Annual Escalation Adjustment Clause

[joel hoffman]

Dingoes, my personal distaste for negotiating A-E or construction contract pricing on the rather simple basis of price analysis, using estimates that were developed from compilation of price data, goes back to my years in Germany with the Corps of Engineers. In Germany, most construction contracts are priced using unit prices for standardly defined units of work. At that time, there were DIN (Deutsches Institut für Normung) Standards covering virtually every horizontal and vertical construction activity. The entire scope of work was (is) broken down into such line items. Our Government estimates were prepared in Frankfurt by an estimating branch who collected unit prices from various sources to compile their estimating database.

The problem with these estimates was that nobody could tell me or anyone else the underlying technical approach, cost or productivity basis of the unit prices. Now, imagine negotiating with a contractor whose proposed unit prices are higher than the estimate or database. Essentially the negotiator's primary argument is that the proposal is higher than the database estimate.

What's worse is the fact that there was systematic bid rigging going on at the time (late 80's). There was evidence of collusion and bribery between contractors and certain Host Government officials on contracts that were awarded and directly administered by the Host Country - at least in our area. I don't know how widespread this practice was outside our area - which was one of the biggest in Germany. These contracts constituted the major share of DOD construction at the time. I was told by a reliable source that bidders were adding at least 3% to every bid to cover kickbacks to those certain persons and that there was some type of 'cooperative' price sharing going on. Those prices were then obviously reflected in the US Government's GE database, which was used to develop IGE's.

I learned from a close friend in my former office soon after returning to the States that the German Government had arrested and charged certain Host country perps and contractors after busting the operation.

Bottom line is that I prefer cost based negotiations for developing unit prices or for sole source negotiating construction or A-E contracts, changes or claims, when possible.