner, the cement and reinforcement bar portions of the item of works are extracted from related works Accordingly; based on the proportions obtained from the break down for each item of works under each Bill for equipment, fuel, cement, reinforcement bar inputs, the dissociated costs are being calculated. Subsequently, the dissociated cost under the equipment, fuel, cement and reinforcement bar have been summed up and computed the respective weightings of each against the total contract amount

23. 23/40 4.0 Approach and Methodology ----- cont’d Sample Calculation for Equipment & Fuel cost Proportion

24. 24/40 4.0 Approach and Methodology ----- cont’d

25. 25/40 . 4.0 Approach and Methodology ----- cont’d The main problems of the formula is Its Accuracy Absences of Indices Ethiopian Central Statistics agency is note in position to deliver the required data. Solution made is a). Collection of price for require items. b). Calculating price indices c). Checking of accuracy of the formula. d). Since this formula works only if the price increment is more than 200+ % , forecasting of future price is used

26. 26/40 4.0 Approach and Methodology ----- cont’d

27. 27/40 . 4.0 Approach and Methodology ----- cont’d

28. 28/40 . 4.0 Approach and Methodology ----- cont’d Checking of accuracy of the formula has been made. As indicted in table above, up to Aprile 2023 it shows negative Since this formula works only if the price increment is more than 200+ % , forecasting of future price is used

29. 29/40 . This Price Adjustment is prepared base on letter of Public Procurement and Property Authority which gave direction to tackle the problem of price escalation which is significantly affecting the construction industry especially irrigation projects as a whole. via dated 13/8/2014 Proportion of None Adjustable needs decision of client Cut of date also needs decision of client 5. Conclusion and Recommendation 5.1 Conclusion

30. 30/40 5. Conclusion and Recommendation --- Cont’d

31. 31/40 5. Conclusion and Recommendation --- Cont’d

32. 32/40 . 5. Conclusion and Recommendation 5.2 Recommendation To alleviate the problem of price escalation which is significantly affecting the construction industry especially irrigation projects, this price adjustment is mandatory. Accordingly, we expect the client and government decision will solve the problems. Checking of accuracy of the formula has been made. This formula has some problems or limitation As indicted in table above, up to Aprile 2023 it shows negative Since this formula works only if the price increment is more than 200+ % , forecasting of future price is used

33. 34/40 . Sources of Index -- OLA Energy Limited Fuel

34. 35/40 Sources of Index -- Sentinel Steel PLC for Re Bar

35. 36/40 . Sources of Index Dangote Cement PLC

36. 37/40 . Sources of Index Dangote Cement PLC

37. 38/40 . Sources of Index Dangote Cement PLC

38. 39/40

39. v May , 2023 Horaa Bulaa !!! THANK YOU