Beware of Escalation Clauses
What Are Escalation Clauses
These are a way of allowing for inflation. Basically it provides a way for the builder to increase his costs in line with inflation.
The Clause will quote an inflation index which can be used to adjust the stage payments.
When Are They Used
I have only used escalation clauses in civil engineering contracts, when one or more of the following apply:
- The contracts expected to take more than a year to complete.
- The work will be carried out in a period of very high inflation.
- If there will be a lot of imported materials and fittings that would be affected by a loss in value of the dollar.
Why I Don’t Like Them.
- Taking the time pressure of the builder means there is less pressure on the builder to complete the works in a timely manner.
- Escalation clauses are a way of transferring risk from the builder to you. . . . . . . If the builder want to have this clause is he going to offer a price discount for reducing his risk?
- With imported materials there are alternative methods of reducing the risk of currency fluctuation, such as buying materials in advance.
- Sometimes the inflation index may not relate accuratly to the actual costs paid out by the builder allowing them to make extra profit.
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