Why Inflation Ate Your Project
- Adebowale Oyinleye
- 11 minutes ago
- 6 min read
What actually happened to prices
A note on the numbers. The figures below are market and survey data rather than an official construction cost index, and are cited as such. Nigeria has no widely published construction-specific index of the kind FIDIC’s adjustment formula assumes, which is itself part of the problem this article describes.
Cement. A Lagos market survey conducted by Nairametrics in May 2024 put the average price of cement at ₦4,300 per bag in May 2023, rising to between ₦7,500 and ₦8,000 per bag a year later—an increase of roughly 74 to 86 percent depending on brand. Reporting in Daily Trust in November 2024 recorded bag prices reaching ₦8,800 against ₦4,000 previously.
The wider picture. Over the same period, National Bureau of Statistics data put headline inflation at 22.41 per cent in May 2023 and 33.69 per cent by April 2024, reaching 32.70 per cent in September 2024. A contractor whose contract contains no adjustment mechanism absorbs the difference between the rate assumed at tender and the rate that actually ran.
And the mismatch that matters. Note the mismatch. Headline inflation over that year ran in the low thirties; cement moved by three or four times that. A general index would not have protected a concrete-heavy project even if one had been written into the contract—which is a point to hold on to when the fluctuations conversation finally happens.
FIDIC — a clause with nothing behind it
Two different clauses. FIDIC 2017 separates two things that are often confused. Sub-Clause 13.6 deals with Adjustments for Changes in Laws. Sub-Clause 13.7 deals with Adjustments for Changes in Cost — that is, ordinary price movement in labour, Goods and other inputs.
What makes it work. FIDIC’s own guidance is explicit about what 13.7 requires to function. Where amounts payable are to be adjusted for rises or falls in the cost of labour, Goods and other inputs, it is important that a Schedule of cost indexation is included in the Contract and that the schedule includes a formula for the calculation. The guidance goes further and recommends the Employer be advised by a professional experienced in construction costs when preparing it.
How it works. The adjustment operates through the familiar weighted formula, in which a fixed non-adjustable coefficient sits alongside weighted terms for labour, equipment, materials and other inputs, each expressed as a current index over a base index. The weightings and the index sources are supplied by the schedule, not by the printed conditions.
And what happens without it. Which produces the outcome that matters commercially. A FIDIC contract can contain Sub-Clause 13.7 in full, printed and unamended, and deliver precisely no protection—because the schedule that gives it content was never prepared. The clause is not the mechanism; the schedule is.
JCT — the options nobody selects
What the form contains. JCT Standard Building Contract with Quantities 2016 offers three fluctuations options in Schedule 7, chosen at Contract Particulars stage. Option A covers contribution, levy and tax fluctuations only — its own heading says so. Option B extends to labour and materials cost and tax fluctuations, in terms that name materials, goods, electricity and fuels directly. Option C is formula adjustment, using the JCT Formula Rules, and reaches materials the same way FIDIC’s formula does — through weighted indices.
What actually happens. The default position, absent a different selection in the Contract Particulars, is Option A. On the significant majority of Nigerian JCT contracts that default is never revisited — nobody deletes it, nobody replaces it with B or C, and the Contract Particulars are completed, where they are completed at all, without the fluctuations line being treated as a decision.
The consequence. So a contractor on a JCT SBC/Q 2016 left on its default Option A, in a market where cement has moved by three quarters in a year, has no contractual route to recovery of that movement — not because Schedule 7 has nothing for materials, but because the option that reaches materials was never selected.
