Escalation Clause From NAHB Provides Insurance Against Rising Prices - 3/22/2004 - Insurance Lawyers Taxes

Escalation Clause From NAHB Provides Insurance Against Rising Materials Prices

Sales profits from a home can be seriously eroded or even turn to losses when builders base their bid or contract prices on building materials prices that rise significantly by the time construction actually begins.

An escalation clause can help protect builders from the adverse consequences of price spikes, especially for materials with volatile markets or where there are indications of possible shortages.

In completing the escalation clause form, in order to avoid future disputes with the owner over the actual cost of materials at the time of the bid or contract, it is recommended that the specific building material be listed, along with its current price per appropriate unit of measurement, as of a certain date (such as the date of the contract or bid) and with the name and address of the supplier.

As a matter of fairness, both the owner and the builder should have a right of termination if increases in materials costs become exorbitant and threaten to make the house unaffordable or too expensive to build.

NAHB’s sample escalation clause provides for termination in the event that increases in materials prices cause the total contract price to increase by more than a certain percent, although this can also be stated as a certain dollar amount. Both the owner and the builder should mutually agree on the percentage or the amount. This may be pegged to the lending limits on the construction loan or another figure that the parties find acceptable.

Because the builder must take affirmative steps to claim the increase, it is possible for him to waive or ignore increases considered to be minor. However, including the clause in the contract is insurance against suffering the effects of crippling builder material cost hikes.

To download the escalation clause, NAHB members can click here.