Cost Escalation

Cost Escalation

Generally, in construction industry, the contractor work in an environment of risk and uncertainty caused by the economic factor such as fluctuations, in the cost of material, labour and equipment. Contractors and suppliers working in today’s volatile materials market find that estimating, bidding and financing the construction project are challenges. Many face significant losses or erosion of anticipated profits because many of them are locked into fixed price construction contracts where contractor bear the risk of material price and supplier cost increases.

Without the price escalation clause that allows for an adjustment to the contract price, if there is an unexpected rise in the market prices of key construction materials, a contractor will have no respite from such increases. It is necessary to have an escalation clause in the contract to guard against a sudden spurt in the cost of material. To reduce this degree of risk; it is necessary for the contractor to include large contingencies in initial estimates of the contract when he tenders the contract. If the contingencies are overestimated, the probability of the contract being awarded to another contractor is increased.