Economic Headwinds: Price-Escalation Clauses in a Time of Uncertainty

In an uncertain and ever-changing economic landscape, businesses are motivated to protect their economic interests, especially for business endeavors which will take place over the extended future. In construction projects, pricing for materials is of the utmost importance, and unexpected spikes in pricing can raise substantial issues, including which party will be responsible for the unexpected price increase. However, a clause in the contract documents could help to mitigate this risk: a price-escalation clause.

Price-escalation clauses came to the mainstream forefront during the COVID-19 pandemic, as scarcity of materials led to dramatic price increases, which had a heavy impact on construction companies. Essentially, a price-escalation clause will detail which party is responsible for an increase in pricing, as well as in what circumstances they are responsible for an increase in pricing. Further, a price-escalation clause could apply to all materials on a given project, or explicitly detail a smaller subset of materials to which the clause applies.

Examples of common price-escalation clauses include the following:

• Any-Increase: Allows for reimbursement for any increase in pricing after the contract date;
• Threshold: Allows for reimbursement if pricing increases by a certain set percentage after the contract date; and
• Delay: Establishes a fixed price for a period of time, and allows reimbursement if there is a delay beyond that set period of time.

When construction contracts are negotiated and finalized, the document should be analyzed in detail to determine if a price-escalation clause is included therein. For example, a general contractor could impose payment obligations for a price increase on the subcontractor or supplier. If a party is not aware of this clause, but signs the construction contract, the party could find itself subject to a hefty payment obligation that it did not anticipate or expect.

In sum, for contracts to be performed in the future during a period of economic uncertainty, a price-escalation clause could provide protection and an avenue for reimbursement for a party if prices rise post-contract.