in High-Risk Global Projects
FEATURED PAPER
By Lyazzat Zholimova
Almaty, Kazakhstan
Abstract
Cost escalation is one of the most critical risks in long-duration Engineering, Procurement, and Construction (EPC) contracts. When projects span multiple years, continents, and currencies, relying on fixed pricing without adaptive mechanisms leads to disputes, overruns, and strained client-contractor relationships. This article presents a structured, index-based escalation model developed and successfully implemented during my role as Project Estimation Manager for Rosatom’s nuclear EPC project in Saudi Arabia. The model separates cost categories (engineering, procurement, construction, nuclear fuel, and commissioning), aligns them with respective economic indices from official Saudi and Russian sources, and recalculates quarterly using a formulaic approach. The resulting escalation mechanism is resilient, auditable, and applicable to global projects. Supporting appendices provide full formulas, data sourcing, a case study, and a step-by-step implementation checklist.
Global EPC projects are exposed to financial risks driven by inflation, wage fluctuations, currency volatility, and regional economic instability. Traditional lump-sum contracts are increasingly challenged by these factors, especially in high-capital, long-duration projects such as nuclear power plants. When I was leading cost estimation for Rosatom’s international EPC contracts, I encountered these challenges firsthand. We had to develop a more resilient cost escalation methodology that honored both client and contractor interests and maintained financial integrity over time. This experience led to the development of a modular escalation system tailored to specific work categories, integrated with publicly available economic indices from the Kingdom of Saudi Arabia (KSA) and the Russian Federation (RF). This paper outlines that model and its real-world application on a multibillion-dollar project.
Model Overview and Formula Structure
The methodology behind this model is built on separating the total EPC cost into major work activity categories—Engineering, Procurement, Construction, Nuclear Fuel, and Testing & Commissioning. For each category, a tailored formula is applied that references specific economic indices reflective of cost changes in both the Kingdom of Saudi Arabia and the Russian Federation. Quarterly escalation adjustments are calculated using arithmetic averages of official data from the prior quarter. These data sources include wage indices, consumer and wholesale price indices, and average nominal exchange rates.
Each formula is structured as[1]:
FP1= FP0 × [Index Ratios × Weight by Geography]
Where:
FP1 is the adjusted firm price
FP0 is the original baseline price
Weights reflect contractual cost exposure to each country
This format allows for precise updates each quarter based on updated economic data while preserving the integrity of the original firm pricing.
This rule helps interpolate missing indices without halting financial adjustments. The formulas were built and validated using Excel and Primavera P6 cost data across multiple project phases. The complete formula details are in Appendix A, with source references in Appendix B, a case study in Appendix C, and a practical checklist for future adopters in Appendix D.
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How to cite this paper: Zholimova, L. (2025). Escalation Modeling for EPC Contracts in High-Risk Global Projects, PM World Journal, Vol. XIV, Issue VIII, August. Available online at https://pmworldjournal.com/wp-content/uploads/2025/08/pmwj155-Aug2025-Zholimova-Escalation-Modeling-for-EPC-Contracts.pdf
About the Author
Lyazzat Zholimova, EVP
Almaty, Kazakhstan
Lyazzat Zholimova, EVP, is a Project Controls Manager with 18 years of experience delivering international infrastructure, energy, and public safety projects. Her experience includes leading cost and schedule management for Rosatom’s international EPC contracts and currently overseeing project controls for the $1.9B Airfield & Terminal Modernization Program (ATMP) at Los Angeles World Airports. Her experience spans all project phases – from estimating and planning to execution and cost control – on projects utilizing Design-Build, Progressive Design-Build and CMAR delivery methods. Highly skilled in developing and overseeing detailed cost reports, conducting cost-to-complete analyses, and ensuring rigorous budget allocation across large-scale, complex WBS structures.
Proficient in reading design prints and building schedules from scratch to optimize project timelines and resource allocation for ensuring alignment with project objectives and client requirements. Lyazzat has supported price negotiations and bidding, developing estimates for 30/60/90% project reviews, cost reconciliation through value engineering and constructability review, estimating and developing scope of work for change orders, and Independent Cost Estimates (ICE) to contractor bids. She holds the Earned Value Professional (EVP) credential and serves on the AACE International Education Board.
Lyazzat can be contacted at l.zholimova@hotmail.com
[1] Data sourced from GASTAT, Rosstat, and CBR; see Appendix B
