A NOTE ON COST ESCALATION CLAUSES

Various problems arise in relation to the implementation of cost escalation clauses in long-term contracts. Items of a contract's cost which are index-linked through escalation clauses will have the amount charged to the principal related to the movement of the cost index during a specified per...

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Bibliographic Details
Published in:Journal of business finance & accounting 1979-09, Vol.6 (3), p.339-346
Main Author: GEE, KENNETH P.
Format: Article
Language:English
Subjects:
Contracts
Costs
Elevators & escalators
Long term
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Summary:Various problems arise in relation to the implementation of cost escalation clauses in long-term contracts. Items of a contract's cost which are index-linked through escalation clauses will have the amount charged to the principal related to the movement of the cost index during a specified period of time.A contractor and a principal can agree on a tender price related to the unit cost levels prevailing at the date of their agreement. There will be relatively little need to predict how these levels will move from the beginning to the end of the contract. The escalation clause makes possible a mutual coexistence of the contractor and the principal over a long period of time. The emphasis in escalation clause design is in arriving at a fair price for both parties.Problems which must be considered in the escalation agreement include the treatment of gains on materials and the question of equitable compensation for unit cost increases relating to inputs for which the usage cannot be traced to certain contracts.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.1979.tb01095.x