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Escalation clauses can protect you when material costs skyrocket

On Behalf of | Nov 3, 2021 | Construction Law

The price of building materials has risen significantly over the past couple of years. Shortages, supply chain issues, natural disasters, worker strikes, fuel prices and tariffs are some of the key reasons for this. There’s not expected to be any pricing relief (or end to the volatility) soon. 

If contractors and subcontractors are required to stand by their cost estimates made when they bid for a project or provide the initial estimate, they can suffer serious financial losses if the price of materials rises during the life of the project. 

As a contractor or other building professional, you can mitigate the risk by including an escalation clause in your contracts. This gives you some flexibility and lets you share the risk of price increases with the project owner. 

Examples of escalation clauses

Escalation clauses typically specify a triggering condition and which materials are covered by that condition. For example, you could say that if the project is delayed by more than a specified amount of time, the owner is required to pay you for the materials at their current cost regardless of the cost you factored into your estimate.

Another example of an escalation clause might be one that states that if the price of a particular material (or more than one) increases over a “threshold” amount or by a certain percentage, the owner is required to pay you to cover the current cost (or share in the increased cost).

Since any number of factors, both within the U.S. and internationally, can affect the price of building materials, it’s wise to protect yourself as much as you can when drafting and negotiating contracts. Experienced legal guidance is key.