Analyzing the price escalation clause in public construction contracts (Mexico).
I. Introduction II. General Aspects III. Price escalation clause IV. Price escalation clause agreed in foreign currency. V. Macroprocess VI. Final considerations.
I. Introduction
In Mexican public construction contracts, it is common for the parties to agree to a price escalation clause, also called cost adjustment, indexing or “escalation”. In this document, we will explain generally what cost adjustment refers to and how It is regulated in Mexico.
II. General aspects.
This document refers exclusively to type “C”[1] construction contracts, which are related to public works at unit prices, regulated by the “Ley de obras públicas y servicios relacionados con las mismas”[2]. In general, the price or total budget of these contracts is constituted as follows:
A. Direct cost (Materials, labor, machinery, and construction equipment)
B. Indirect cost
C. Financing Cost
D. Utility charge
E. Additional charges
III. Price escalation clause.
Both in the law and in Mexican public construction contracts, it is common to find the price escalation clause. This clause regulates the occurrence of non-intended economic circumstances in the contract, which determine an increase or reduction of direct costs. When this happens, the direct costs must be adjusted, this means, the costs of materials, labor, machinery and construction equipment will be reviewed, while leaving the indirect cost, financing and profit initially agreed in the contract intact. This cost escalation process is a legal and contractual provision that allows the parties to update the prices of the direct costs offered in the tender, if they have an increase or decrease derived from economic variations not attributable to the parties, for example, the inflation which impacts directly the prices of the inputs needed in construction (steel, concrete, etc.).
IV. Price escalation clause agreed in foreign currency.
In this case, when the contract or a part of it is agreed in foreign currency since the tender, it is a legal obligation to establish the price escalation mechanism, as well as the review and authorization periods.
V. Macro-process (index method)
VI. Final considerations.
A. The request for a price escalation can be made at any stage of the contract execution period, but it can only be collected with the pending execution works.
B. The price escalation is applicable -exclusively for the pending execution works according to the agreed program- even when there is a delay attributable to the contractor.
C. The price increase is collected through cost estimates.
D. If you need advice on the price escalation claim in Mexican contracts, or advice on the structuring of these types of clauses, do not hesitate to contact us.
Construbufete Juridico S.C.
https://www.despachomata.com
[1] Type “C” contracts (construction only).
[2] The contracts celebrated by CFE and PEMEX contain their own provisions and clauses to regulate the price escalation, therefore, they remain excluded from this article.