What is a price fluctuation clause in construction?
A price fluctuation clause adjusts your price when named costs move after a base date, so a rise is paid rather than absorbed.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
The answer
It is also called a price escalation clause or a price adjustment clause. Without one, a fixed price leaves the risk of rising costs with you. A clause that works answers five questions. Which costs are adjusted: everything, or only named materials such as steel, copper or timber? From what date: the base date, the date your prices were fixed to? By what measure: invoices against your tender quotes, or a published index? From what threshold: every movement, or only a change above a set percentage? And what notice: must you notify each rise, and by when? A clause usually works both ways, so your price comes down if costs fall. Here is a plain-English example. The reinforcing steel price moves with the named steel index, from the base date of 1 March to the month of delivery. Changes under 3% are ignored. The subcontractor gives notice of each change within 14 days of the index being published. The standard forms have their own versions: the JCT fluctuation options and NEC's Option X1. Your subcontract may choose one, amend one or delete them all. So read the price terms before you sign, and ask for a clause when the job is long or the materials are volatile. Our Price Rise Loss Prevention service sets the price basis in your quotations and negotiates the clause before you sign.
Example
Illustrative example. The scenario and figures are invented.
The facts
A steelwork subcontractor quotes £500,000 for an 18-month job, and its steel prices have moved sharply over the last year. It will not carry that risk on a fixed price.
What happens
- It names reinforcing steel and structural sections as the adjustable items: £200,000 of the price.
- It sets a base date of 1 March and a published steel index as the measure, with changes under 3% ignored.
- The main contractor accepts the clause, and the subcontract is signed with it.
- By month 9 the index is up 11%, and £120,000 of the steel has been delivered.
- The adjustment on that steel, £13,200, is paid with the month 9 valuation.
The adjustment in figures
| Item | Amount |
|---|---|
| Adjustable steel in the price | £200,000 |
| Steel delivered by month 9 | £120,000 |
| Index rise since the base date | 11% |
| Adjustment paid | £13,200 |
The outcome
£13,200 is paid for the steel delivered by month 9, and the rest is adjusted as it arrives. Without the clause, all of the rise would have stayed with the subcontractor.
To have a fluctuation clause set in your price and negotiated before you sign, see our Price Rise Loss Prevention service.