Prepayment Ability to Offset Inflation
Publication: Journal of Construction Engineering and Management
Volume 112, Issue 4
Abstract
A model is presented to highlight actions that both owners and contractors, who do construction overseas, need to take in order to obtain costeffective construction projects. The model delineates a clear relationship between inflation, price escalation, time‐lag, prepayment, and the effects of price escalation on the value of the project. To simplify that relationship, the model concentrates inflation, price escalation, time‐lag, and profits into one term, the project's net present value. The analysis reveals three major points. First, the prepayment can be viewed and quantified as an additional markup whose benefits should be shared with the owner. Second, there is, indeed, an equilibrium point that defines the extent to which the prepayment accounts for inflation coverage, and thus no price escalation is needed. Finally, price escalation clauses in countries having high levels of inflation do not encourage prudence in spending. On the contrary, price escalation clauses encourage price escalation.
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Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 112 • Issue 4 • December 1986
Pages: 514 - 529
Copyright
Copyright © 1986 ASCE.
History
Published online: Dec 1, 1986
Published in print: Dec 1986
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