Introduction

In Mexican public construction contracts, it is common for the parties to agree to a price escalation clause, also called cost adjustment, indexing or “escalation.” This article explains generally what cost adjustment refers to and how it is regulated in Mexico.

General aspects

This article refers exclusively to type “C” construction contracts, contracts related to public works at unit prices, regulated by the Ley de Obras Públicas y Servicios Relacionados con las Mismas (LOPSRM). In general, the price or total budget of these contracts is constituted as follows:

  • Direct cost (materials, labor, machinery, and construction equipment)
  • Indirect cost
  • Financing cost
  • Utility charge
  • Additional charges

Price escalation clause

Both in the law and in Mexican public construction contracts, the price escalation clause is a common provision. It regulates the occurrence of non-intended economic circumstances in the contract that determine an increase or reduction of direct costs. When this happens, the direct costs must be adjusted, meaning the costs of materials, labor, machinery and construction equipment will be reviewed, while leaving the indirect cost, financing and profit initially agreed in the contract intact.

This cost escalation process is a legal and contractual provision that allows the parties to update the prices of the direct costs offered in the tender, if they have an increase or decrease derived from economic variations not attributable to the parties, for example, inflation that impacts directly the prices of the inputs needed in construction (steel, concrete, etc.).

Price escalation clause agreed in foreign currency

When the contract or a part of it is agreed in foreign currency since the tender, it is a legal obligation to establish the price escalation mechanism, as well as the review and authorization periods.

Key considerations

  • The request for a price escalation can be made at any stage of the contract execution period, but it can only be collected with the pending execution works.
  • The price escalation is applicable exclusively for the pending execution works according to the agreed program, even when there is a delay attributable to the contractor.
  • The price increase is collected through cost estimates.

Note: Contracts celebrated by CFE and PEMEX contain their own provisions and clauses to regulate price escalation and remain excluded from the general LOPSRM framework described in this article.