Legal basis and purpose of escalation
- Section 61 of Republic Act No. 9184 provides that all bid prices are fixed prices and generally not subject to price escalation during contract implementation.
- Section 61 of Republic Act No. 9184 allows price escalation only under extraordinary circumstances and upon prior approval of the GPPB.
- The guidelines govern requests for price escalation during contract implementation pursuant to and in accordance with Section 61 of Republic Act No. 9184 and its Implementing Rules and Regulations Part A (IRR-A) (Scope and Section 1).
- The guidelines require the GPPB and NEDA to undertake the mandated extraordinary-circumstances task competently, objectively and expeditiously (Purpose).
- The guidelines establish legal and technical parameters for an objective determination of extraordinary circumstances in accordance with the Civil Code of the Philippines (Purpose).
Scope and covered government entities
- The guidelines govern requests for contract price escalation during contract implementation for all contracts for the procurement of goods and infrastructure projects under extraordinary circumstances (Section 1).
- The guidelines apply to all branches, constitutional commissions and offices, agencies, departments, bureaus, offices and instrumentalities of the Government.
- The guidelines apply to GOCCs, GFIs, SUCs, and LGUs (Section 1).
Defined terms and legal anchor
- “Price Escalation” means an increase in the contract price during contract implementation based on extraordinary circumstances as determined by NEDA, upon prior approval of the GPPB (Section 3.1).
- “Extraordinary Circumstances” mean an event or series of events during contract implementation that gives rise to price escalation, as determined by NEDA in accordance with the Civil Code of the Philippines and enumerated in Section 4 (Section 3.2).
- “Extraordinary Inflation or Deflation” means an unusual decrease or increase in purchasing power of the Philippine currency, computed using the two (2) standard deviation rule under Section 5.2.b rules, that could not reasonably have been foreseen or was manifestly beyond the contemplation of the parties (Section 3.3).
- “Fortuitous Event” means an occurrence that could not be foreseen, or even if foreseen, is inevitable, requiring the contractor or supplier to be free from negligence, and arising from two general causes: Nature (e.g., earthquakes, storms, floods, epidemics, fires) or act of man (e.g., armed invasion, attack by bandits, governmental prohibitions, robbery) with force that the contractor or supplier could not resist (Section 3.4).
- WPI, CPI, and PPI are defined as follows:
- WPI: Wholesale Price Index measuring monthly changes in general price level flowing into wholesale trading.
- CPI: Consumer Price Index measuring monthly changes in average retail prices commonly purchased by a particular group in a particular area.
- PPI: Producer Price Index measuring average change in the unit price as it leaves the establishment of the producer (Sections 3.5–3.7).
What qualifies as extraordinary circumstances
For purposes of the guidelines, “extraordinary circumstances” refers to enumerated Civil Code provisions and conditions.
Ordinary fortuitous events under Article 1174 qualify when all requisites are present (Section 4.1):
- The event must be independent of the will of the parties.
- The event must be either unforeseeable or unavoidable.
- The event must make performance difficult but not impossible and outside the contemplation of the parties.
- The supplier or contractor must be free from participation in or aggravation of the injury to the procuring entity.
- The allowance for price escalation if an ordinary fortuitous event occurs must be stipulated by the parties or the nature of the obligation must require assumption of risk.
- Examples include typhoons, thunderstorms, flooding of lowly areas, and vehicular accidents (Section 4.1).
Extraordinary Inflation or Deflation under Article 1250 qualifies as defined in Section 3.3 (Section 4.2).
Extraordinary fortuitous events under Article 1680 qualify when the circumstances before, during, and after the event are taken into consideration (Section 4.3), including examples such as fire, war, pestilence, unusual flood, locusts, and earthquake (Section 4.3).
Two-stage review for escalation requests
The procuring entity must satisfy defined conditions before a price escalation request can be acted upon (Section 5).
The Head of the Procuring Entity must endorse the request to NEDA, through its Director-General, and attach required documents (Section 5.1), including:
- A certification by the Head of the Procuring Entity that the request is justified under R.A. 9184, its IRR, and the guidelines.
- A description of the nature of the requested escalation and identification of the specific legal and technical parameters complied with, including technical supporting information/data under Section 5.2.b.
- A certified copy of the original contract with original scope of work and original contract price as awarded.
- Original cost estimates and/or bill of materials of items, goods, or components affected, and the proposed escalated prices as applicable.
