Last edited 13 Jan 2017

Escalation

Civil Engineering Procedure, 7th edition, published by the Institution of Civil Engineers (ICE) defines ‘escalation’ as:

Increases (or decreases) in the costs of labour or materials due to inflation (or recession and deflation).

Some contracts make provisions for contract price adjustment to allow for the effects of escalation based on data about changes in the cost of commodities, labour, fuel and so on. Such allowances might be referred to as ‘fluctuations’ as there is a fluctuating price in the contract (although fluctuations generally also allow for changes in taxation and increases in head office or administrative costs).

On smaller projects of a short duration, the contractor may be expected to have taken the effects of escalation into account when calculating their price, and they may be able to hold sub-contractors and suppliers to agreed prices for the duration of the contract.

On larger projects, typically lasting more than a year, the contractor may be asked to tender based on prices at an agreed base date, and then the contract makes provisions for escalation to specified items over the duration of the project, such as fuel, steel and so on.

Determining the actual amount of escalation for each item would be very time consuming, and so calculations are generally based on agreed indices, such as public records, JCT bulletins and so on.

Escalation can be caused by issues such as:

An overheating construction industry.
Natural disasters.
Exchange rate changes.
Changes to regulations.
Supply problems.
Labour shortages.
Inflation in the wider economy, such as fuel price increases or wage increases.
Global economic conditions.

Escalation clauses put the client at risk, as the final price is not known when the contract is agreed. It is sensible therefore for clients to forecast likely escalation during the course of the project and to make allowances for this, with a contingency provision.

Significant escalation which has not been allowed for can result in the scope of projects being reduced, and can even bring projects to a halt.

However, if there were no escalation provisions, the contractor would have to bear all the risk of price changes, and this would be reflected in their tender.