Price Escalation in Construction Projects: Examining National and International Contracts

Abstract

The construction industry has witnessed unprecedented disruptions in the supply chain (SC) over the past four years due to the consecutive impacts of the 2018 steel and aluminum tariffs, the COVID-19 pandemic, and the Russian–Ukrainian war. SC disruptions have been linked to price escalations, the management of which varies across different construction contracts. Thus, there is a timely need to understand the contractual implications of price escalation clauses. This article fulfills this research requirement by following an interdependent research methodology. First, the authors analyzed and compared price escalation provisions under various US-based, international, and UK-based standard design–bid–build contracts. Second, the authors examined legal cases that have arisen due to disputes over price escalation-related matters. Third, based on the contractual and legal analysis, the authors formulated and proposed a set of contractual considerations that can be used to plan and manage the contractual implications arising from triggering price escalation clauses. The findings indicate substantial variability in contractual provisions addressing price escalation. A predominant approach entails specifying a fixed contract price, often with a general exception permitting adjustments related to legislative changes. Certain standard contracts afford flexibility through the incorporation of supplementary clauses or amendments during the contract formation stage to counteract escalation risks. Further, insights from the legal review show that judicial relief from contractual obligations is typically granted solely in instances of unforeseen and severe economic conditions. This research makes a significant academic contribution by advancing the understanding of contractual obligations concerning price escalation, especially in the context of ongoing market disruptions. Ultimately, the findings of this study will impact the construction industry by promoting more balanced contractual practices regarding price escalations in construction projects.