Introduction
In recent months, the construction contracting market across the Arab region has witnessed a significant surge in price escalation claims submitted by contractors, subcontractors, and suppliers. These claims frequently reach 20% to 30% of the original contract value, with a particular focus on freight cost differentials arising from the closure of the Strait of Hormuz and rising petroleum-based material prices driven by geopolitical tensions in the region.
Should you accept these claims? Reject them? Or negotiate?
This is the question facing every project manager and project owner today. In this comprehensive guide from PM Guide, we clarify the appropriate Determination procedure step by step — focusing on contractual Entitlement, the distinction between the Contractual Position and the Commercial Position, and how to make a strategic decision that protects the rights of all parties.
🎯 Whether you are a project owner, contractor, or engineer, this article will help you avoid disputes and achieve fair settlements in price escalation and freight claims.
What is Entitlement in Price Escalation Claims?
Entitlement is the Contractor's contractual right to claim an adjustment to the Contract Price or the Time for Completion. Before deciding whether to accept, reject, or negotiate any claim for inflation differentials or freight cost increases, you must ask yourself the following four critical questions:
❓ The Four Critical Entitlement Questions
| # | Question | What It Tests |
|---|---|---|
| 1️⃣ | Was the Contractor compliant with the Programme? Were Submittals submitted on time? Were Purchase Orders placed for materials at the appropriate time? | Contractor's own performance |
| 2️⃣ | Did the Contractor take all Mitigation Measures? Did it attempt to reduce the impact before the external event — such as the closure of the Strait of Hormuz — occurred? | Duty to mitigate |
| 3️⃣ | Is the Contractor attempting to conceal its own prior delay behind a Force Majeure event? Was there a failure to order materials even after Approvals had been obtained? | Culpable delay vs. excusable delay |
| 4️⃣ | Does the Contract actually permit price adjustment? Does it contain a clause allowing for Adjustment for Changes in Cost or Changes in Laws? | Contractual basis |
📌 The answers to these questions determine whether the claim is contractually entitled or not.
In the context of the Strait of Hormuz closure and rising fuel prices, the event may qualify as a Change in Cost or a Change in Laws — depending on the specific circumstances of each project and the applicable contract terms.
FIDIC 2017 Clauses That Protect Both the Contractor and the Employer
Most major construction contracts in the region are based on the FIDIC 2017 Red Book. The following sub-clauses are most relevant to price escalation and freight cost claims:
📋 Sub-Clause 13.7 — Adjustment for Changes in Cost
Permits adjustment of the Contract Price based on cost indices agreed at Tender stage, provided the Contract includes a Schedule of Cost Indexation.
Key conditions:
- The Contract must explicitly include a Cost Adjustment Formula (often based on agreed indices such as CPI or commodity price indices)
- The indices and weightings must have been agreed in the Tender Documents
- The adjustment applies to the portion of the Contract Price not yet certified
✅ This is the primary and most reliable route for price escalation claims where the contract includes indexation provisions.
📋 Sub-Clause 13.6 — Adjustment for Changes in Laws
Protects the Contractor from any legislative, regulatory, or executive changes that occur after the Base Date and affect the cost of executing the Works.
This includes:
- New government circulars relating to shipping, customs duties, or port charges
- Changes to taxation regulations affecting imported materials
- New licensing requirements or regulatory interpretations by authorities
✅ If a government authority issues new directives relating to shipping, tariffs, or levies after the Base Date, the Contractor acquires a strong contractual entitlement to claim under this sub-clause.
⚠️ Important Distinction
| Sub-Clause | Trigger | Requires Cost Index? |
|---|---|---|
| 13.7 — Changes in Cost | Market price fluctuations (inflation, commodity prices) | ✅ Yes — agreed formula required |
| 13.6 — Changes in Laws | Government/regulatory changes after Base Date | ❌ No — actual cost impact sufficient |
The Role of the Project Manager: Balancing Contractual and Commercial Positions
The Project Manager — whether representing the Employer or the Main Contractor — is responsible for determining the appropriate course of action. This requires a careful study of two distinct positions:
⚖️ The Two Positions
| Position | Core Question | Focus |
|---|---|---|
| Contractual Position | "Do I have a legal right?" | Entitlement, Notice, Substantiation |
| Commercial Position | "What is the best way to recover my right — or part of it?" | Negotiation, Settlement, Cost-Benefit |
📌 Practical Example 1 — Employer's Perspective
An Employer may agree to pay 15% of a contractually weak claim to avoid a six-month delivery delay — because the delay would trigger Delay Damages (Liquidated Damages) that exceed the claim value.
