What is a price adjustment clause?
A price adjustment clause is a provision in a construction contract that sets out how increases in labour, fuel and material prices are shared between client and contractor. A year or more can pass between tendering and building. Without such a clause the contractor carries the whole price risk, and will either price that risk in heavily or take a serious loss if steel, asphalt or diesel suddenly climbs.
How it works
The arrangement is best known in civil engineering work. In outline:
- Base date — the contract names a base date, usually around the tender. That is the reference point.
- Index figures — recognised bodies publish index figures at regular intervals for labour costs, fuel and a range of materials (asphalt, concrete, steel, aggregate).
- Settlement per valuation — at each interim payment the difference between the current index and the index at the base date is calculated and settled.
It works both ways: if prices fall, the client gets money back.
What to watch
- Only what is named gets adjusted. If the works contain large items not listed in the clause, those are not adjusted. This is the most common disappointment in practice.
- There is often a threshold. Small movements are not settled; the clause only bites above an agreed percentage.
- Fluctuation is not the same as indexation. A price adjustment clause settles specifically named cost categories against defined indices. “Indexation” is the broader adjustment of a sum to a general price level.
- Short contracts usually exclude it. Where the works run only a few months, the clause is normally not applied.
And on a domestic project?
In housing and refurbishment you meet the same principle as a fluctuations clause or variation-of-price provision. If one appears in your building contract, read exactly which cost categories are covered, from what date it runs, and whether a cap applies. A fixed price without a fluctuations clause gives the most certainty; in that case, get written confirmation of how long the quotation stands.
Related terms
- Building specification
- Tender clarification note
- Construction costs
- Contractor
- Subcontractor
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