A Contractor’s New Friend, the Escalation Clause

By Drew C. Williams, Esq.
Wed, Sep 15, 2021 at 9:00AM

A Contractor’s New Friend, the Escalation Clause

Price increases in the construction industry climbed steadily in 2020 and 2021 is no different.  As a result of the pandemic, price escalations occurred due to supply chain shortages and increasing demand from the global economy.  For example, Associated Builders and Contractors reported that iron and steel prices were up 15.6 percent from January of 2020 to January of 2021, and that softwood lumber prices have tripled during the same period.  Unanticipated increases have had a drastic effect on contractor budgets as contractor’s have been unable to pass along those added costs to others.  Many contractors and owners are faced with litigation as each party disputes which party is responsible for absorbing the increased costs.  The havoc that fluctuations of costs have created in the construction industry has caused many to include added protection in their construction contract by way of the “escalation clause”.

For projects that are based on a cost-plus or time and materials basis, the contract is likely to name the Owner as having he responsibility for cost increases.  This cost structure provides contractors with the least exposure when dealing with price fluctuations provided the contract is not a “guaranteed maximum price” contract.  On the other hand, a fixed price or lump sum contract does not offer contractors that same protection.  Under this cost structure, a contractor’s fixed price is agreed to at the outset.  Thus, owners are unlikely to provide any cost relief to contractors when material price escalations exceed contractor’s budgets.

A typical force majeure clause excuses a contractor’s performance for catastrophic or otherwise unanticipated events identified in the contract, such as extreme weather, wars, strikes, and changes in the law that would make performance impossible.  However, these clauses typically don’t address price escalations caused by market factors.

Therefore, it is important for contractors to request an escalation cause in future contracts.  For example, a material price escalation clause should add protection for increases, such as:

"In the event of significant delay or price increase of material or equipment occurring during the performance of the contract though no fault of the Contractor, the contract sum and time of completion shall be equitably adjusted by change order in accordance with the contract documents”.

It is more effective however to actually include an agreed amount percentage or other metric.  

The volatility of construction material prices is here to stay.  Therefore, we recommend to contractors, and even those downstream (suppliers, subcontractors, etc.) include material price escalation clauses in their contracts.

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