Cost Escalation Following Force Majeure Event Clause
(Fixed-Price Construction Contract)

Summary

This escalation clause may be included in a fixed-price construction contract to provide that the contract will be modified if the total price of materials required to perform the contractor's work increases by more than a certain percentage. This clause includes practical guidance and a drafting notes. The COVID-19 pandemic has disrupted global supply chains and raised the costs of certain construction materials. In cases like this (be the trigger COVID-19 or another force majeure event), if the contract for the project is for a fixed price, the contractor often bears the risk for these increased costs. This clause can be included in a construction contract's force majeure section to protect the contractor by requiring that if a force majeure event increases the total price of materials required to perform the work by more than a certain percentage either: • The contractor receives an equitable adjustment to the contract sum for the purchased materials –or— • The owner and the contractor will equitably adjust the contractual obligations yet to be performed by each party through an appropriate contract modification Capitalized terms used in this clause should be conformed to those used in the relevant contract. Practical Guidance's Private Market Data (PMD) Real Estate Survey from the third quarter of 2023—which includes trends in the real estate and construction markets from nearly 80 real estate attorneys from across the country—reveals that for 72% of the respondents, supply chain issues impacted their construction clients in 2023. The COVID-19 pandemic and resulting supply chain often drive up the costs of construction materials, resulting in attorneys including price adjustment clauses in their construction contracts. Visualization of Have Supply Chain Disruptions Significantly Impacted Your Construction Clients in 2023? When the 9% of the PMD survey respondents who indicated the question was not applicable to their practice are removed from the survey results, 79% answered in the affirmative. Visualization of Have Supply Chain Disruptions Significantly Impacted Your Construction Clients in 2023? (Respondents with construction clients) When asked about the outlook for 2024, more than half of respondents, 54%, predicted that things will improve, with 19% predicting they will worsen and 14% believing they will stay the same. Visualization of How Will Supply Chain Disruptions Evolve Over the Next Year? For a full listing of key content covering purchasing and selling commercial real estate, see Owner and Contractor Agreement Resource Kit. For a full listing of key content covering construction, see Construction Resource Kit. For further guidance see Force Majeure Clauses in Construction Contracts .