During the first Trump administration and the pandemic, contractors frequently demanded contract terms allowing price adjustments if the cost of materials increased due to tariffs or pandemic-era supply chain disruptions. These terms were vital to contractors because, in most instances, a contractor assumes the risk of future material price escalation when entering a fixed price or guaranteed maximum price agreement. Owners, in turn, were frequently forced to either accept material escalation terms or receive inflated bids to account for the risk of future price increases.
In recent years, as the risk of tariffs and the impacts of the pandemic have dissipated, fewer owners and contractors have included material price escalation terms in their contracts. However, recent tariffs and threats of trade wars may again cause escalation terms to be commonplace. These terms are not one-size-fits-all and can vary greatly depending on the project and the risk tolerance of the owner and contractor.
Contractor-Favorable Escalation Terms
Generally, a broad and vague escalation term is more advantageous to the contractor. For example, a contractor may prefer a term stating that the initial contract value is based on pricing conditions existing at the time of contracting and reserving the contractor’s right to seek contract price adjustments in the event of future price increases. This type of escalation term may allow a contractor to recover any price increase from the owner regardless of its cause – whether due to tariffs, supply chain disruptions, or otherwise. A broad escalation term that ties pricing to existing market conditions may also allow a contractor to prove its claim by simply offering a quote showing that materials were available at lower prices at the time of contract award.
Owner-“Favorable” Escalation Terms
The escalation term most “favorable” to an owner is one that is excluded from the contract altogether. However, if an owner must accept an escalation term, the owner should demand specificity. For example, an owner may demand that the escalation term only allow for the recovery of increased costs due to tariffs not threatened or enacted before the contract award. An owner may also require that the contractor identify specific materials or goods subject to the escalation term and disclose and justify its initial pricing.
An owner may also require that an escalation term impose certain burdens and notice requirements on the contractor. As an example, an escalation term could affirmatively require that the contractor demonstrate it purchased materials timely to mitigate the risk of price escalation and that the contractor demonstrates that a price increase is the direct result of tariffs and not bidding mistakes or other market conditions. An owner may also require a contractor to provide written notice of a claimable price increase before purchasing the subject materials.
Potential Cost-Sharing “Middle Ground”
Other potential compromises exist. An escalation term could provide that the owner and contractor will share the cost of price increases at specified percentages. Parties may also place caps or floors on their potential liability. For example, an escalation term could provide that the contractor bears the risk of tariff-related price increases up to a specific percentage, with the owner and contractor then sharing costs beyond that threshold.
Escalation terms can take numerous forms, with each shifting risk differently between owners and contractors.
