What Are Escalation Clauses in Construction Contracts?
General contractors spend a great deal of their time balancing costs on their projects. To ensure profitability, they must control material, labor, and overhead costs while continually receiving payment from clients. The task is difficult and a number of factors affect a contractor’s ability to do this. One such factor is the varying costs of materials and labor. If fuel or building materials cost the same when you bid the project as it does halfway through the project that would be excellent. Unfortunately, that’s seldom the case, especially in our fluid economy.
The contractor’s primary tool for combating this is the escalation clause. An escalation clause is a provision in a contract that calls for adjustments in fees, wages, or other payments to account for fluctuations in the costs of raw materials or labor. This clause shifts the burdens for increasing materials and labor costs from the contractor to the client. It’s an important clause to include in your contract, so it’s helpful to have an Orlando construction lawyer review your contract before submittal.
Pros and Cons of Escalation Clauses for Project Owners
The escalation clause is only as good as a client’s willingness to accept it as part of a working agreement. Escalation clauses are helpful for owners because contractors will be more comfortable submitting lower bids, meaning more contractors will bid on jobs. However, escalation clauses can present challenges because the prices that are being submitted aren’t being guaranteed. Determining final costs of projects can be challenging.
What Costs Are Subject to Escalation Clauses?
Escalation clauses can apply to any cost that is subject to fluctuation based on market conditions. However, escalation clauses are most commonly seen in conjunction with fuel, steel, and asphalt costs.
Fuel costs: If you follow the news, you know that oil prices fluctuate regularly and over the course of a year, there can be sharp increases and decreases. Escalation clauses are designed to protect contractors from those changes.
Steel costs: An escalation clause can be used here to adjust to fluctuations in the steel cost adjustment index.
Asphalt: Escalation clauses apply to fluctuations of asphalt cement based on average price in a geographic area.
It’s important to note in each case that escalation clauses are meant to protect contractors from sharp increases that are beyond the normal fluctuation of market prices.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.