Escalation and De-escalation Clauses Protect Commerical Projects

by Andy Burns on January 23, 2009

On my last post, Kevin made a comment about how to apply escalation and escalation clauses in commercial real estate development contracts.  I thought I would go into more detail about it here.  While they sound like tricky business, they are really good business practices that protect both parties.

Although the clauses can be bookkeeping nightmares - they are thought by some to be a very fair way of handling the contracting process - especially for projects of long duration. Obviously, the perception is that the escalation clause will benefit the contractor - the de-escalation clause the owner.

The US Department of Labor, Bureau of Labor Statistics provides some very complete guidance on the change in prices for commodities in all stages of processing. The BLS Producer Price Indexes measures prices objectively and its use can be referred to in construction agreements as a basis for making adjustments - up and down.

Obviously, these contract clauses should be written carefully to avoid disputes.

Some things to consider:

  • Establishment of the base price or part thereof that will be subject to adjustments; selection of the appropriate BLS Index(es);
  • Decide on whether seasonal adjustments will be considered; decide how often a price adjustment will be calculated and implemented (e.g. during the contract period, at intervals, or at contract completion?);
  • Decide whether the adjustments are based on preliminary or final indexes, and; last, but certainly not least, the parties must agree on the formula(s) to be used to calculate the contract price adjustments.

{ 3 comments… read them below or add one }

Stephenson Equipment 07.31.09 at 6:39 pm

Thanks for following up Kevin’s question on the escalation clauses.

I was familiar with the concept but was pretty fuzzy on the details. I think I have a better handle on them now.

akash choudhary 04.22.11 at 3:46 am

dear sir
we are a contractors working with Delhi Public School at all over india for 20 years.
we have contract agreement with our client as per CPWD specifacation.
we have a project in hand amounting 8.00CR with Escalation clause.
the work have awarded us on the basis of rate of 2years back ie 2009.
please guide how to calculate the escalation.
thanking you
Shiva Builders And Contractors
Akash 9650023918

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