BY BRIAN PERLBERG, EXECUTIVE DIRECTOR OF CONSENSUSDOCS AND AGC’S SENIOR COUNSEL FOR CONSTRUCTION LAW
Price escalation spikes and supply shortages threaten construction companies’ financial viability in an unprecedented way. It creates a conundrum for existing contracts with a firm fixed price, lump sum and, to a lesser extent, a guaranteed maximum price (GMP). The best approach to address cost uncertainty going forward is to include a price escalation clause in your next contract. A price escalation clause adjusts the contract price based on an agreed-upon metric, usually an objective cost index. This approach is both equitable and effective for owner clients, suppliers, trade contractors and general contractors’ financial solvency. Rather than guessing on prices, an agreed-upon objective index provides a superior risk management strategy.