IACCM Contract Management Forum

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2014-05-22 01:19:35

Rate escalation

I am interested if anybody can share their mechanism of calculating the annual escalation of hourly personnel rate. I am interested particularly in Countries such us UK and Kazakhstan
 •  IACCM  •   2014-05-24 17:58:36
I asked one of our senior members in Kazakhstan for their advice. They wrote as follows:

First few points are directly related to the forum question, the next few are general comments.

• For Kazakhstan, it may help to tie a consumer price index (CPI) to the hourly personnel rates due to high annual inflation rates in the Country. In Kazakhstan, the CPI measures changes in the prices paid by consumers for a basket of goods and services.

• Adding provisions that allow for negotiation if the index moves drastically (a certain % threshold) from year-to-year would also be helpful to protect both parties if an inflationary/deflationary spike occurs.

• Note that strict application of an inflationary adjustment clause may not allow for the appropriate wage adjustment due to supply/demand economics, so a general understanding of the supply/demand picture can help to address the appropriate wage adjustments required.

• Methods to address currency fluctuation risk would also have to be considered in the Contract and the corresponding method for rate adjustment as a result (e.g. February 2014 devaluation of Kazakhstan currency by ~19%).

• If the Contractor is heavily dependent on you for revenue, it would be wise to monitor the Contractor's audited financials through the duration of the Contract to see if Contractor is being sufficiently compensated. This would allow for more dialogue and understanding of the true costs for a Contractor to operate in Kazakhstan and adjustments can be negotiated.
 •   2014-05-27 02:30:51
Dear Tim,
Thank you very much for your reply!!!
 •  VVB Engineering  •   2014-06-03 00:29:54
CPI (Consumer Price Index) or other such like index is a reasonable and common way to approach fluctuation on labour costs. Most escalation clauses I am familiar with are based in western europe (UK, Germany, Holland, Ireland), as a consequence the CPI is relatively stable and labour rates are reviewed annually. If there are big fluctuations Tim rightly mentioned considering the timing and frequency of the review to ensure losses are not made by the contractor. There are other mechanisms to deal with escalation (i) increases in line with working rule agreements or collective bargaining agreements (if any), and (ii) escalation formula. The more switched on clients will be weary and try to ensure labour escalations are not just another revenue stream for the contractor, thus they will seek to link the pay to an actual pay to man.
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