Thursday, November 14, 2013

What is an escalation clause in construction contract?

Q:
What is an escalation clause?

A:

In a contract with an escalation clause, the customer agrees to pay any price increases for specified items that occur between the signing of the contract and the start of construction. Volatile materials markets have made these clauses fairly common today. The alternative is for the contractor to inflate the contract price to cover possible increases. The decision to sign or not sign such a clause is basically a market bet, and will depend on whether or not the customer expects prices for the materials in question to rise.

When a general contractor receives prices for services and materials the proposals are dated the day that they were issued as a bid on the project. In the bid it will state how long the proposed price is guaranteed to stay the same. Usually the price is good for about 30 days. If the bid is successful then the bidder will be asked to hold that price until their services are required on site. When custom home building this could be up to 6 months or more after the date of the bid.

Where you get into price increases is when companies place bids on a project and because of plan changes or client indecisions the project isn’t rewarded to the general contractor until well after the 30 day limit. When this happens the client has to understand that the sub-contractors that bid on the project might have to charge them an extra because their own costs have gone up.

This can make pricing custom homes tricky because with a custom home as a general contractor working on a bid you could end up waiting 6 months to a year before you ever find out if you have won the project or have a finalized signed contract.

Rob Abbott
Operations Manager
Village Builders Inc.

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