Calculation of Escalation on Bid Project Cost in HAM (Hybrid Annuity Mode)

Today I m gonna to explain you how to calculate escalation on Bid Project in Hybrid Annuity Mode based Road Project. Currently all over India this kind of project is well focused and every new project comprises this. It is called Hybrid because it is combination of BOT based Project and EPC based project. The Contractors gets payment is certain ratio during construction and remaining in certain time in the form of Annuity.
 1. Various NHAI project is currently running on this type of mode of project.
 2. Various State Government adopted same kind of Project for up gradation and strengthening of  
       existing road as well as new construction with minor modifications in payment system to make  
       it easier for contractor.

First Question Comes into mind that.......What is Escalation in Construction Industry? Why it is so important? How it can be calculated? 

The term ESCALATION used  to indicate extent of these changes from the commencement of a project through any point during its life. As equivalent terms fluctuations rise and fall and contract price adjustments are used interchangeably.

It is so important because the financial success of construction projects can be uncertain and at risk due to changes in escalation rates during construction. The success of a construction projects is mainly influenced by to what extent of cost escalation identified and allocated to the projects. Cost escalation is part and parcel of construction projects in India. Escalation in construction market in recent years has been extremely volatile, and this trend expected to continue in the near future due to competition for resources and skilled workers. This situation has created a great deal of uncertainty and nervousness among construction field. (The above information is taken from www.academia.edu)

The calculation of escalation is fully based on what kind of project it is, In construction industry there is lots of  ways to calculate escalation. But as we are talking about HAM (Hybrid Annuity Mode Project) So, here we would get details calculations to calculate the project. But before proceed the calculation we should have well familiar terms like Bid Project Cost, Bid Date, Price Index , Wholesale Price Index, Consumer Price Index. For Better Understanding here we assume some data to analyze the escalation of certain road project.

The assumptions are:- 

1. Bid Project Cost:-  100 Cr.

2. Bid Submission Date:-  31st Dec-2018

3. Price Index shall comprise 

    a). 70% of WPI 

    b)  30% of CPI

Now Calculations begins

1. First of all we need price index for both WPI & CPI for the month preceeding the bid date and for the month preceding the invoice date of bill. Suppose here we put the invoice to the client in the month of August-2019 , hence, the preceding month will be july-2019. So, we have to take the Price Index of July-2019.

2.  Now For WPI (Whole Sale Price index)

   a). we would visit the website of OFFICE OF THE ECONOMIC ADVISER by clicking the link i.e. https://eaindustry.nic.in/

   b). Now we will go to the area in which will ask the the WPI forPeriod type i.e. month or yearly, year and Groups/commodities. (Screenshot given below). As our assume bid date is 31st Dec-2018 hence our preceding date would be Nov-2018. So in the period type we have to select monthly, in Year column we have to select 2018 and in Group/commodities column shall be ALL. After that click Click to Search Date in Green Colour.

 

 c). After clicking the Click to Search Data a new page shall be open as given below and after that we should click on All Commodities tab.

d). After clicking on All Commodities tab a new page shall be open as given below , which show the price index of year 2018 of each and every month.(Screenshot given below)

 Now from here we would select the price index for the month of Nov-2018 i.e. 121.6 and similarly we would check for the price index for the month of July-2019 as our invoice date in the month August-2019. The price index of July month is 121.2 (screenshot given below)

3. Now For CPI (Consumer Price Index)

   a). we would visit the website of Labour Bureau by clicking the link i.e. http://labourbureau.gov.in/

 and the new page shall be opened as screenshot given below after that click on Index Number Only  options

b) After Clicking on Index Numbers Only options there would be a new page shall be open as given below and on that page click on
Previous Years/Months  Index Numbers

 

 

 c) After Clicking of Previous years/Months Index Number a PDF will be downloaded in which entire year month wise and State wise labour index would be given. Here I assume that I m calculating the price index for the project in Maharashtra in Nagpur region. Always select the nearby region which shall be given in list. Otherwise select the All India Index. Here in Maharashtra in Nagpur region the Index for the month of Nov-2018 i.e. 361

d)  Now again we will go to the previous page and click on Centre wise Index for CPI and from there we would take the index value for the month preceding the invoice date. so, for the month of July-2019 i.e.403 (Screenshot given below)

4. Now After getting all this we would calculate the Price Escalation of Revised Bid Project after Escalation.

 Now, from the above you can see that your project cost was Rs.100 Cr. and due to escalation its comes to Rs.103.20 Cr. The increase by 3.20 Cr. is called escalation value.
The escalation may positive and negative and consequently the bid project cost may go up and down.
If you need excel copy of calculation sheet you may mail to me at avinash47399@gmail.com.