- Original and, if applicable, revised schedule of contract implementation.
- The original copy of the request submitted by the contractor/supplier, including information on quantity of materials/components and/or scope of work proposed for escalation.
- Ten (10)-year historical data on price indices of the materials or goods under consideration, including the source of data.
- Other information/documents as required by NEDA/GPPB (Section 5.1).
The review begins only after NEDA acknowledges the completeness of the request under Section 5 (Section 5.2).
A request is granted only if it satisfies both the First Stage and Second Stage reviews (Section 5.2).
First Stage (Legal Parameters):
- This stage establishes the legal basis for extraordinary circumstances that allow escalation.
- The legal determination must strictly follow the extraordinary-circumstances enumeration under Section 4 (Section 5.2.a).
Second Stage (Technical Parameters) requires compliance with the technical standards under Section 5.2.b–5.2.d (Section 5.2.b).
Technical thresholds and price index rules
The escalation for an item, good, or component must meet at least one applicable technical threshold under Section 5.2.b and the applicable index rules under Section 5.2.c and 5.2.d (Section 5.2).
Standard deviation threshold (Section 5.2.b.1):
- The requested escalation must show an increase in the price of the item/good/component of at least two (2) standard deviations from the mean calculated using a ten (10)-year historical trend.
- The ten-year period is reckoned from when the contract was awarded or from the time when the latest price escalation was awarded.
- The mean’s prevailing price data depends on price volatility and availability:
- For locally available goods/items/components, data are those issued/published by the appropriate entity.
- For international goods/items/components where appropriate domestic data are not available, data are those issued/published by the appropriate foreign entity (Section 5.2.b.1.i–ii).
Ten percent index increase threshold (Section 5.2.b.2):
- If the standard-deviation computation is inapplicable, the request is reviewed under a price-index rule requiring the applicable index to have increased more than ten percent (10%), as determined from the prevailing price index at the time of bid submission (Section 5.2.b.2).
Goods—choice and order of indices (Section 5.2.c):
- Goods escalation computation uses the most appropriate price index among WPI, CPI, and PPI.
- When applicable and available, WPI must be used first, then CPI, then PPI.
- The commodity-group indices must be those presented under Annex A, classified and issued by the National Statistics Office (NSO).
- When a prevailing price index cannot be established for an item/good/component, the review uses the most relevant and applicable index (Section 5.2.c).
Infrastructure—parametric formula and coefficient K (Section 5.2.d):
- Infrastructure escalation computation uses the coefficient K, representing the increase or decrease of the unit price due to price fluctuation (Section 5.2.d).
- K varies for each item of work and is represented by:
- K = a+ b (Xi/Xo) + c (Yi/Yo) + d (Zi/Zo) + a n (Ni/No)
- Coefficient rules:
- a is 0.15 fixed coefficient representing contractor’s profit and other non-adjustable items.
- b, c, d, a n (as applicable in the formula) represent coefficients for the proportionate value of each pay item to the total.
- b + c + d + a n = 0.85.
- Index variables:
- Xi, Yi, Zi, aNi are current price indices for labor, materials and other contract items at the time of the request for price escalation.
- Xo, Yo, Zo, aNo are price indices at the time of bid submission.
- The rule requires the sum of coefficients a + b + x + a n = 1 (100%) (Section 5.2.d.1).
- The items/components proposed for escalation determine coefficient validation; non-proposed items/components must have corresponding coefficient equal to 1.
- If fluctuation factor K is claimed as a whole, the contractor must demonstrate the effect of the extraordinary circumstance on all component items of K (Section 5.2.d.2).
- The fluctuation factor and its application include the items listed in Annex B (Section 5.2.d.3).
Amount, timing, and limits of escalation
After the legal and technical determinations, escalation for goods must be only the remaining amount over and above the thresholds computed under Section 5.2.b.1 or 5.2.b.2 (Section 5.3).
For civil works, the amount to be granted is determined by the formulas in Section 5.3.a using:
- P = escalated bid/unit price
- Po = original bid/unit price
- K = fluctuation factor (Section 5.3.a).
Civil works formula rules (Section 5.3.a):
- Where K > 1.10: P = Po (K - 0.10)
- Where 0.90 < K < 1.10: P = Po
- Where K < 0.90: P = Po (K + 0.10)
Requests for price escalation must follow timing and scope limits (Section 5.4):
- Escalation may be requested only for cost items already incurred by the contractor/supplier.
