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ISSN: 2278-0181
Vol. 1 Issue 3, May - 2012
Wholesale Price Index and its effect on Price Escalation of materials for
Indian construction industry
Associate Professor, Depart ment of Civil Post Graduate Student, Depart ment of Civ il
Engineering, College of Engineering, Pune- Engineering, College of Engineering, Pune-
411005, Maharashtra, India. 411005, Maharashtra, India. E-mail ID:
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International Journal of Engineering Research & Technology (IJERT)
ISSN: 2278-0181
Vol. 1 Issue 3, May - 2012
project due to passage of time [10]. John the project execution especially in projects in
Hollmann et. al. (2007) [8] defines escalation as which variability and uncertainty is greater. Due to
changes in price levels driven by underlying frequent rise in the prices of materials and wages
economic conditions. of labour, the contract rates of the various items of
Escalation affects the budget and causes work are affected adversely for the contractor who
severe financial overrun by the contractor. It also could not visualize such a steep rise and therefore
adds to contingency in the contractors bid and is a could not include the same in his tender rates.
major contributor to the overall cost uncertainty of Under such circumstances, the contractor claims
escalation in h is tender rates from the emp loyer. quantity of goods or services [11]. Rate of
Construction work is carried out according to the inflation is an important measure to monitor
pre-confirmed contract agreement. To cope up economic fluctuations which is based on the
with the sudden price escalation, regulated movement of these indices. Rate of inflation is the
provision is necessary in construction contract rate at which the general level of prices of goods
document. and services rise. Inflation is a continual increase
in prices throughout a countrys economy. The
1.2. Construction contract and claims behaviour of the economy is cyclical and hence
the pattern of change in the indices cannot be
Contract terms and conditions play a estimated accurately. Various price indices
dominant role in proper and timely execution of followed by different countries are wholesale price
works, preventing and resolving disputes arising index (WPI), producer price index (PPI),
thereto [7]. Conditions of contract guide the consumer price index (CPI). As the name
involved parties regarding their rights, obligations, suggests, WPI considers prices of goods at
responsibilit ies and procedures to be followed. wholesale level, PPI at the producers end and CPI
Draft ing a construction contract is nothing but at consumer level.
allocation of risks involved in a project among the
parties to the contract [5]. Irrespective of all the 2.1. Wholesale price index (WPI)
provisions in the contract document, claims are
raised on a construction site. Claims generally WPI is an index that measures and tracks
arise when one party to the contract suffers a the changes in price of goods in the stages before
detriment for which that party needs to be the retail level i.e. at the wholesale market level
compensated by the other party [9]. It may be [2]. Govern ment of India uses wholesale price
defined as a legitimate request for additional index to monitor the changes in the average price
compensation on account of a change in the scope level of goods traded in wholesale market fro m
of project. Possibility of escalation over the period period to period. The purpose of WPI calculation
of execution of project leads to claim for is to monitor p rice movement serving as an
escalation amount in addition to the base cost. important determinant in formu lation of economic
Claims when not properly sorted lead to disputes . policies of the nation. Th is index is used for the
To cope with the possibility of changes in purpose of escalation clauses in the supply of
economic conditions reflected through fluctuation materials and mach inery in construction works [1].
in the cost of items and to make a prov ision for WPI is calculated on the basis of quotations of
fair reimbursement of the escalation cost to the various items received at a regular interval of time.
contractor who bears the extra cost, regulated The items to be considered for calculat ion are
escalation clause in the law or conditions of decided based on market study, demand, supply,
construction contract is necessary. Construction consumer behaviour etc. In India, since January
contract conditions drafted by central public works 1942 i.e. introduction year of WPI, the series has
department (CPWD), India, contain provision for undergone number of constructive changes.
calculation of escalation in prices of construction
materials for co mpensating the contractor. 2.2. Need of revision of the series of WPI
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International Journal of Engineering Research & Technology (IJERT)
ISSN: 2278-0181
Vol. 1 Issue 3, May - 2012
obsolete ones. A relatively fixed set of consumer situation. History of WPI in India is representative
products and services valued on an annual basis to of this phenomenon with overall seven revisions
track inflation in a specific market or country is a of the series of commodit ies to incorporate the
commodity basket. Thus the changes need to be dynamic changes in market. It has been a practice
incorporated in the commodity basket for the since then to revise the series after every decade.
computations for WPI to be more effective, The revisions in WPI series in India till date are
precise and indicative of the present economic compiled in Table 1 below.
Table 1. Revisions in WPI series in India
3.0. Calculation of WPI Prices are collected for those items which are
selected in the WPI basket from selected sources
Each index has its own calculation for data collection. M inimu m 5 quotations per item
methodology and definition of terms and is are desirable whereas lesser number due to
expressed in terms of a change from a base value. unavoidable circumstances is also acceptable. Price
The commodity basket forms the basis of relative is the ratio of current price and base price
computation of WPI as it is said to represent the of the commodity. Price relative is calculated for
overall market. Once the basket is fixed, each quotation. Price quotations for commodit ies
transactions of the items in the basket in a given enable calculation of price relat ive which is
economy are surveyed and recorded. Price calculated as follo ws:
quotations for the same items are co llected fro m
various vendors. Based on this information further Price relative = (Current price/ Base price )*100
calculations are carried out as follo ws.
