While the benefits of a price escalation clause are obvious, they can have an unintended consequence. Most provisions limit the amount of the increase to the difference between the estimated costs and the actual costs. This may force an entrepreneur to open more of their books or processes than they prefer to get the raise. It also requires contractors to be careful in their estimation and budgeting in order to have a solid basis with which to compare increases. Owners and contractors should also consider the effect of the escalation clause once it has been triggered. For example, it can be a “any increase” clause, a “threshold” clause or a “delay escalation clause” clause. In the case of an “increase clause”, a contractor or supplier may be entitled to a refund or modification order for price increases that occur between the tender or the signing of the contract and construction. While a “threshold clause” only allows the contractor or supplier to additional compensation for price increases that exceed a certain percentage or amount in dollars. Finally, a “delay escalation clause” freezes a fixed price for a limited period of time and allows the downstream contractor to obtain additional compensation if the project is delayed beyond a certain number of days or a certain date. Depending on the project and its participants, each of these clauses may be preferable. When assessing whether an escalation clause in your contract makes sense, consider the practical implications of the clause.

The delay/event price scale clause is triggered by a specific event or delay and allows the party concerned to claim reimbursement of the increased costs. During a multi-year or multi-year project, the event can be the achievement of a certain milestone, a change in the calendar year, or a price increase from a critical supplier. The event may also be a failure of another party or a change of a particular contractor or supplier. If any of these events may affect the cost of a project, the affected party should consider adding a provision that shares the risk of increased costs. Finally, percentage price increase clauses allow a party to cover costs once its budgeted costs have increased by a certain percentage. These types of provisions are much rarer, but can be very useful if the parties try to fairly distribute the risk of increased costs. This type of arrangement also allows a contractor to recover from increased costs, such as the recent rise in wood prices. If an increase in material costs occurs but is not caused by a delay or does not occur during a delay, it is unlikely that a delay/event price scaling clause will be triggered. (7) Will the contractor be granted an extension of the time limit for the supply of equipment due to delays in delivery or material defects? (4) How is the price adjustment basis communicated to the counterparty? Is there a specific date on which this notification must be made from the date on which the basis for a price adjustment occurs? It is important that owners and contractors take into account the risks associated with changing material prices between the time of offer and the order of materials, and define the expectations of each party through specific contractual conditions before the contract is performed. There are dozens of articles dealing with the economy behind price increases, corrections, and recoveries, but using them to predict where material prices go or to change estimation or budgeting measures is only half the battle. Most construction projects take more than a few days to estimate, sell and execute.

If this process takes months or even a year, contractors and subcontractors need a mechanism to claim compensation for cost increases. As with many contractual clauses, price scale clauses can be very nuanced and even regulated by law. Be careful with implementation and consider consulting a lawyer when developing or negotiating. 5) Are surcharges for overheads or profits taken into account in the clause? 1) Does the clause allow adjustments for price increases and decreases, which creates parity in price volatility, or are the adjustments limited to rising or falling prices? There are also certain situations where an owner may request a price escalation clause (which effectively acts as a de-escalation clause) to anticipate a price reduction. For example, such a clause makes sense if the price of a particular material has risen rapidly before the offer and is expected to fall again at the time the material is ordered. Owners can choose to negotiate a change to the material price scale clause when the contractor assumes the risk for the first, say, 5% or 10% of the material price increase, so that the owner and contractor share the risk. Sometimes the owner will demand a cap on their risk, but as long as the owner has a termination clause in the contract for convenience, they are protected from such a large price increase that the project no longer makes commercial sense. Contractors must carefully weigh the risks involved before accepting a cap on the owner`s risk. More common is a price scale clause triggered by certain delays that are not caused by the party trying to enforce the clause. Delays can be natural disasters, acts or omissions caused by other contractors or the project owner, pandemics, etc. Regulations may require the delay to last for a certain period of time, or they may simply allow a party to claim increases, no matter how long the delay lasts as long as the delay causes the increase.

8) What supporting documents must be provided to justify the price adjustment? Enter the price escalation clause. . . .