Escalation clauses are most commonly used to account for potential fluctuations of material prices throughout the project life cycle. It safeguards the contractor and allows for price adjustments in contract prices when material and labour costs unexpectedly arise.
This is particularly useful and allows a contractor to competitively price a project at current prices without making allowances for unexpected price increases. It is also helpful when project requirements include material or goods that are volatile. Under the common law, the contractor would be liable for these increases.
These clauses are especially important on projects that have a long duration and provide a mechanism to handle cost uncertainties without placing the burden solely on one party.
Where an escalation clause applies to a contract, the following items can serve as a checklist to apply them practically:
Does escalation apply to your contract? In some contracts, the escalation clause can be found in the terms and conditions, however, the parties opt out of its application in the contract data.
Has there been an event that triggers the escalation clause? This could be a time-based increase or by validated evidence of a price increase.
Are the correct adjustment mechanisms being used? These include CPAP as an example.
Consider the risk allocation in your specific contract, i.e. does the contract stipulate that these increases are for the client’s risk or has this been modified in any way?
Have you followed the contractual notification process?
Have you submitted a detailed and comprehensive claim with supporting documents?
Escalation clauses are ultimately about balancing risk between the parties to the contract. With the rising cost of construction, requiring a contractor to carry all the escalation risk may lead to either inflated tenders or distressed projects. Incorporating escalation clauses encourages more competitive pricing whilst ensuring that contractors remain financially stable during the project life cycle.
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Escalation clauses are most commonly used to account for potential fluctuations of material prices throughout the project life cycle. It safeguards the contractor and allows for price adjustments in contract prices when material and labour costs unexpectedly arise.