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A Study on the price escalation system in public construction contracts in Turkey

Ercan, Muhammed
The construction industry has a major role in the development of Turkish economy. The construction sector contributes 6-8 % of the gross domestic product of Turkey. At the same time, public investments comprise an important portion in the Turkish construction sector. Medium to large construction projects generally take over a year for completion and cost of materials and labor that are used as resources in construction projects often increase during implementation of construction projects. On the other hand, construction projects are executed according to the pre-confirmed contract value and contract agreement in principle. Thus, due to the cost increases in construction inputs, most contractors have to bear considerable extra burden which causes major problems and disputes during administration of the contract. To cope with these types of problems, most countries regulated the escalation clause in the law or conditions regarding construction contracts. Escalation Clause regulates adjustments to the contract amount, due to the changes in prices. The purposes of this study are (i) to study the current price escalation decree in Turkey, (ii) to understand the escalation clauses presently used in construction contracts adopted by various Government agencies in Turkey, (iii) to investigate the arguing points related to the price escalation decree and problems related to price adjustment applications, (iv) to provide suggestions to improve the current price adjustment system; through questionnaires directed towards representatives from contracting parties. The results show that; the most important problem related to the price adjustment applications is varying price adjustment implementations of different government agencies. The most important problems related to the price escalation decree are; unpredictable increases in exchange rates that bring contracts to an incomplete state, and the indices used for the price adjustment payment that do not exactly reflect the market conditions. The most important suggestions to improve the price escalation system are; the practices of the contracting authorities should be united in terms of putting the price adjustment clause into the contract, in order to simplify the calculation of price adjustment calculations and to avoid differences in implementation, a web-based Price Adjustment Calculation Module which is open to the use of administration and contractors should be established on the website of the Public Procurement authority, and construction indices that are specific to construction project type and take into account the construction sector inputs should be created and used in price adjustment (Building Cost Index, Road Cost Index, etc.).