Why escalation clauses can be crucial in construction contracts

Why escalation clauses can be crucial in construction contracts

| Nov 3, 2021 | Construction Law |

As a construction industry professional, you know that many things can go awry between the time you contract to do a job and the actual work commences. The building materials, for example, can rise significantly based on demand and supply chain issues, worker shortages and strikes, fuel prices, natural (and man-made) disasters, tariffs and more.

The last couple of years have brought a multitude of problems for those producing and buying products, culminating in the current worldwide supply chain issues. If a contractor is required to stand by their estimate based on what materials cost when they bid and drew up their contract, they could be looking at thousands of dollars in losses on a project.

That’s why having an escalation clause in your contracts is crucial. An escalation clause can let you share the risk of price increases with the project owner or possibly even shift the whole increase to them.

What should be included in an escalation clause?

Typically, an escalation clause includes a triggering condition. That condition could be the price of materials going up more than a specified percentage. Another condition could be a delay of more than a specified time. Delays often result in price increases. If a triggering condition occurs, the contractor doesn’t have to stand by their original pricing.

It’s also wise to include what materials are covered in the escalation clause. Some cover all materials. Others cover only specific materials where the price tends to be more volatile.

There may be better options, depending on the circumstances

There are other ways to draft contracts so that both the contractor and the project owner share in the risk of material cost increases. Every situation is unique. 

That’s why pro forma contracts aren’t a good idea in the construction industry. It’s best to have experienced legal guidance as you draft and negotiate your contracts – and, of course, if you are dealing with a contract dispute.