Why Your Construction Contract Should Include a Material Price Adjustment Clause

George Lauber
Aug 5, 2025
3 min read

In today’s volatile market, construction material prices can shift overnight.

From lumber and steel to concrete and copper, global supply chain disruptions, inflation, tariffs, and even natural disasters can send costs skyrocketing. These price swings pose serious financial risk—for contractors and clients alike. That’s why including a material price adjustment clause in your construction contract is no longer just smart—it’s essential.

What Is a Material Price Adjustment Clause?

Also known as an escalation clause, a material price adjustment clause allows for changes in material costs to be reflected in the contract price after the agreement has been signed. It shares the risk of price fluctuations between the contractor and the client, providing protection for both parties.

Why It Matters in Construction

Shields Against Unpredictable Cost Increases
Without an adjustment clause, contractors are often forced to absorb sudden spikes in material prices—turning profitable projects into financial liabilities. A well-drafted clause provides a fair mechanism for recouping those unforeseen expenses.
Encourages Accurate and Competitive Bidding
In the absence of a clause, contractors may inflate their bids to protect against future cost hikes—making their proposals less attractive or pricing themselves out of the job.
Keeps Projects Moving Forward
When prices rise and the contract doesn’t allow for adjustments, projects can stall or get canceled. Escalation clauses reduce these risks by keeping work moving without constant renegotiation.
Strengthens Client Trust
Clear contract language about how to handle cost fluctuations creates transparency and alignment between both parties.
Aligns With Today’s Economic Realities
Trying to lock in material prices for 6 to 12 months isn’t realistic in today’s market. Contracts must account for global supply volatility.

Best Practices for Drafting an Escalation Clause

Be specific: Identify which materials are subject to adjustment (e.g., steel, lumber, copper).
Use objective benchmarks: Tie adjustments to a trusted index, such as the Producer Price Index (PPI).
Set a threshold: Define how much prices must change (e.g., 5%) before the clause is triggered.
Clarify the process: Explain how adjustments will be calculated, documented, and approved.
Make it two-sided: Allow for both price increases and decreases to promote fairness.

Real-World Example

One of our clients—a mid-sized commercial contractor—locked in a bid for a large warehouse project just weeks before steel prices surged over 30%. Because their contract included a material price adjustment clause tied to the PPI index, they were able to renegotiate the affected portion of the contract, preserving their margin and maintaining trust with the client.

FAQs

Q: Are material price adjustment clauses common?

A: They’ve become increasingly common post-2020 due to inflation and supply chain disruptions.

Q: Do these clauses hurt my ability to win jobs?

A: No—if anything, they show clients that you run a transparent and fair business.

Q: Can I use this clause in public bids?

A: Public sector contracts often have specific rules. Some allow escalation clauses; others may not.

Q: What if material prices go down?

A: A well-written clause should allow for downward adjustments too. This builds trust.

Final Thoughts

A material price adjustment clause isn’t just a legal safeguard—it’s a practical necessity. It helps manage risk, fosters trust, ensures fairness, and keeps projects on track in an unpredictable economy.

Get Expert Help Structuring Contracts That Protect You

At Shapcott & Lauber, we work exclusively with construction business owners to help you protect your profits, price competitively, and scale with confidence.

If you’d like help reviewing or implementing a material price adjustment clause in your contracts, contact me at george@shapcottlauber.com and I'll also walk you through our Free contract checklist.