Cost Escalation

1. Cost Escalation COST ESCALATION Presented by Professor Michael Cook M.E. Rinker School of Building Construction

2. Cost Escalation Can a contractor obtain compensation for an increase in its costs? Two general scenarios: • No escalation clause in the contract. • Escalation clause is in the contract.

3. Cost Escalation Where there is not escalation provision: Is there a “merger and integration “ clause (the parole evidence rule)? Contractor typically must rely on common law theory of impracticability. The duty to perform is suspended until the condition giving rise to the impracticability passes (here, increase in costs).

4. Cost Escalation The view of other countries: French law – compensation allowed where the circumstances have changed so much that a reasonable person could not have foreseen the new situation.

5. Cost Escalation German law – a change in circumstances that results in a “profound alteration of the economic equilibrium of a contract” which makes performance substantially more onerous to perform.

6. Cost Escalation Egyptian law – the contract may be revised to “reduce to reasonable limits, the obligation that has become excessive” where the occurrence of the changed circumstance is of a “general character,” the events were unpredictable and the events result in exceptionally heavy losses to the contractor.

7. Cost Escalation Chinese law – allows for either termination of the contract or an adjustment of the contract price where there had been an extreme change in circumstances. Other civil law countries – contract price change allowed when contractor is faced with an unforeseeable and exceptional loss.

8. Cost Escalation Common theme………The contractor must show that the cost increase was: • Event of general nature • It was unforeseeable • Result is an extreme cost increase

9. Cost Escalation Each element is subject to various interpretations and is difficult to establish The net result is that studying cost escalation could reduce the likelihood of receiving additional compensation.

10. Cost Escalation Escalation clause is in the contract • Provides a basis for any claim. • Make sure the clause addresses the three elements that establishes an escalation claim. • Specify the general events that would give rise to a cost escalation claim (i.e. war, terrorism, natural catastrophe, cost escalation.

11. Cost Escalation Specify the parameters for a cost escalation claim under a force majeure theory. 1. Events 2. Foreseeability a. avoid vague citations b. include all appropriate indexes c. avoid vague references to dates d. avoid locking indexes to a specific base period. e. avoid use of ambiguous terms in general f. include an incentive clause 3. Extreme cost increase – establish threshold based on project delivery method.

12. Cost Escalation SUMMARY Proper Contract Language • Bare escalation clause • Force Majeure - broadly construe • Basic issue is foreseeability • Assigning responsibilities/procedures • Incentive clause

13. Cost Escalation Credits • Arabian Business.com • White and Case LLP • Bureau of Labor and Statistics