Construction projects usually span for a long period of time. During this time, the costs of various materials used in construction increase significantly. The prices of oil and gas change frequently, and these changes affect the local markets directly.
Thus any unanticipated increase or decrease in the prices can affect the budget of a construction project. An increase in these costs is often not considered when the signatory parties of the project sign the contract before the project begins.
These increased costs are a burden on the project manager or the contractor if not put into writing in the shape of the escalation clause during the signing of the contract. The contractor is responsible for all expenses by default unless decided in the contract to be otherwise.
What is an escalation clause?
To combat the excess monetary burden, the project manager has got only one tool: escalation clause. In a contract, an escalation clause is a provision that takes into consideration the highs and lows that costs of various commodities, raw materials, and labor see during the course of the project. This provides the contractor a chance to shift the burden from its own shoulders to that of the client.
This article aims to provide you with the escalation clauses that save the contractor or project manager from undue burdens of costs and payments.
Three escalation clauses to add in construction contracts
Escalation clauses are used in construction projects very often. The contracts of large construction projects where the time period of the construction may exceed a span of one year, essentially contain escalation clauses. Sometimes, in these longer projects, delay claims arise and elongate the projects even further. To deal with such a situation, you need the help of a construction delay expert witness to ensure no one bears the undue burden of expenses.
Following are the key kinds of materials for which escalation clause becomes necessary:
1. Fuel costs escalation
Fuel costs change very frequently. Consider a construction project spanning over a period of six months or a year in a country with a volatile economy. The costs will be a lot higher when the project reaches midway than the costs when the project activities begin.
A fuel escalation clause is thus an essential clause for construction projects. Usually, contractors request for the addition of a fuel escalation clause. As a chance to minimize the repercussions that fluctuation in fuel prices can have for them.
2. Oil-based products cost escalation
Asphalt is a key raw material with indispensable importance in the field of construction. The prices of Asphalt cement fluctuate with a high frequency. The escalation clause for asphalt is often exclusive of liquid or emulsified asphalt.
The asphalt clause bases the anticipated prices on the sale prices of asphalt cement. You can base the comparison with average high and low prices in a certain area. The provision, as mentioned in percentage in the clause will then dictate the party who pays the escalation cost and the amount to be paid.
3. Steel costs escalation
Steel is a common raw material without which construction work cannot take place. For some projects, the volume of steel to be used increases the ordinary bounds. In those cases, a provision is needed to protect the contractor. The provision takes into consideration the price hike for the coming months and decides the party, which will bear the brunt as a result of inflation.
The contractor requests this provision for a predefined list of of steel based items. This is to describe that all items are not included in the list. Neither is the steel costs escalation clause defined by default. It is just to save the interests of the contractor. The progress payment resulting from a varied market price of steel can either ask for an increased adjustment or a decreased one.
Want to rid contractor of excess expenses?
Many developers rethink their construction projects because of high escalation costs. Thus it is important to seek service of professional consultants, e.g. Quantum and a Delay Expert. With the help of these professionals, include escalation clauses for raw materials like fuel, steel, and cement.
Prices of commodities, equipment, and raw materials increase each passing day. When it comes to construction projects, raw materials like steel, cement, and fuel have a significant impact on the budget. When the prices go up, the contractor has to manage it from the amount he/she has taken for the project. But, if the project contract has cost escalation clauses, the adjustments can easily be dealt with.
Instead of completely letting the concept of your project go, and you can manage your project well, by spending a good amount of time on the contract. Thus, save your business with the help of a comprehensive contract and professional services.