Why has there been a surge of interest in the Price Adjustment Formulae Indices (PAFI)?

The move to high and volatile construction cost inflation, after ten years of relatively low inflation, has sparked a renewed interest in including price adjustment clauses in construction contracts.

Price volatility has put contractors and projects at risk. Sensible clients, their consultants and contractors have sought ways to manage the risk inherent in this volatility.

There have been a range of initiatives but index linking some, or all, of the costs in a contract is the most common method, as it introduces transparency in sharing the risk of inflation. This has resulted in a significant growth in the demand for the BCIS Price Adjustment Formulae Indices (PAFI).

Specialist agreements

Formulae fluctuations is the industry standard way of allowing for inflation in a contract and PAFI are the industry standard indices to use in Joint Contract Tribunal (JCT) and New Engineering Contracts (NEC) contracts.

They were introduced in the 1970s in another period of high inflation. At that time two thirds of building contracts were let on a fluctuating basis. By the end of the ‘80s, this had dwindled to less than 10% as building contractors were more willing to include the risk of inflation in firm price tenders. However, the use of indexed adjust clauses continued in civil engineering and specialist contracts.

PAFI continued to be the accepted industry measure, widely used on longer term contracts, particularly in civil engineering but also for specialist agreements on contracts for minerals extraction, 106 agreements, etc.

Accessed over 100,000 times

The sudden price shocks of the past couple of years led to a level of innovation in sharing the risk of inflation. In addition to fully fluctuating contracts, some contracts were let with limited fluctuations covering the most volatile trades and resources, such as steel, timber and asphalt.

There were also contracts that allowed for the pre-ordering of materials, some which included prime cost of price sensitive items and some where the forecast increases were declared and adjusted, if the out-turn was above a certain percentage of the forecast.

This has resulted in a significant increase in the use of the PAFI indices, which were accessed well over 100,000 times in 1Q2023.

Usage up by 200%

We have compared the number of times the indices were accessed by subscribers to the BCIS PAFI service in the latest quarter, with a similar period in the quiet days before COVID-19 and the subsequent shocks to the market. This shows that usage of all the current series* was up over 200%.

Conclusion

Although we hope that construction cost inflation will settle down, the risk of further shocks and pressure on labour rates continues to mean that the best prices will be obtained if the risk of inflation is shared.

*BCIS continue to publish some superseded series for the benefit of subscribers on long term contracts a full list of series currently published is given below:

• PAFI Series
• Building series 2
• Building series 3
• Civils series 2
• Civils 1990
• Civils series 4
• Highways Maitenance
• Highways Maintenance RCI (2010)
• Highways Maintenance WCI (2010)
• Highways Maintenance RCI Series 4
• Highways Maintenance WCI Series 4
• Specialist Engineering Series 2
• Specialist Engineering Series 3