Calcul ati on of Index
Allocation of weights
Average of price relatives for all quotations
Value of output is the value of transactions for a given commodity gives the WPI for that
carried out in domestic market at first point of bulk particular item. Method of compilation of index
sale. Weights are assigned to the commodity on the follows Lasperyres formu la based on weighted
basis of its share in the total value of output in the arith metic mean wh ich is as follows:
economy. The weights of individual co mmodit ies
I =((IiXWi)) / (Wi)
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International Journal of Engineering Research & Technology (IJERT)
ISSN: 2278-0181
Vol. 1 Issue 3, May - 2012
1.4
Weight
1.2
1.0
0.8
Weight
0.6
0.4
0.2
0.0
Loader
Thinner
Distemper
Steel-CRC
Lime
Insulation board
Railway sleeper
Steel-flat HRC
Bitumen
Stone
Veneer wood
Plywood board
Grey cement
White cement
Slag cement
Polished granite
Marbles
Rails
Cranes
Lifts
Veneered particle board
Plastic/ PVC pipe
Paints
Chemical colours
Graphite rods
Fibre glass & glass sheet
Steel-rounds
Wooden planks
Steel-wire rods
Laminated glass
Toughened glass
Steel-angles
Steel-plates
GP/GC sheets
Steel pipes- welded pipe
Commodity
Fig 1. Weight allot ment to various construction items identified in WPI co mmodity basket
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International Journal of Engineering Research & Technology (IJERT)
ISSN: 2278-0181
Vol. 1 Issue 3, May - 2012
5.0. Variation in WPI for major reflected through significant increase in WPI for
construction materials major construction materials. The following
table highlights this variation in WPI for eight
financial years. Fig 2 & 3 ind icate the monthly
Change in WPI over time is the
variation in WPI for co mmod ities grey cement
phenomenon of economy. The variation in
economic conditions is reflected through changes and rebars from January to December for the
year 2011.
in WPI. Over the past few years construction
industry has witnessed boom. Th is is also
WPI WPI
162
161
156
154
WPI
WPI
150 147
Fig 2. Monthly variations in WPI for g rey Fig 3. Monthly variations in WPI for rebars
cement
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International Journal of Engineering Research & Technology (IJERT)
ISSN: 2278-0181
Vol. 1 Issue 3, May - 2012
Consider, sudden escalation is encountered in 1. Fro m the total of weights allotted to the identified
Nov2011 on a construction project in which work construction items, it is seen that as per series
of INR 2,00,000 is executed in this period and 2004-05, construction items account for
quantity of grey cement accounts for 40% of the approximately 9% of the total econo my. Series
work and the base i.e. CIo is taken as Jan2011 for 1993-94 allots 5.5% of the weights to construction
grey cement. Then the escalation amount to be items. Hence there is drastic rise of 3.5% in the
recovered fro m the owner co mes out to be INR weightage of construction items fro m old to
6977.68. If the same is encountered in the month of revised series.
Dec2011, the amount comes as INR 7302.23. 2. Among the various materials and machinery
Hence, any variation in WPI fro m date of considered in the commodity basket of series
receipt of tender to the date of actual computation is 2004-05, it is observed that flat HRC steel has the
directly proportional to the variat ion in cost of item highest weight followed by grey cement and steel
to be recovered under escalation. rebars. Major items affect ing the price of work are
identified as cement and steel which consume
6.1. Case study higher weights and affect the overall cost of the
work executed. Items such as bricks & t iles,
Escalation is one of the most dispute prone paints, various types of steel items also consume
clauses in construction contracts as per the study of considerable weights.
Iyer and Kalidindi (2002). Various claims related to 3. In series 1993-94, co mmodit ies such as building
escalation were studied. One of the claims was bricks, ceramic tiles, fire bricks were considered
raised on a project of lining of left bank canal which as separate entities. But as the individual weights
followed CPWD conditions of contract. Claim was assigned were very low these commodities are
for balance payment of price escalation amount. For now grouped in series 2004-05 forming one
working out the amount of compensation, the base commodity of bricks & tiles. Cement was a
index to be adopted was the average index fo r the separate entity in series 1993-94 with 1.73105
quarter preceding the date of opening the tender as weight whereas this entity is divided into four
specified in contract document. Hence there was separate commodit ies of grey cement, white
amb iguity in considering the value of CIo as shown cement, slag cement, lime under the heading
in the formu la above. cement & lime in series 2004-05.
The owner had adopted different meaning of 4. Under the subgroup of machinery & machine
quarter and had taken indices of three months prior tools, separate provision for construction
to date of opening i.e. of month June. No definit ion mach inery has been made which takes into
of term quarter was provided in GCC, hence account major construction machinery such as
definit ion in common parlance should have been loader, concrete vibrator & mixture and other
adopted i.e. 1/4 th of a year. As the bids were construction machinery / equipment. Co mmodity
opened on 27/9/1994, quarter preceding it would other construction machinery / equipment is
have been April-May-June. Hence, the contractor supposed to take into account all the rest
claimed for the difference of INR 5,00,681. Taking mach inery which are not separately given
WPI for calculations as the average of WPIs for the weightage in the series. Earth moving machinery
months April-May-June instead of June as was though majorly imp lemented on construction
calculated by the respondent, the difference of works is included under the heading non-electrical
amount payable to the contractor came out to be mach inery rather than construction machinery.
