Escalation in input cost: Railways to compensate contractors

According to the modified price variation clause, the reimbursement for the escalation in the prices of steel during the work on the project would be based on the prices of steel published by Steel Authority of India Ltd (SAIL) from time to time. The variations in the prices of cement will be based on the index number of the wholesale price of cement as published in the RBI bulletin.

Experts say that the new norms would help infrastructure players overcome any unanticipated rise in the prices of steel and cement, and complete the projects in time.

Atul Agarwal, senior vice president at BSBK Pvt Ltd, a railway infrastructure builder, said, "The modified price variation clause incorporated by the North-West Railway zone in one of its tender documents (for the Udhampur-Katra section) is a welcome step. We definitely hope that these new price variation norms will be incorporated in all future projects, which will ensure timely completion of various projects."

Currently, the price variation clause in a tender document for steel and cement is linked to the wholesale price index published by the Ministry of Commerce and Industry, which contractors allege is not a true reflection of the actual increase in the price. For example, the wholesale price index (WPI) of steel stagnated at 258.3 during the period between October 2007 and March 2008, whereas the price of steel according to SAIL increased by over 37 per cent, from Rs 32,750 per tonne to Rs 45,000 per tonne during the same period.

According to industry estimates, steel and cement together constitute around 35 per cent of the total input cost in a railway project. In the last one year, the prices of these two key raw materials have witnessed an increase of over 70 per cent, forcing the contractors to bear the extra cost.

This has also resulted in delay in execution of the projects.