Escalation Clause

What is an Escalation Clause?

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An escalation clause is a provision in a contract whereby the vendor can raise the price of goods or services over the course of the contract.

Common Reasons for Escalation Clauses

Two of the most common reasons for escalation clauses are increasing supply costs to the vendor and annual price increases. With the first common reason, a vendor’s inputs into the products they produce increase in price.

Some goods have volatile prices, and when those goods are used to produce other goods, the prices of the latter goods have some corresponding volatility in price. When buyers and sellers agree to this type of escalation clause, the vendor must justify a price increase by showing how their costs are going up. While this type of escalation clause common in some industries, it is very rare ​in government contracts.

In an annual price adjustment escalation clause, the buyer and seller agree to a predetermined price increase each year. This is similar to a cost-of-living adjustment employers give their employees. Escalation clauses for annual price increases are fairly common in government contracts for goods and services.

Examples of Escalation Clauses

Here are a couple of examples of escalation clauses in government contracts:

  • A licensed professional counselor contracts with a protective services agency to provide counseling services to children, families and adults who cannot afford it. The counselor and the agency have a contract with a renewal option that includes an escalation clause. Each year, the counselor charges 5% more than the previous year.  

  • A city contract with a photocopier company to lease machines. The lease agreement includes an escalation clause where every six months the city pays half a cent more per page printed or copied.