Increasing Material Costs and Escalation Clauses

The COVID-19 pandemic has had a tremendous impact on many different industries across the world, including the Construction Industry. In particular, the COVID-19 pandemic has affected the supply chain for many construction materials which has caused dramatic increases in pricing of materials. This has caused trouble for contractors and their attempts to stick to project budgets.

To avoid issues of determining which party bears the consequence of delays and increases in pricing, it is crucial to address these points during contract bidding and negotiations. One of the best ways to do this is by including price escalation provisions in your contracts. A price escalation clause is a provision that can be inserted into any contract to provide a way for subcontractors or contractors to recover some of the cost increases that occur over a course of a project under certain circumstances. The three most common types of escalation clauses are: (1) any-increase escalation clauses; (2) threshold escalation clauses; and (3) delay escalation clauses.

Any-increase escalation clauses allow for a contractor or supplier to seek reimbursement for any price increases that occur after the signing of the contract or submission of the bid. The clause can identify certain types of materials that are subject to the clause. Threshold escalation clauses specify that if building materials increase by a certain percentage, then the contractor or supplier may seek reimbursement for the excess cost. Lastly, delay escalation clauses hold a fixed price for a certain amount of time and only allows for reimbursement if there is a delay beyond that fixed amount of time.

Although these are the most common types of escalation clauses, they all can be modified for individualized situations. It is key to protect your business and finances, especially during the uncertainty of Covid-19, and ensure that these variables are anticipated. Price escalation clauses can be very nuanced, so let Hannah Sheridan & Cochran help you navigate the drafting.

By: Rachel Rogers