Escalation is the rise in material, labour or equipment prices after the contract is signed. On long contracts it can wipe out the margin. Whether the contractor can bill for it depends on the contract; either way, rises must be recorded and calculated in a way that can be checked.
When a price adjustment can be claimed
| Contract type | Price adjustment |
|---|---|
| Private project with an escalation clause | Yes, by the formula, threshold and evidence the clause sets |
| Private project without a clause, fixed price or lump sum | Essentially the contractor’s risk; it can only be negotiated |
| Indonesian government multi-year contract (over 12 months) that includes price adjustment | Yes, with the formula and indices in the procurement documents |
| Indonesian government single-year or lump sum contract | Generally not available |
For Indonesian government procurement the rules are in Perpres 16/2018 and its amendments, with technical guidance in LKPP Regulation 12/2021. The price adjustment rules are being revised in 2026, so always check the current version and your own contract.
The index-based adjustment formula
Hn = Ho × (a + b × Bn/Bo + c × Cn/Co + d × Dn/Do). Ho is the value of the work at the original price, Hn the adjusted value. a is the fixed part that is not adjusted (usually profit and overhead). b, c and d are the shares of components such as materials, steel and labour; a + b + c + d = 1. Bn/Bo is the component’s price index this month divided by the index at the base date, usually from Statistics Indonesia (BPS).
Worked example
| Component | Coefficient | Index this month ÷ base index | Result |
|---|---|---|---|
| a. Fixed part | 0.15 | 1.00 | 0.150 |
| b. Concrete and cement | 0.35 | 1.08 | 0.378 |
| c. Reinforcing steel | 0.30 | 1.12 | 0.336 |
| d. Labour | 0.20 | 1.05 | 0.210 |
| Adjustment factor | 1.00 | 1.074 |
Work done this month is worth Rp200 m at the original price. After adjustment: Rp200 m × 1.074 = Rp214.8 m, so the escalation is Rp14.8 m. The coefficients and indices here are fictional; use the ones in your contract.
How to claim
- Read the escalation or price adjustment clause: formula, components, indices, base date, threshold and how to claim.
- Gather evidence: official price indices for the base month and the month of the work, and supplier quotes or invoices before and after the rise.
- Calculate only for work done in the period the adjustment applies to, from the site measurement. Work already paid at the old price is not recalculated.
- Submit a formal letter with the calculation and evidence attached.
- If approved, record it in minutes and an addendum, then update the RAB, RAP and weights.
When the contract does not cover escalation
- Include a price-rise risk allowance in the RAP for the main materials.
- Lock prices early: place POs or price agreements with suppliers for large materials such as steel and ready-mix concrete.
- Record each material’s price rises with evidence, as the basis for negotiating with the client.
- Propose equivalent material substitutes, with the client’s written approval.
- For the next tender, include an escalation clause with a threshold, for example rises above 5%.
Common mistakes
- Calculating escalation on the whole contract value instead of only the work done after the base date.
- Using supplier invoices alone when the contract asks for official indices.
- Claiming after the deadline set in the contract.
- Not recording price rises at all, so the margin disappears with no explanation.
The full guide is in How to build a construction cost report that catches overruns early. It has a free template (Excel or Google Sheets) and a checker that reads your own workbook.
Ready to use the Komander agents on your projects?
When your workbook is complete, apply for a pilot: we help connect your project data to the Finance, Cost and Scheduler agents and review the first reports with you.
Send to melwani@komander.ai. Your workbook check result is included when there is one; the workbook itself is not sent.
Common questions
What is price escalation in construction?
The rise in material, labour or equipment prices after the contract is signed, which can be claimed as a price adjustment when the contract allows it.
Can a lump sum contract be escalated?
Essentially no, unless it contains an escalation clause. Otherwise it can only be negotiated.
Which indices are used?
The ones set in the contract, usually Statistics Indonesia (BPS) price indices for building materials and wages.
When does price adjustment apply on government projects?
On multi-year contracts that include it in the procurement documents. Check the current Perpres 16/2018 and LKPP rules.
References
- Perpres No. 16 of 2018 (BPK regulations database, Indonesian): price adjustment rules and amendments
- DDTCNews: government procurement and the fuel price rise (Indonesian): the adjustment formula in practice