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When to Include a Price Escalation Clause in Your Construction Contract

Sometimes the unknown happens. Recently, the construction industry has not only been facing a shortage of materials, but they have also been dealing with price spikes in materials. All of which impact a construction project. Contractors can protect themselves from these situations with a price escalation clause in contracts.

What is a Price Escalation Clause?

A price escalation clause is an additional clause in a contract that allows the adjustment of a price from time to time. When this happens and how much the price increases is usually unpredictable.

Why Use a Price Escalation Clause?

From diesel and asphalt, to lumber and steel. All of these things can increase in a blink of an eye.

Contractors shouldn’t be held responsible for an unexpected price increase, especially when it comes to materials needed for the job. The owner of the project needs to expect to pay for these things. It is unfortunate, but nothing is free and the owner gets what they pay for, which includes the materials used.

What to Include in a Price Escalation Clause

A price escalation clause can be tailored to best fit the contract and project, which is why all of the details of the clause need to be included in the construction contract.

– What is covered under the price escalation clause (Types of materials and tools)

– How to calculate the baseline price of materials and tools

– How to calculate the price adjustments (the exact number is unlikely)

– The minimum and maximum amount allowed during a price adjustment

– The length of time for the price adjustment (this also might not be exact)

– How all parties involved will be notified

Construction contracts offer protection. And since we are all unsure what the future holds, add an extra layer of protection by protecting yourself from price increases. Anytime you draft a contract or have questions about a construction contract, consult with a top construction lawyer in Phoenix at Murphy Cordier PLC.