Tariff uncertainty, supply chain disruptions, labour shortages, and inflationary pressures continue to create volatility in Ontario’s construction industry. As a result, the costs of labour and construction materials may fluctuate significantly over the life of a project, particularly on medium- and long-term projects spanning many months or even years. Price escalation clauses, which surged in popularity during the COVID-19 pandemic, are increasingly relied on for such projects.

Price Escalation Clauses

Price escalation clauses are contractual provisions that permit adjustments to the contract price in response to market conditions, supply chain disruptions, or other defined events that result in increases (or, in some cases, decreases) to the costs of labour and materials. Such clauses can be incorporated into any type of construction contract, including fixed price contracts. For an overview of the variety of pricing methods for construction contracts, please see our concise overview of Types of Construction Contracts.

Negotiating Your Price Escalation Clauses

Price escalation clauses must be drafted to clearly reflect the intention of the owner and contractor with respect to risk allocation. When negotiating a price escalation clause, the parties should carefully consider the following:

  • What costs does the price escalation clause cover? Price escalation clauses typically apply only to clearly specified labour, materials, equipment and other cost components.
  • What is the threshold? Minor fluctuations in costs typically do not trigger price escalation clauses. Instead, the clause often applies only once increases exceed an agreed upon threshold, which may be tied to objective price indexes, such as commodity prices, the Consumer Price Index, or published union rates.
  • What is the triggering event? Costs may fluctuate for many different reasons. Is the intention that the owner bear the risk regardless of the cause? The clause can be narrowly drafted (e.g., only covering cost increases due to tariff increases on countries from which materials are sourced), or more broadly drafted (e.g., to cover all unforeseen circumstances).
  • What is the procedure? It is important that both parties have visibility on increasing costs. Typically, increased costs due to changes in scope of the contract require written approval from the owner or consultant. If costs increase without any corresponding change in the scope of work, should the contractor be required to provide prompt written notice? Should the owner have the opportunity to approve alternative materials, adjust the project schedule, or otherwise mitigate the increased costs before additional expenses are incurred?
  • Will you include a force majeure clause? Force majeure clauses relieve parties of obligations under contract if some supervening event beyond the control of either party makes performance impossible. How does the force majeure clause in your contract intersect with the price escalation clause? Courts generally interpret force majeure clauses according to their specific wording, and increases in the cost of performance aloe will not ordinarily constitute force majeure unless the contract expressly allocates that risk.
  • Why would owners contracting out construction work ever agree to price escalation clauses? Because such clauses are not one-sided protections. Owners stand to benefit from them as well. Construction contracts can be negotiated with reliance on current market prices, without factoring in all the risk of future increases in material and labour costs from the outset. Owners may also negotiate price de-escalation provisions, allowing both parties to share the benefit of significant decreases in labour or material costs beyond an agreed threshold.

A well-drafted price escalation clause can reduce uncertainty and help preserve commercial relationships when market conditions change unexpectedly. Conversely, a poorly drafted clause may create disputes over whether the clause has been triggered, what costs are recoverable, and how any adjustment should be calculated. Careful drafting at the outset of a project can help avoid costly disagreements later.

Whether you are an owner, contractor, or subcontractor, the construction lawyers at SV Law can help you negotiate and draft price escalation provisions that appropriately allocate risk and reflect the commercial realities of your construction projects.



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