Strategic logic: The commercial cost of delay outweighs the contractual weakness of the claim.
📌 Practical Example 2 — Contractor's Perspective
A Contractor submits a contractually weak claim but applies commercial pressure due to its critical role in the project. Direct rejection risks project disruption.
Strategic logic: Negotiation and partial settlement is preferable to outright rejection and the consequential project impact.
The Difference Between Contractual Position and Commercial Position in Claims
🏛️ Contractual Position — "Do I Have the Legal Right?"
The Contractual Position requires three elements:
| Element | Description |
|---|---|
| 📋 Contractual Entitlement | A supporting clause in the Contract that grants the right |
| 📬 Timely Notice of Claim | Submitted within the prescribed period under Sub-Clause 20.2 |
| 📊 Adequate Substantiation | Sufficient evidence linking the event to the cost or time impact |
💼 Commercial Position — "What is the Best Way to Recover My Right?"
The Commercial Position encompasses:
| Tool | Description |
|---|---|
| 🤝 Negotiation | Direct discussion between parties to reach an agreed settlement |
| 🕊️ Amicable Settlement | Structured resolution under Sub-Clause 21.3 FIDIC 2017 before formal dispute proceedings |
| 📊 Dispute Cost vs. Claim Value | Comparing the cost, time, and reputational risk of formal dispute proceedings against the value of the claim |
🎯 One-sentence summary: The Contractual Position determines the right; the Commercial Position determines the best way to recover it.
💬 If you found this useful, leave a comment below — and we will publish a dedicated article on "Contractual Position vs. Commercial Position in Claims Management."
How Does the Contractor Secure Its Rights in Price Escalation Claims?
A structured, three-stage approach is recommended:
🔍 Stage 1 — Analyse the Contractual Position First
- Review the entire Contract carefully
- Identify all supporting sub-clauses (13.6, 13.7, 20.2)
- Confirm the Base Date and the timing of the price change event
- Verify that a timely Notice of Claim was submitted under Sub-Clause 20.2
- Assess whether the Contractor fulfilled its duty to mitigate
💼 Stage 2 — Evaluate the Commercial Position
- Is negotiation more advantageous than formal proceedings?
- What is the cost of dispute compared to the claim value?
- What is the impact on the ongoing commercial relationship?
- What is the risk to project completion if the claim is rejected outright?
🎯 Stage 3 — Make a Strategic Decision
| Contractual Position | Recommended Strategy |
|---|---|
| ✅ Strong — clear entitlement, timely Notice, strong evidence | Submit the claim with full confidence and substantiation |
| ⚠️ Moderate — partial entitlement or procedural gaps | Strengthen through negotiation; consider partial settlement |
| ❌ Weak — no clear contractual basis | Reinforce commercially through negotiation, or consolidate with other stronger claims |
Step-by-Step Determination Procedure for Price Escalation Claims
The following procedure applies to the Determination of a price escalation or freight cost claim under FIDIC 2017:
📋 Step 1 — Receive and Register the Claim
- Log the claim formally with date of receipt
- Confirm whether a Notice of Claim was submitted within 28 days of the Contractor becoming aware of the event (Sub-Clause 20.2)
- A late Notice does not automatically extinguish the claim, but significantly weakens the Contractor's position
🔍 Step 2 — Review Contractual Entitlement
- Identify the applicable sub-clause (13.6, 13.7, or other)
- Confirm the Base Date in the Contract Data
- Verify whether the price change event occurred after the Base Date
- Check for any contractual exclusions or risk allocation provisions
📊 Step 3 — Assess the Contractor's Programme Compliance
- Was the Contractor on programme at the time of the event?
- Were materials ordered promptly after Approvals were received?
- Was the duty to mitigate fulfilled?
