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Why construction contracts need an escalation clause

On Behalf of | Aug 31, 2022 | Civil Litigation

On a large, lengthy construction project, the cost of materials can change significantly between the time you contract to do a job and the time you actually purchase the materials. Everything from fuel prices to supply chain issues to natural disasters and more can affect what you ultimately have to pay. The same can be true, although generally to a lesser extent, for the price of labor.

How do you prevent yourself from being locked into the estimate you provide for a job and potentially losing many thousands of dollars if the costs rise drastically? That’s where an escalation clause comes in. An escalation clause details how you and the other party to the contract will share in the cost of any price increases that affect your estimate.

Triggering conditions in an escalation clause

Most escalation clauses include a triggering condition. For example, an increase of at least a specific percentage in the price of a necessary material might trigger the escalation clause, which means you can adjust the pricing without violating the contract. 

Some escalation clauses refer to specific materials where the price is volatile. Others address all materials. Typically, it would need to be a material where a substitution wouldn’t do. It should be noted that the other party may require that if the price of one of these materials drops substantially, the cost of the project will be adjusted downward.

Some escalation clauses designate that only a portion of the price increase will be passed on to the other party. Others state that the entire cost will be passed on to them.

Escalation clauses are just one element of construction contracts. They often need to be highly detailed in order to allow for a wide range of eventualities and minimize disputes. Having experienced legal guidance as you draw up and enforce your contracts is crucial.