| FIDIC 2017 | JCT SBC/Q 2016 |
|---|---|---|
Provision | SC 13.7 Adjustments for Changes in Cost | Schedule 7 — Options A, B and C |
What it covers | Rises and falls in labour, Goods and other inputs | A: tax/levies only · B: labour + materials · C: formula (all inputs) |
Materials prices | Yes — if the schedule provides for them | Only under B or C — not under A, the default |
What makes it operate | A Schedule of cost indexation with a formula, included in the Contract | Active selection of B or C in the Contract Particulars |
If nothing is selected | The sub-clause is printed but delivers nothing | The default (A) applies — materials stay uncovered |
Separate provision for law changes | Yes — SC 13.6 Adjustments for Changes in Laws | Option A is itself the tax and levy mechanism |
Who must choose it | The Employer, advised by a construction cost professional | The drafter, at Contract Particulars stage |
The Nigerian obstacle is the index, not the clause
What the formula assumes. FIDIC’s formula needs indices — a current value and a base value, for each weighted input, from a source both parties accept. In jurisdictions with a published construction cost index that is administrative. Here it is the hard part.
Why a general index will not do. The National Bureau of Statistics publishes headline and component inflation, but as the figures above show, a general consumer index tracked the low thirties in a year when cement moved by three quarters. Weighting a concrete-heavy project against headline inflation would have under-compensated the contractor by a wide margin while giving both parties the comfortable impression that the risk had been dealt with.
What can be done instead. The workable answers are narrower and more deliberate. Name specific published material price series where they exist and can be verified. Where they do not, agree a documented basket with named suppliers and an agreed sampling method, recorded in the schedule at tender stage rather than reconstructed in an argument. Either is more work than leaving the clause blank. Both are less work than absorbing a seventy-five per cent movement on the largest line in the bill.
The case against fluctuation provisions
The obvious objection. Contractors tend to treat fluctuation clauses as self-evidently desirable. Employers have a serious answer, and it is worth putting properly.
The argument. A fluctuation provision converts a known price into an unknown one. An employer financing a project against a fixed facility, or a public body working to an appropriated budget, may reasonably prefer a higher fixed price to a lower adjustable one, because certainty is the thing being purchased. In a high-inflation environment the adjustable contract is precisely the one whose final cost cannot be stated at award — and on a public project that is not merely inconvenient, it is a procurement problem.
And a second. There is a second point. An index-linked adjustment tracks the index, not the contractor’s actual purchasing. A contractor who bought forward, hedged, or simply procured well can be over-compensated; one whose basket diverges from the weighting can be under-compensated while the employer pays out. The mechanism distributes risk; it does not abolish it, and it introduces basis risk of its own.
Where that leaves it. The honest position is that the choice depends on duration, volatility and who can actually price the risk. On a short contract in a stable market, fixed price is efficient and the contingency small. On a multi-year contract in a market moving at thirty per cent, asking a contractor to price inflation is asking it to quote a number nobody can calculate — and the tender will contain either a contingency that makes it uncompetitive or an omission that makes it undeliverable.
What to settle before the tender goes out
First. Decide the risk allocation deliberately and record it. Fixed price is a legitimate choice; fixed price by default, because nobody completed a schedule, is not a choice at all.
Second. If FIDIC 13.7 is to operate, prepare the Schedule of cost indexation before tenders are invited — weightings, the fixed non-adjustable coefficient, the index sources and the base date. FIDIC recommends professional cost advice for exactly this, and it is the single most valuable half-day a quantity surveyor spends on a volatile project.
Third. If JCT is the form, understand that the default, Option A, will not reach materials, and that reaching them takes an active selection of Option B or C at Contract Particulars stage — not an amendment to a form that has nothing to select.
Fourth. Where no reliable index exists, consider the alternatives to indexation directly: forward purchase of the dominant materials at award, a provisional sum for a named volatile package, or a shorter contract period with a re-priced second phase. Each carries a cost. Each is cheaper than the alternative that has been running by default.
THE BROADER POINT The clause was always there. The schedule behind it was not. Inflation did not eat that project because the contract lacked a fluctuations provision. FIDIC has one, and JCT has three. It ate the project because Sub-Clause 13.7 needs a Schedule of cost indexation to function and nobody prepared one, and because Option A — the JCT default — was never going to reach materials on its own, and nobody selected the option that would. Decide the allocation deliberately, prepare the schedule before tenders go out, and pick an index that tracks what you are actually buying — because a general index in a year when cement moved three-quarters would have protected almost nobody. |
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