Construction Contracts: Using Price Escalation Clauses to Address Rising Costs

While the housing industry appears to be on the rebound, contractors are now faced with a number of challenges in trying to meet the recent increase in work. One of the biggest challenges relates to significant price increases in building materials and products. Of course, unanticipated price increases will affect the bottom line in most construction projects. One way to address this risk at the beginning of the project is to include an escalation clause in the construction contract. This allows parties to adjust the contract price if the costs of building materials and products incorporated into the project exceed a set amount. Even after the market stabilizes and the price of construction materials is more predictable, external forces such as labor strikes, natural disasters, and trade restrictions can still cause significant losses.  Contractors should be aware of these risks, and take the necessary steps to protect against or limit the risks or price hikes by including escalation clauses in their contract negotiations.