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What is a Material Price Escalation Clause?
A material price escalation clause, also referred to as a ‘cost escalation clause’, serves as a contractual tool enabling the contractor to transfer increased overheads to the employer, or client. It grants the contractor the flexibility to modify the contract price to align with fluctuating costs of raw materials and other elements of the works at the time.
Benefits of Material Price Escalation Clauses
Carefully crafted escalation clauses can benefit all parties involved in a contract by redistributing financial risks while preventing excessive contingency pricing. By clearly outlining potential risks for suppliers, contractors, and owners, these clauses introduce predictability into an otherwise volatile market, thus aiding in dispute prevention. When drafting such clauses, several crucial factors should be considered:
- Precise identification of materials subject to price escalation.
- Clear methods for calculating increased costs.
- Determining the duration for which material prices are affected.
- Identifying the source of impacted materials.
- Mandating that the contractor substantiate any increased costs.
- Requiring the contractor to make every effort to secure the lowest prices from reputable or agreed-upon suppliers.
- Including provisions that discourage owners from terminating enforceable contracts prematurely.
- In cases where termination is inevitable, establishing mechanisms for providing notice of termination by the owner and compensating the contractor for costs incurred, including a prorated percentage of profit.
