Optimal Policies for Claiming Payment under Price Escalation Clause Types of Contracts

Generally, in the contracting industry, the contractor works in an,environment of risk and uncertainty caused by the economic factors such as fluctuations in the costs of labour and materials. This paper examines the overall effect of these factors on the policy for claiming payments under the price escalation clause type of contracts. Particular reference has been made to the formula ‘F’ of the Water Tube Boiler Maker's Association (WTBA), England. It has been shown that under certain circumstances the contractors can optimise the benefit, or minimise the loss, arising from changes in the costs of labour and materials due to inflation. An appropriate alogrithm based on dynamic programming is given.