Escalation Clause

An escalation clause is a type of contingency clause often found in construction contracts. It allows for an increase in the contract price due to unforeseen circumstances beyond the control of either party. The clause typically includes a mechanism for calculating the new price and a date by which the increased price takes effect.

Escalation clauses are used to protect both parties from cost increases that may occur during the term of the contract. For example, if the cost of materials rises sharply, the contractor may include an escalation clause in the contract to compensate for the higher costs. Similarly, if labor costs rise, the owner may include an escalation clause to help offset those costs.

While escalation clauses can be beneficial, they can also create problems. If inflation increases more than expected, one party may be forced to bear a larger share of the cost increases than originally anticipated. Escalation clauses can also lead to disputes if there is disagreement over whether a particular cost increase is covered by the clause.

To avoid these problems, it is important to carefully draft escalation clauses so that they are clear and concise. The calculation method should be specified in detail, and any disputed items should be clearly identified. In addition, it is important to review actual costs periodically to ensure that the escalations are accurate and fair.