In the early days of our legal system, a contract was considered an absolute promise to perform. No excuses were acceptable, regardless of war, earthquakes, labor problems (like strikes), or other such catastrophes beyond one's control. Fast forward to 2004. Most modern contracts account for at least some known and unknown risks such as force majeure events (e.g., unusually severe weather, labor strikes) and differing conditions on the project site. But one risk not often addressed is price fluctuations for labor, materials, and equipment.

With a construction project of short duration, you probably know, or can guess, whether there will be wage increases or an escalation in materials prices. However, in recent memory we have seen materials costs skyrocket almost overnight because of the so-called oil embargo or the demands of a foreign war. To cover yourself, you'll want to insert an effective escalation clause in your contracts.

Define what units of the work are subject to price adjustment. For example, set forth hourly wage rates and equipment rental rates as if you had a “time and materials” agreement. Materials prices pose unique problems. Often, the escalation is not in the installed materials (doors, windows, paint, sheet metal) but in the components and the materials and supplies used in construction (plywood, miscellaneous metals, gasoline, power). One federal regulation uses this approach: “Any adjustment shall be limited to the effect on unit prices of the increases or decreases in the rates of pay for labor (including fringe benefits) or unit prices for material shown in the schedule [of prices]” (FAR 52.216-4(a)(1), emphasis added). Make sure the schedule of materials is comprehensive.

In small contracts, a general provision might be sufficient: “Owner agrees that materials and labor, including that provided by subcontractors, are subject to price escalations.”

You cannot justify a price increase to your contract just because your local hardware supplier or equipment leasing company has increased its prices. The escalation should be industry-wide, or at least throughout your geographic region, and measurable. Use price indexes, published by the government or by trade magazines, as a reference point.

Typically, an escalation clause will not cover such items as monetary fluctuations in international exchange rates, loss of volume discounts, the bankruptcy of a key supplier, and changes in building codes.

Drafting an effective escalation clause that is acceptable to a homeowner takes some skill. Consider the factors mentioned above when working with your attorney to develop contract protection against price escalation. —Judith Ittig, a partner in Ittig and Ittig, P.C., in Washington, D.C., practices construction law, representing contractors, subcontractors, architects, and suppliers building single-family residences and condominiums. She can be reached at [email protected].

This article is for informational purposes only and should not be construed as legal advice.