How does NEC Option X1 price adjustment for inflation work?
X1 adjusts what you are paid in line with published indices, using the proportions, indices and base date set out in the Contract Data.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
The answer
The Contract Data is the part of an NEC contract where those details are filled in. X1 is used with the priced options, A and B, and the target options, C and D. The cost-reimbursable options already pay costs as they are incurred. At each assessment, the latest index values are compared with those at the base date. Each change is weighted by its stated proportion, with a non-adjustable portion left out. The result is the Price Adjustment Factor, which is applied to the amount due. You do not give notice of each rise, because the adjustment is worked out at every assessment. But it only works if the Contract Data was filled in properly: the proportions, the named indices and the base date. Check it before you sign. If the main contract has X1 and your subcontract does not, your main contractor recovers inflation that you do not.
Example
Illustrative example. The scenario and figures are invented.
The facts
A mechanical subcontractor signs an NEC subcontract under Option A with X1 included. The Contract Data links 0.45 of the price to a mechanical services materials index and 0.40 to a labour index. It leaves 0.15 non-adjustable and states a base date.
What happens
- At each assessment, the latest values of the two indices are compared with their base date values.
- Each change is weighted by its proportion, and the non-adjustable 0.15 is left out.
- By month 10, the materials index is up 8% and the labour index up 6.5%, a weighted change of 6.2%.
- The price adjustment is added to the amount due at that assessment, on work done to date.
The outcome
The adjustment is paid at every assessment without a single notice or argument. The Contract Data named the indices, the proportions and the base date before anything moved.
To have your subcontract's price adjustment terms read and negotiated before you sign, see our Price Rise Loss Prevention service.