⚠️ A Contractor that was already in culpable delay at the time of the price increase will have its entitlement significantly reduced or eliminated.
💰 Step 4 — Evaluate the Quantum
- Verify the cost indices or market data relied upon
- Cross-reference with independent price data (e.g., government indices, commodity exchanges)
- Separate legitimate cost increases from contractor inefficiency or risk
- Apply the agreed Cost Adjustment Formula if Sub-Clause 13.7 applies
⚖️ Step 5 — Determine the Contractual vs. Commercial Position
- Prepare a clear Determination document setting out:
- The contractual position (entitlement, quantum, Notice compliance)
- The commercial position (project impact, relationship value, dispute cost)
- The recommended course of action
🤝 Step 6 — Negotiate, Settle, or Formally Determine
- If both parties agree → Amicable Settlement (Sub-Clause 21.3)
- If the Contractor's entitlement is confirmed → Engineer's Determination (Sub-Clause 3.7)
- If disputed → escalate to DAAB (Sub-Clause 21.4) or Arbitration (Sub-Clause 21.6)
Frequently Asked Questions (FAQ)
Q1: Does the closure of the Strait of Hormuz qualify as Force Majeure under FIDIC 2017?
It may qualify as an Exceptional Event under Sub-Clause 18.1 if it can be demonstrated that the event was entirely beyond the Contractor's control and could not reasonably have been foreseen or mitigated. However, FIDIC 2017 preferentially directs parties to Sub-Clauses 13.6 and 13.7 where these provisions are applicable — as they provide a more precise and commercially certain mechanism for cost recovery.
Q2: What is the permitted timeframe for submitting a Notice of Claim?
Under Sub-Clause 20.2 of FIDIC 2017, the Contractor must submit a Notice of Claim within 28 days of the date on which it became aware — or should have become aware — of the event or circumstance giving rise to the claim. Failure to submit within this period does not automatically extinguish the claim, but the Contractor loses its right to an Extension of Time and/or additional payment to the extent that the Employer has been prejudiced by the late Notice.
Q3: Can the Employer reject a claim if there is no explicit contractual clause?
Yes — in principle. Without a clear contractual basis, the Employer is entitled to reject the claim. However, the Contractor may still argue that the cost increase was unforeseeable and beyond its control, which may support a claim under general contractual principles or applicable law. The Employer should also consider the commercial implications of outright rejection before making a final determination.
Q4: What is the role of the subcontractor in price escalation claims?
The Subcontractor must submit its claim to the Main Contractor with the same quality of evidence and substantiation required under the Main Contract. The Main Contractor then incorporates the Subcontractor's claim into its own claim to the Employer. The Main Contractor remains responsible for the contractual validity of the claim it passes up the chain.
Q5: What if the Contractor was already in delay before the price increase occurred?
This is the most critical factor in the Determination. If the Contractor was in culpable delay at the time the price increase occurred, its entitlement to additional cost may be significantly reduced or eliminated — because the Contractor cannot benefit from a price escalation event that coincided with its own breach of contract. A rigorous delay analysis is essential to separate excusable and non-excusable delay periods.
Q6: Can a price escalation claim be combined with other claims?
Yes — and this is often a commercially effective strategy. A contractually weak price escalation claim may be consolidated with a stronger Extension of Time claim or a Variation claim, creating a more robust overall package that is more amenable to negotiated settlement.
Conclusion: Make a Considered Decision That Protects the Project
There is no universal "yes" or "no" answer to every price escalation claim. The key lies in balancing the Contractual Position with the Commercial Position.
✅ Examine the Entitlement rigorously. ✅ Analyse both positions objectively. ✅ Make a strategic decision that ensures project continuity and preserves the commercial relationship.
🎯 In the words of Jean Zachary: "The most expensive mistake in claims management is making a decision based on instinct rather than analysis. Know your contractual position first — then decide your commercial strategy."
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|---|---|
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📊 For authoritative official information on FIDIC clauses relating to inflation, cost adjustments, and geopolitical change events, visit the official FIDIC website: 🌐 https://www.fidic.org
(The global official source for construction contract standards and guidelines.)
Together, we build a better future in construction project management.
Jean Zachary Founder, PM Guide