INR 5,00,681. The contractors case was found to be There was removal of co mmodity excavator fro m
genuine and hence this amount was granted to the mach inery in series 1993-94 wh ich was given
contractor. weightage of 0.10637.
This shows that WPI varies in a very short 5. Items such as tractor, trucks, diesel, lubricants,
time span and affects the amount computed using safety helmets, hydraulic & pneu matic tools,
escalation formula. compressors etc are given weightage in WPI
series based on their overall transactions in the
7.0. Findings and s uggestions market. These items consume a considerable
portion of budget on construction sites.
Considering their overall weight for calculation of
7.1. Findings escalation is rid iculous as only percentage of
these items would have been consumed by
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International Journal of Engineering Research & Technology (IJERT)
ISSN: 2278-0181
Vol. 1 Issue 3, May - 2012
construction sector and only this percentage contracting parties. The month or quarter in which
should affect the computation of escalation. escalation in prices was observed should be
6. Variation in WPI exh ibits a typical trend of clearly identified and accepted.
increase over years. For some materials this 5. As seen from the statistics, construction items in
variation is either gradual o r drastic. Variation on the latest series account for approximately 9%.
the negative side may also be encountered with Considering unwanted 91% of items which have
some materials whose market rate falls in course got no relation with the items under consideration
of time. Th is is indicat ive fro m value of WPI for affects the escalation amount payable. Hence
stone for the year 2007 & 2008 and that for rebars using WPI is irrelevant in calculating escalation
for the year 2009 & 2010. There was negative amount for construction materials.
change observed in WPI for bitumen in the year 6. As WPI is calculated based on the prices at
2011 whereas it experienced a drastic increase in wholesale level, it does not depict the exact
WPI in the month of January2012. market situation, hence switching to a better index
7. These ups and downs in the values of WPI of the such as PPI or CPI would be beneficial as price
construction materials directly affect the amount changes from producers and consumers
of escalation derived from the formulae for prospective are more relevant and technically
different components of construction given in superior co mpared to one at wholesale level. Th is
clause 10 CC of CPWD conditions of contract. should be taken into account by CPWD in
The most important cause for the gap between revising the contract conditions.
actual escalation occurred and escalation payment 7. A separate index for construction items such as
made based on the currently used escalation building cost index (BCI) should be drafted and
clause in the CPWD contract is mainly due to the adopted. Use of BCI for escalation calculation
application of the WPI in the escalation formu la would be more appropriate as it would consider
for calcu lating the escalation payment. the effect of construction related items only.
Being a specialised index, many construction
7.2. Suggestions related items which are not included in WPI series
due to their very less or negligible weightage can
1. Products such as rubber transmission belt, V belt, be accommodated in the series of BCI.
plastic cabinet, pencil, dried tobacco, cotton 8. Considering the emerging new technologies in
pillow cover etc. which consume very less construction industry, new materials such as
weightage approximately of the order of 10-, are alu min iu m formwork, ferrocement, roofing textile
included in the commod ity basket. It is important fabrics, paving blocks etc., need to be given due
to include sand, being one of the most important consideration in revising the series. Revision of
commodit ies utilised on construction sites, as one series should be exercised yearly so as to consider
of the commodity in the series. the effect of new technologies, new materials
2. All the construction related items should be coming in the market.
grouped under one sub-group for ease of
calculations as it is provided for rubber and textile 8.0. Conclusion
industry. For items such as tractor, trucks, diesel,
lubricants etc. which are given weightage in WPI The WPI which is considered for calculation
series based on their overall transactions in the of escalation for civil engineering items co mprises
market, a percentage figure should be provided of basket of materials which contain approximately
which would represent the share of construction 91% of materials those are not directly related to
sector in the total weightage of the commodity. construction field. The co mpensation paid to the
3. Efforts should be made to source the data of contractor based on the currently used escalation
commodit ies and their quotations from different clause in CPWD contracts is not adequate as it
parts of the country in order to have a variety of considers WPI for its computation. Hence it is quite
data. This would maintain geographically evident that the escalation calculated using WPI
balanced character of the wholesale price index may not reflect the correct increase and may be
thus making it more appropriate. unjust to either owner o r contractor. Hence there is a
4. WPI varies in a very short span of time and hence dire need to develop an index wh ich is exclusively
the amount calculated using the formu lae is time useful to the construction sector which is second
sensitive. Base month to be considered in the largest industry in India. This study highlights the
computation of WPI for any particular material need of such index.
should be fixed and accepted by both the
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International Journal of Engineering Research & Technology (IJERT)
ISSN: 2278-0181
Vol. 1 Issue 3, May - 2012
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ISSN: 2278-0181
Vol. 1 Issue 3, May - 2012
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