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Mar 13, 2009

Solution on the way for users of CPI in escalation contracts

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Engineering|Africa|Aggregate|CPI|Group Five|Murray & Roberts|Stefanutti|WBHO|Africa|South Africa|Contracting|Food|Basil Read|Patrick Kelly|Pierre Blaauw|Sima C-PIX DV-6400 Digital Camera
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Statistics South Africa (StatsSA), which last week released the first official consumer price index (CPI) based on the much-publicised new basket and weights, 
reported that it was preparing a mathematical remedy for those companies and individuals currently battling to apply the new CPI to escalation contracts.

The statistical agency indicated that it had received a number of enquiries from engineering contractors, in particular, indicating that they had been inconvenienced by the fact that the new CPI, and its rebasing from 2000 to 2008, had disrupted the continuous time series.

This had made it difficult for them to apply their traditional formulas to those contracts that embraced escalation clauses for labour.

CPI executive manager Patrick Kelly explained that the two key changes had been the discontinuation of CPIX (CPI excluding interest rates on mortgage bonds) and the intro-
duction of a parallel survey to ensure a like-on-like comparison to generate annual inflation figures.

“Both of these cause a disruption of the continuous time series,” Kelly outlined to Engi-neering News, acknowledging that this was affecting those who use the CPI in “contract adjustments, legal proceedings and the like”.

But he stressed that StatsSA was fully aware of the problem and reported that a remedy was being compiled and would be made available on the agency’s website as from mid-March.

A set of indices, which will link the new indices (base period 2008) with the historical indices (base period 2000), would be made available, while a continuous time series would be prepared for the main CPI aggregate indices 
(such as headline inflation, CPIX and food) for each provincial aggregate and for each primary urban area.

“Historical tables will be provided, as well as a factor for each index to provide for forward continuity,” Kelly assured.

South African Federation of Civil Engi-
neering Contractors (Safcec) economist Pierre Blaauw told Engineering News that contractors who applied escalation formulas to their contracts needed the conversion factor to 
ensure that their escalation calculations were in fact correct.

Safcec’s membership is drawn from across the engineering contracting community and includes companies such as Murray & Roberts, Grinaker-LTA, Group Five, WBHO, Stefanutti Stocks and Basil Read.

Blaauw said that the CPI was an important component for calculating labour escalation, while the producer price index, which had not been adjusted, was employed for factors such as fuel, materials, and plant and machinery.

“Therefore, we have advised our members to continue to use the December figures for any escalation certificates that need to be issued ahead of March 16,” he explained.

Kelly urged CPI users to amend contracts or legal agreements, where appropriate, as soon as possible, so as to use the headline 
inflation measure.

Edited by: Martin Zhuwakinyu
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