Nothing went wrong. The margin went anyway.

Nothing went wrong. The margin went anyway

Take the job this site has been running since Track 2. A million-dollar contract, $951,837 of cost, and $48,163 of net margin at the end — five cents in every dollar, as Cost & Cash Week 22 put it.

Now suppose a third of that cost sits in another currency. Imported plant. Rock from across a border. A specialist subcontractor who invoices in euros. Fuel priced against a dollar index.

Over two years, that currency moves fifteen percent against you. Not a crisis, not a devaluation anybody wrote about — an ordinary movement in a great many places.

That costs $47,592. The net margin is $48,163. Ninety-nine percent of the profit on the job, and not one thing went wrong on site.

It is worth being blunt about why this matters more now than it did twenty years ago. A contractor working in one country, buying from local suppliers, paid in the local currency, has no exposure worth managing. That contractor is increasingly rare. Plant comes from three continents, the specialist subcontractor invoices from wherever it is domiciled, and fuel is priced globally whatever the pump says. The exposure arrived without anybody deciding to take it on.

Two mechanisms that look like one

Ask most project people about this and you get an answer about escalation. Which is a different clause, answering a different question, and switched on by a different mechanism.

Sub-clause 13.7 handles changes in cost. Labour, goods and other inputs get more expensive, and the amounts payable are adjusted up or down by reference to cost indices. It asks: what do things cost now?

Sub-clause 14.15 handles currencies. It sets which currencies the price is paid in, in what proportions or amounts, and at what rates of exchange. It asks: what is your money worth?

A cost index that tracks steel perfectly tells you nothing about the exchange rate you convert at. Both can move in your favour, both can move against you, and they can move in opposite directions at the same time. Treating them as one subject is how a job ends up hedged against the smaller of the two.

Escalation is opt-in

Here is the part that surprises people, and it is a single sentence at the top of 13.7.

If the contract does not include schedules of cost indexation, the sub-clause does not apply at all. Not partially, not by implication. There is no adjustment for input costs unless somebody built the tables.

So a fixed-price job with no indexation schedule carries the whole of its input inflation, for its whole duration. That is a defensible commercial position on a nine-month job and a very aggressive one on a three-year job, and the difference between the two is a document somebody chose to include or leave out at tender.

Two details worth carrying. The adjustment is calculated separately for each currency the price is payable in — so the mechanism already knows currencies exist, it just doesn't manage them. And anything already valued at Cost, or at prices current when the work was done, is left out of the adjustment altogether — which makes sense, because that work is being paid in today's money already.

Risk Week 11 treated escalation properly, as a distribution rather than a point estimate — the $31,808 allowance sitting somewhere between $19,085 and $50,893. That article was about the uncertainty in the number. This one is about whether the contract lets you recover any of it.

What the Contract Data actually fixes

Currency works the other way round. It is always in force, and the terms are in the Contract Data.

Where more than one currency is named, that document states the proportions or amounts payable in each, and the fixed rates of exchange used to calculate the payments. Those rates are the whole negotiation. Fix them at signature and the movement afterwards belongs to whoever is exposed to it. Link them to a published rate at the time of payment and the exposure moves.

Most contractors never see that entry, because by the time the site team arrives the Contract Data is a document about periods and percentages that somebody else filled in.

The default nobody chose

And if the Contract Data says nothing about rates? The conditions supply an answer: the rates ruling at the base date, published by the central bank of the country.

Read what that means. Silence doesn't create flexibility. It fixes the rates at a date before you started, and every movement after that is yours. The default isn't neutral — it is the version most favourable to whoever is not converting money.

That is the base date turning up for the third time in this track, and it is worth seeing the pattern.

What happens when you are late

One more provision, because it changes the arithmetic on a delayed job.

Where indexation does apply and you fail to complete within the time for completion, the adjustment of prices after that point is calculated on a restricted basis rather than on the current indices.

The logic is straightforward: if the overrun's yours, the inflation during the overrun is yours too. Which quietly links delay to money in a way most people meet for the first time in the final account — and it is another reason an extension of time secured early, as Week 9 argued, is worth more than one argued at the end.

Practical insight

Three things, and the first takes five minutes.

Open the Contract Data and find the currency entries. Which currencies, in what proportions, at what rates — and whether those rates are fixed or referenced to something. If the entry is blank, the base date rates apply and you are carrying everything.

Then measure your actual exposure, which isn't the same as the currency you get paid in. Go through your cost plan and mark every line where the money leaves in a currency other than the one it arrives in. Plant, imported materials, expatriate staff, fuel, specialist subcontractors. Add them up as a percentage of total cost. That percentage times a plausible movement is your exposure, and on this job a third and fifteen percent was the entire margin.

Third, check whether an indexation schedule exists at all. If it does, read which indices it uses and whether they actually track what you buy — a general construction index on a job that is ninety percent marine works is a hedge against somebody else's costs.

None of this is treasury work, and none of it needs a hedging policy. It needs somebody to know the number before the job starts rather than after.

Key takeaways

✔ Escalation and currency are separate clauses answering separate questions: what things cost, and what your money is worth.

✔ Sub-clause 13.7 doesn't apply at all unless schedules of cost indexation are in the contract. No schedule, no adjustment.

✔ Indexation runs separately for each currency, and skips anything already priced at Cost or at prices current at the time.

✔ Sub-clause 14.15 puts the currencies, the proportions and the fixed exchange rates in the Contract Data.

✔ Where the Contract Data is silent, the rates are those ruling at the base date. Silence fixes the rate rather than freeing it.

✔ On a $1,000,000 job with $48,163 of margin, a third of costs in a foreign currency moving fifteen percent costs $47,592 — the whole profit.

✔ Where you overrun the time for completion, price adjustment after that point is restricted, so delay and inflation compound against you.

What's coming next

Phase D has one piece left, and it is the money that is yours but that you don't have. Retention sits in every certificate from Week 12 and comes back in stages long after the work is done. Performance security, advance payment guarantees and retention bonds are instruments somebody else can call, sometimes without proving anything. And insurance is the one part of the contract where a clause you never read decides whether a bad day's expensive or fatal. Next week we go through what is being held, who can take it, and what it costs you to have it held.