On Wednesday, President Trump announced new tariffs on many U.S. imports. Many key construction materials may be affected by the new tariffs as the supply chain shifts as a result of uncertainty in international trade.
In the ever-evolving landscape of construction, managing costs effectively is crucial for the success of any project. This rings even more true now, with the most significant challenges contractors face today in the volatility of tariffs, which may dramatically impact the prices of essential materials. This is where price escalation clauses in construction contracts become indispensable.
Understanding Price Escalation Clauses
A price escalation clause is a provision in a construction contract that allows for adjustments in the contract price based on fluctuations in the cost of materials or labor. These clauses are designed to protect contractors from unforeseen increases in costs, including but not limited to market volatility, government regulations or tariffs, or severe supply chain disruptions. The purpose of a price escalation clause is to ensure contractors are not solely responsible for absorbing these financial hits.
Why Price Escalation Clauses Are Essential
Tariffs, especially those imposed on key construction materials, can lead to significant price increases. These increases can lead to issues with a contractor’s budget, timelines, and ability to deliver on projects. By including a price escalation clause, the risk of these disruptions can be mitigated by sharing the risk amongst contracting parties and decreasing the risk of financial losses. Price Escalation clauses also promote fair and accurate bidding, as contractors are not forced to pay bids in fear of market volatility.
Key Elements of an Effective Price Escalation Clause
To be effective, a price escalation clause should include specific and unambiguous language regarding what events will trigger escalation of the contract price, a transparent method for calculating price adjustments, and notification and documentation requirements.
Including price escalation clauses in your construction clause, especially at a volatile and increasingly unpredictable time like now, is essential to the financial safety of your construction company.
If you have any questions regarding the use of price escalation clauses in your construction contracts, please contact Zoe Ginther, attorney at BrownWinick.
