Inflation and Price Escalation: Why Contractors Should Review Contracts for Allocation of Risk

Inflation and the increased cost of doing business are taking the nation by storm – and felt across industries. Supply chain issues and labor shortages are causing projects to run longer and at a higher cost than expected. If contractors fail to include certain escalation provisions in their contracts, they may be stuck with the bill. While contracts can vary, there are a few common provisions to be mindful of.

Price Escalation Clause

These clauses vary considerably but it is the first stop to determining who holds the bag for the increased bill. Some contracts include a price escalation clause that allocates the risk between the contractor and the owner. Other contracts have broadly defined change provisions that grant the contractor the ability to make a price adjustment due to increased costs. However, in the absence of any such provisions, the answer may be found within the “force majeure” clause.

Force Majeure

This clause has come under more scrutiny than ever in the past few years. This clause specifies the assignment of risk in the event of an unforeseeable event outside of the parties’ control. If a contract is silent on this issue, the risk of price escalation may fall on the contractor.

In the event of a silent contract, a contractor may be able to take the position that the increase fundamentally changed the project, in ways not contemplated by the parties or rendered performance impossible. These sort of positions can be difficult to support and tend to produce costly dispute resolution proceedings.

While these clauses are often boilerplate and easily overlooked, it is important for owners and contractors to pay close attention to the allocation of risk in their contracts. It may be time to take a new look at your contracts and may even wish to update your contracts in a way that provides some more certainty and reduce the risk for potential disputes.

For questions regarding contractors and contract review, please feel free to contact author Darbie Smith, [email protected] or (952) 746-2164.