Construction Financial Glossary

Escalation Clause Definition

An escalation clause is a contract provision that allows for adjustments in project costs due to fluctuations in material prices, labor rates, or inflation. It protects contractors and owners from unexpected financial impacts caused by market volatility.

Why Escalation Clauses Are Used

Construction projects often extend over long periods, during which material costs and wages can change significantly. Without an escalation clause, contractors may be forced to absorb cost increases, reducing profitability.

Implementing an Effective Escalation Clause

    1. Define which cost components are subject to escalation, such as steel, concrete, or fuel
    2. Set a threshold percentage that triggers an adjustment
    3. Outline a clear process for calculating and documenting price changes


Related Terms: Material Price Escalation Clause, Cost Escalation, Fixed-Price Contract, Inflation Adjustment

FAQs

Q: Can escalation clauses apply to both labor and materials?

A: Yes, they can cover any cost element subject to price fluctuations.

Q: How is an escalation adjustment calculated?

A: Typically, it’s based on published industry indices or Supplier price lists.

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