Price increases that are not foreseen in the bid should be resisted in all cases. The Procurement Officer should explain to the bidder that it has signed a fixed price bid and agreed to take responsibility for the risk of cost increases.

In exceptional circumstances, price increases may be accepted prior to contract placement but exclusively provided that:

•    It is proven that the contractor’s costs have increased significantly, e.g. by reference to indices or quotations made available by the contractor;
•    If FC approval has already been obtain for the contract, accepting the price increase does not require FC approval (cf 11.1.2 of the CERN Procurement Rules);
•    Accepting the price increase would not have impacted on the ranking of the bids and therefore on the adjudication decision;
•    The contractor will not accept to sign the contract unless CERN accepts to increase prices;
•    The Procurement Officer has sought to resist the price increase through negotiation;
•    The technical department is willing to fund the price increase.
In all cases, the Procurement Officer shall consult with his or her section leader before accepting any price increase not foreseen in the bid. It is important to ensure that contractors are treated in a coherent way.
In addition, the Procurement Officer should try to negotiate something for accepting a price increase. It could be an extended warranty or similar. In all circumstances, CERN should not bear the full consequence of the situation. The burden of increased raw material prices, etc, should be shared, wherever possible, with the contractor.
 

The price revision formula included in the Tender Form template should be used as a starting point, but it will need to be adapted by the Procurement Officer on a case by case basis. The following elements shall be taken into consideration in the design of the price revision formula:

•    The costs that are allowed to vary. These may include costs that are not easily under control of the contractor (such as raw material costs and energy costs) or costs that are very likely to increase over the duration of the contract (such as wages). Costs that can be effectively managed by the Contractor should not be included;
•    The indices used to measure the evolution of the costs. Indices used should be publicly available and clearly defined (i.e. include at least the full reference of the index and its publishing body). For raw materials, it is recommended to use LME indices. For wages, it is recommended to use CPI in the country where the majority of the work takes place or the currency of the contract. The indices should be discussed with the Technical Officer and, in case of doubts, it is recommended to consult with several potential bidders before publishing the DO or IT;
•    The coefficients/weights associated with each cost element. This shall be defined by CERN following consultation between the Procurement Officer and the Technical Officer and, in case of doubts with several potential bidders before publishing the DO or IT. The bidder should not be given the freedom to propose the coefficients/weights itself, as this may make it impossible to adjudicate;
•    The baseline value (I0), which is fixed to a particular date or period and will be the basis for the prices in the bid. For indices that are updated on a daily basis (typical for raw materials, for example) the baseline value should be fixed as the date 1-2 weeks before the closing deadline of the DO or IT or as an average of the dates around this time. It is recommended to confirm the exact value to be used by issuing a clarification to the DO or IT. For wages, the indices are typically published monthly or quarterly with a lag, therefore the baseline value or at least the reference period can be stated in the Tender Form;
•    The revision date i.e. the date on which the new prices are calculated. In the current very volatile situation, for raw materials and energy costs the revision date may need to be immediately before the placement of the order to reduce the risk for bidders sufficiently, or an average of the dates around this time. 
 

As of March 2022, prices for many components are very high and/or subject to unforeseen, sudden increases imposed by manufacturer. This is creating a situation where some bidders are unable to send fixed price bids to CERN or are only able to do so with a very large margin of risk included in their pricing and/or where some bidders are unable to source components requested by CERN or are only able to do so with extremely long lead times (can be over a year even for off-the-shelf components).

In order to manage this situation:

•    To the extent possible, allow bidders to propose alternative components that they may have in stock and/or may be able to obtain more quickly or cheaply;
•    Consider having CERN procure the components and free issue them to the contractor. This can be helpful for securing component availability earlier and managing long lead times (components can be purchased before the main contract is placed). However, this approach should be weighed against the risk of CERN taking responsibility for the components provided to the contractor, the possibility that CERN may pay higher prices than contractors for components, and the overhead costs for CERN of managing this;
•    Consider delaying the publication of the DO or IT, if the project timescales allow, in the hope that the current market shortages will be resolved in the short term;
•    If other solutions are not available, consider following a “cost + fee” model for the components, whereby the bidder provides quotes from its component suppliers and a fixed mark-up (as a %) to be used for adjudication purposes but the contract foresees the possibility to update the prices based on updated quotes from component suppliers shortly prior to order placement. This should only be used  in exceptional cases if nothing else works, as this model can be abused by contractors.
 

As of March 2022, prices for many raw materials (including in particular steel and nickel, which is used for stainless steel, and aluminium) are extremely volatile and/or rapidly increasing to the point their trade on public markets has been suspended on 8th March 2022 to avoid speculation. This is creating a situation where some bidders are unable to send bids to CERN or are only able to send bids with a very large margin of risk included in their pricing.

In order to manage this situation:

•    Consider delaying the publication of the DO or IT, if the project timescales allow, in the hope that the current volatile situation will be resolved (or, at least, better understood) in the short term;
•    If the DO or IT concerns a multi-year contract, consider reducing the scope of the DO or IT to cover only the short term needs, and plan to carry out a further DO or IT in the medium term in the hope that the current situation is resolved;
•    Where this is not possible, consider including a price revision formula in the tender form that allows for price revisions on the date when the order is placed. For advice on how to design a price revision formula, refer to the question “How should I design the price revision formula?”. However, this should be verified with several potential bidders in advance, as some firms are not willing to work with price revision formulae;
•    Ensure that the technical department(s) funding the purchase are aware of the budgetary risks, in particular that the price received in the bid may not be the same as the price on the future order.  

The contractual price revision does not represent an obligation of CERN to apply it annually. In case the price revision is negative. We advise you not to apply it but to keep it in memory for the coming years. CERN will only think about granting the contractual price revision if the technical Department is fully satisfied with the contractor’s performance. In case CERN wishes to improve any contractual or performance aspect, the application of the price revision formula could be used as an economical incentive. In the year with high inflation and provided that CERN is highly satisfy with the performance of the contractor, the Procurement Officer should always challenge the fact if the price revision should be granted in full or partially. For instance, for service contracts price revision CERN has decided not to grant more than 50% of the increase foreseen by the price revision formula for 2022.

In discussions with contractors, the following arguments may be used to resist price increases:

•    CERN’s budget does not increase year on year. In fact CERN’s management has requested all Departments to reduce their annual budget this year;

•    It is not because inflation has increased that the contractor’s costs will increase. CERN expects its Contractors to manage its costs effectively, irrespective of general price increases (inflation);

•    Depending on the contract, it may be that there has been negative inflation in recent years which CERN has not used to decrease prices.  

Links to commonly used indices are available below. However, it should be noted that the indices chosen must be considered on a case by case basis to ensure they appropriately reflect the costs under the contract, always following a discussion with the technical officer.

INSEE : https://www.insee.fr/fr/statistiques?debut=0&theme=30&conjoncture=43

OCSTAT : https://statistique.ge.ch/domaines/apercu.asp

LME indices : https://www.lme.com/Account