- No escalation may be granted for items not included in a specific request.
- Requests must be made no shorter than six (6) months reckoned from the start of contract implementation, and no shorter than a subsequent six (6)-month period thereafter.
- For contracts with duration shorter than six (6) months, the request must be made after completion of the contract (Section 5.4).
Any misrepresentation by the procuring entity or the contractor/supplier in any stage causes automatic denial/disapproval of the claim (Section 5.5).
GPPB approval authority and payment prohibition
- NEDA must submit its recommendations to the GPPB after completing its review under Section 5.2 (Section 5.6).
- The GPPB must approve/act on the request during one of its meetings attended by the Head of the Procuring Entity concerned or a duly authorized representative (Section 5.6).
- The Head of the Procuring Entity must not pay any contract price escalation until after the GPPB has approved the claim (Section 6).
Post-completion price review and deductions
- After contract completion, the procuring entity must calculate the amount of price escalation supposedly due to the contractor/supplier/consultant to account for any downward movement in prices during the entire contract implementation period (Section 7).
- If the resulting amount is lower than the amount of price escalation already paid, the procuring entity must deduct the overpayment:
- From retention money for infrastructure projects, or
- From warranty security for goods,
- on or before the expiration date (Section 7).
Schedule delays and advance payment limits
If the project is behind schedule based on the approved PERT/CPM network or schedule, price escalation applies only to the portion that should have been accomplished within the period using the applicable price index for the period it should have been accomplished (Section 8).
Payment of the computed amount for behind-schedule portions must not be made until the unaccomplished portion is completed and upon prior approval of the GPPB and the Head of the procuring entity (Section 8).
Where advance payment has been made, no price escalation may be granted for:
- The portion of work accomplished during the period corresponding to a value equal to the amount of recoupment of advance payment, and
- The amount of materials for which advance payment was made (Section 8.1).
Amendment and supplemental guidelines
- The GPPB may amend the guidelines as necessary (Section 9).
- The GPPB may issue supplemental guidelines in the form of addenda or annexes for the review process in Section 5.2 without needing to amend the guidelines (Section 9).
Annex A: commodity groups for indices
WPI commodity groups used for detailed computation and validation include:
- food
- beverages and tobacco
- crude materials except fuel
- mineral fuels, lubricants and related materials
- chemicals including animal and vegetable oils and fats
- manufactured goods classified chiefly by materials
- machinery and transport equipment
- miscellaneous manufactured articles (Annex A, WPI).
CPI commodity groups used for detailed computation and validation include:
- food, beverages and tobacco
- clothing
- housing and repairs
- fuel, light and water
- services
- miscellaneous (Annex A, CPI).
PPI commodity groups used for detailed computation and validation include:
- beverage
- tobacco
- textile
- leather products
- footwear and wearing apparel
- wood and wood products
- furniture and fixtures
- paper and paper products
- publishing and printing
- chemical products
- petroleum products
- rubber products
- plastic products
- non-metallic mineral products
- miscellaneous non-metallic mineral
- glass and glass products
- cement
- basic metals
- iron and steel
- non-ferrous metal
- fabricated metal products
- machinery
- electrical machinery
- transport equipment
- other manufacturing industries (Annex A, PPI).
Annex B: infrastructure parametric K formulas
- Annex B requires the fluctuation factor and its use in the parametric formula for infrastructure projects to include any or combination of listed fluctuation factors (Annex B).
- The annex provides fluctuation factors with fixed base coefficient 0.15 and additional proportional terms, including (by example and numbering):
- K1 through K52, including forms for common earthwork, rock excavation, asphaltic materials, concrete works, reinforced structures, piping, painting, labor/equipment daywork, and general construction.
- The definitions of variable indices in Annex B establish:
- Mi and Mo as current and base general construction price index figures.
- Li/Lo as labor index current/base.
- Ei/Eo as equipment index current/base.
- Multiple material-specific current/base indices (e.g., Ci/Co cement, Ri/Ro reinforcing steel, Xi/Xo tile work, Ti/To exterior electrical, Pi/Po plumbing fixtures).
- Annex B directs that specified price indices be sourced from the NSO or other appropriate/authorized government agency, including where labor indices are published by the Department of Labor and Employment.
- If there is no price index for a specified adjustable item, the annex requires using the price index of the nearest related item.