How To Include Escalation Clauses in a Construction Contract

Fuel, steel, and asphalt escalation clauses can protect your contract

Escalation clause
Oil-derived materials costs can be adjusted. Photo: USACE

What Is An Escalation Clause?

Escalation clauses have been used in construction contracts regularly. Escalation clauses are typically included on large construction projects, where the job might exceed one year. Recent economics changes due to gas and oil prices could introduce contract escalation clauses even on small and medium size projects. If done properly, they will protect you from the inevitable bump in prices; otherwise you might end up with possible legal problems.

Fuel Escalation Clause

A fuel escalation clause might be introduced when the contractor requested so, or in certain instances when the Owner might foresee future problems with oil-derivate products. A fuel escalation clause might be considered when only the contract price is affected, upward or downward by certain pre-established percentage. The price adjustment on a Fuel Escalation Clause is aimed to minimize the cost fluctuations of certain articles to the Contractor. The Fuel Escalation clause is not intended to protect the Contractors for daily fuel price variations, but they are useful to protect the Contractor on price adjustments that are not considered normally on a day to day basis.

Can It Be Used on Steel Too?

The escalation clause used on steel products is another contract provision normally used in contracts with more than 1 million pounds of steel. The importance of this clause, at the fuel escalation clause, is that only applies to pre-determine items and they must be requested by the contractor.

The steel escalation clause only could apply to reinforcing steel, structural steel, steel piling, dowel bars and tie bars for concrete pavement, and beam elements and metal posts for guardrail.

Using a steel escalation clause the progress payment might be adjusted upward or downward as indicated by the steel cost adjustment index.

Normally the steel cost adjustment is obtained from the average of #4 reinforcing bars and hot-rolled carbon steel plate from nationwide publications. No steel cost adjustments are going to be made for any items manufactured from steel having a mill shipping date prior to the bid date of the contract . In addition, a maximum quantity of steel material will be set to establish a top gap of material being scrutinized.​

Oil-Based Products

An Asphalt escalation clause is set in some contracts for only asphalt cement products. The asphalt escalation clause normally excludes liquid asphalt or emulsified asphalt. The progress payment will be adjusted upward or downward, as set forth in contract provisions. The asphalt escalation clause will based prices on selling prices for asphalt cement. The prices used to compare asphalt prices will be from average high and low selling prices for the entire state area or the specified geographic location. The adjustment for said "Asphalt Cement" will be subject to increase or decrease in accordance with the following provision for "Asphalt Cement" price fluctuations exceeding 10%.

Problems and Issues of Using Escalation Clauses

Price escalations have been affecting the construction industry during the last year causing many problems and many developers to rethink projects.

Price escalation produces delays in construction projects, reduced scope projects or projects being cancelled. Escalation clauses could also impact public projects adversely due to the fact that prices being submitted are not being guaranteed during long period of time. In the past, general contractors were able to hold subcontractors and suppliers to their quotes for 60, or 90, or perhaps 120 days.

Because of escalation fears, owners are finding fewer bidders for their projects; some projects need to find alternatives funding sources or canceling the project if additional money is not available. Contractor and supplier fears regarding potential, future price escalation, and the absence of price escalation clauses in most construction contracts, often leads to higher contract prices and larger project costs.