The price adjustment formulae is a method of calculating the increase, or decrease, in contractors’ costs over any period. The formulae and the indices are widely used in larger building civil engineering contracts.
Published: 22/04/2022
The government announced in its 2020 budget that it would remove the entitlement to use red diesel and rebated biodiesel from most sectors from April 2022 to help meet its climate change and air quality targets. The tax changes will ensure that most users of red diesel use fuel taxed at the standard rate for diesel from 1st April 2022.
BCIS Price Adjustment Formulae Indices (PAFI) for Highways and Civil Engineering are particularly affected by this action. Gas Oil is a resource cost index included within the Highways/Civil Engineering PAFI Indices and within work categories of PAFI Building series produced by BCIS.
From April onwards, Gas Oil resource in affected PAFI work categories will be changed to DERV and a one-off percentage uplift of 40% will be applied for indices to reflect cost increases. This percentage uplift represents the share of the increased levy (42.77 pence per litre based on the fuel duty rate 2022-2023 as of the 23rd March 2022) in the agreed price for DERV as reported by contractors as of the 1st April 2022.
Applying the changes
The change will be applied to the different PAFI series as follows:
- Building series, Plant indices – the changes will be applied to the Plant indices and work categories that include plant as a resource in indices for April 2022.
- Building series, Work categories containing Gas Oil – In line with the PAFI methodology, indices for materials are based on the prices for the month preceding that to which the index number refers. Therefore, where the Gas Oil is used as a material resource in the work categories, the change will be applied to the May 2022 indices.
- Civil Engineering and Highways Maintenance series – the change will be applied to the April 2022 indices.
Renaming the indices
As there may be some contracts using PAFI that continue to use red diesel we will continue to produce a red diesel index as well as the continuation of the Gas Oil index.
For Civil Engineering series, the current 70/9, 90/11, 4/CE/28 Gas Oil indices will be renamed to the 70/9, 90/11, 4/CE/28 Gas Oil (Diesel in construction) indices. It will follow the movement of the DERV index from April onwards and a one-off percentage uplift as stated above will be applied for April indices to reflect the removal of the tax discount.
For any activities that would still permit use of the Red Diesel, a new index series has been introduced: 70/9a, 90/11a, 4/CE/28a Gas Oil (Red Diesel) indices will continue to provide a movement of the red diesel based on the Gas Oil PPI.
For Highways Maintenance series, the current R/10/11 and 4/HM/R/13 Gas Oil indices will be renamed to the R/10/11 and 4/HM/R/13 Gas Oil (Diesel in construction) indices. It will be following movement of the DERV index from April onwards and a one-off percentage uplift as stated above will be applied for April indices to reflect cost increases.
For activities that would still permit use of the Red Diesel, new index series: R/10/11a and 4/HM/R/13a Gas Oil (Red Diesel) indices will continue to provide a movement of the red diesel based on the Gas Oil PPI.
No further action should be required from BCIS users to continue using PAFI indices.
Any costs attributable to the loss of red diesel to manufacturers and suppliers of materials will be reflected in the indices for those materials as the manufacturers pass them through, it will not be identified separately.
