Construction contractors are seeing material costs increase, particularly lumber, steel and fuel. As you review your contracts for 2021 and beyond, you may want to consider adding a price-escalation clause the protect against material cost increases.

What is a price-escalation clause?

In its simplest terms, a price-escalation clause allows contractors to recover material cost increases on a project.  While triggering events for escalation clauses vary, the two most popular types are:

  1. Cost increases encountered because of delays on the project; and
  2. Cost increases above a certain percentage, in essence unexpected cost increases.

When considering a delay-based escalation clause, you should consider the project milestones, most importantly having to order materials beyond the anticipated year.  For example, if you intended to order materials in 2021 and had prices locked in with your supplier, but the project is delayed and you now have to order materials in 2022.  Percent increase escalation clauses are just that—if material costs increase beyond a certain percentage, say because of a pandemic, the owner or upstream contractor must allow for an increase in the contract.

What does an escalation clause look like?

As noted above, escalation clauses can vary from project to project, but a common version is:

If, during the performance of this contract, the price of _______________significantly increases, through no fault of contractor, the contract sum shall be equitably adjusted by an amount reasonably necessary to cover any such significant price increases. As used herein, a significant price increase shall mean any increase in price exceeding ____% from the date of contract signing. Such price increases shall be documented through quotes, invoices, or receipts. Where the delivery of _________ is delayed, through no fault of contractor, as a result of the shortage or unavailability, contractor shall not be liable for any additional costs or damages associated with such delay(s).

Review your contracts

As we head into 2021, now is the time to review your contracts to identify any opportunities you have to recover unforeseen or unanticipated material cost increases.

Material costs are expected to rise for the foreseeable future.  Make sure you protect your company against these increases with a well drafted escalation clause. If you need help reviewing your construction contracts, we recommend you contact an experienced construction attorney.