X1: Price Adjustment for Inflation

NEC4 X1 moves the Prices with published cost indices, so the Client carries inflation risk after the base date instead of the Contractor pricing it in. It is used only with main Options A, B, C and D, and it works differently on the priced Options than on the target Options.

Clause numbers here are for the NEC4 Engineering and Construction Contract (ECC) unless stated. Option X1 is one of the NEC secondary Options, and it is left out of a contract unless the Contract Data selects it.

When to use it

X1 suits long jobs and jobs exposed to volatile materials or labour rates, where a fixed allowance would be a gamble for tenderers. On a short job with prices fixed by quotation, it may add calculation effort for little benefit. Option E has no X1 because the Client already pays actual cost, and the Option isn't offered with Option F either.

The trade-off is simple. With X1, tenderers should not need to price long-term inflation, but the Client's final cost becomes less certain. Without it, the risk sits with the Contractor, who either prices it or absorbs it.

How the calculation works

The Contract Data lists the proportions of the work linked to each named index, along with the base date. At each assessment, the Price Adjustment Factor (PAF) is worked out: for each index, take the latest available figure, compare it with the figure before the base date, and multiply the percentage change by that index's proportion. Add those results together to get the PAF.

Main Option	What the PAF does	NEC4 clause	NEC3 clause
A and B	Adds a separate price adjustment amount to each amount due	X1.3	X1.4
C and D	Raises the total of the Prices, so the target moves and the money flows through the share calculation	X1.4	X1.5
Compensation events	Keeps Defined Cost at base date levels, so inflation isn't paid twice	X1.5 in the NEC4 subcontract text	X1.3

The renumbering catches people out. If you're moving a template from NEC3 to NEC4, check every X1 reference.

A worked example

These figures are illustrative. A fictional highway scheme links 60% of the work to a labour index and 40% to a steel index.

Index	Base	Latest	Change	Proportion	Result
Labour	100	104	0.04	0.6	0.024
Steel	200	218	0.09	0.4	0.036
PAF					0.060

Since the last assessment, the Price for Work Done to Date rose by £500,000.

• Option A: the new adjustment is £500,000 x 0.06 = £30,000. That sum is added to the adjustment already built up in earlier assessments.
• Option C: the total of the Prices rises by £500,000 x (0.06 / 1.06) = £28,302. The divisor is there because the Price for Work Done to Date on a target contract is based on Defined Cost, which already reflects today's prices.

What changed from NEC3

• Index corrections. In NEC3 ECC, a changed index meant repeating the calculation and adding a correction. The NEC4 subcontract text says a calculation already made isn't reopened.
• After the Completion Date. NEC3 freezes the factor at the whole-works Completion Date. The NEC4 subcontract text uses the last assessment before that date.
• Compensation events. The NEC4 subcontract text refers to the dividing date when converting current cost back to base date levels.

These three points come from the subcontract wording, so confirm them against your own NEC4 ECC. The NEC3 Professional Service Contract numbers X1 separately for each main Option, so take PSC references from that form's text alone.

What people get wrong

• Double counting in compensation events. Pricing a quotation at current rates, then letting X1 inflate it again, overstates the change. Deflate the current cost to base date levels first.
• Vague index entries. Name the publisher, series and reference in the Contract Data. A loose description invites argument when the figures are published.
• Proportions that don't fit the job. The proportions are a fixed estimate. Check that they reflect the real cost mix before tender.
• Missing the money on Option C. The adjustment isn't a payment line on target contracts. It alters the target, and only shows up through the Contractor's share.

For help deciding whether X1 belongs in your contract, see choosing secondary Options.

Related guides

• NEC Secondary Options: X, Y, W and Z Clauses Explained
• X2: Changes in the Law
• X3: Multiple Currencies
• X4: Ultimate Holding Company Guarantee

This guide is general information in our own words, not legal advice. Your contract and its Contract Data always govern. NEC, NEC3 and NEC4 are trade marks of Thomas Telford Ltd; Contract Status is not affiliated with or endorsed by NEC.