When the Price Is Right: Price Escalation After Contract Execution

As discussed in Part 1 of this series, When the Price Is Right: Planning for Price Escalation in Contracts, price increases continue to be on everyone’s mind. This is especially true for local government agencies that are facing rising costs and decreasing revenue. To ensure the price is right during these challenging times, this blog examines how agencies can address price escalation after contracts have been executed.

MRSC encourages agencies who have already executed contracts to take the following proactive steps to address future requests for price increases:

• Identify which contracts may be subject to price escalation,
• Review existing contract provisions relating to price escalation, and
• Evaluate other contract provisions that may be applicable to price increases.

Due to the varying language in each contract, this guidance is general. MRSC highly recommends consulting with your agency attorney on specific contract language.

Identify Impacted Contracts

After analyzing recent changes to market conditions, agencies should identify which contracts could be most impacted by these changes. Are there certain services, materials, or equipment that may increase in price due to specific market conditions? Consider discussing potential supply chain concerns with your contract provider and work with them to analyze the applicability of new tariffs or other variable market conditions. Specifically identify long-term contracts (over a year in length) since these are more susceptible to price increases over time.

Review Existing Contract Provisions on Price Escalation

As discussed in Part 1 of this series, a contract may already include price escalation provisions. The contract could include a fixed price obligating the contract provider to bear the risk of increased pricing. Alternatively, the contract could include a market indicator price escalation clause. Some contracts may have broader language, allowing for an equitable adjustment for price increases.

However, if an agency issues a change order without a provision in the contract allowing price increases, this action could be considered an illegal gift of public funds under Article VIII of the state constitution due to the lack of adequate consideration (see our Gift of Public Funds webpage for more information). MRSC also highly recommends consulting with your agency attorney on this type of language to avoid these potential pitfalls.

Finally, if the contract does not include a fixed price and is silent or open-ended on cost increases, your agency may be exposed to increased costs. Make sure to read the fine print, especially in cooperative purchasing agreements that your agency did not negotiate directly.

Open-ended language can be especially risky when ordering special equipment that requires multiple years of lead time. To avoid surprises, make sure the price is right by communicating expectations in writing with the contract provider and becoming familiar with the applicable contract language.

Evaluate Other Applicable Contract Provisions

If there is no specific contract provision relating to price escalations, an agency should review other applicable provisions, which are discussed in more detail below.

Force majeure

Force majeure clauses permit parties to suspend, delay, or otherwise release them from contractual obligations in the event of unforeseen contingencies. These provisions allocate risk for actions that are not the fault of either party, such as acts of war, labor strikes, natural disasters, epidemics, etc. They may or may not contain a ‘catch-all’ provision designed to capture other unforeseen contingencies.

Some force majeure clauses specifically mention tariffs or other government acts or laws, but many will not. While many force majeure clauses address performance delays and provide for an equitable adjustment of the contract time, they may not allow for an adjustment in the price.

Using a force majeure clause to support a price increase may ultimately prove to be challenging. For example, the court in BAE Indus., Inc. v. Agrati - Medina, LLC (2022) enforced contractual obligations when steel prices rose unexpectedly during the COVID-19 pandemic because the force majeure clause stated that “changes in cost or components will not constitute a force majeure event” even if it was due to “wars and other natural disasters[.]” Courts narrowly construe force majeure clauses and apply them only if the event that caused the party’s non-performance is specifically identified.

Depending on how specific a force majeure clause is, an agency could argue that the contract provider is liable for absorbing tariff costs. Alternatively, tariffs may be a force majeure event that releases a party from performing its obligations under the contract if tariffs were included as a contingency contemplated by the parties. Since the force majeure language in each contract is unique, agencies should conduct a careful review with their attorney to determine how it should be applied.

Changes clause

Contract providers commonly use a changes clause to address changes in the scope of work requested. This is usually one of the first ways a contract provider looks for additional money. Since the agency likely did not request a change that caused the price to increase, this route will typically be unsuccessful. However, if the agency makes a change to the contract that makes tariffs unavoidable (change in materials specifications, etc.), the changes clause may be a basis for price increases. 

Applicable law

Most contracts include a clause stating that the contract provider is responsible for complying with “applicable laws” in its performance of the work. “Applicable laws” may be defined as laws in effect at the time the contract was executed or laws in effect during the period of performance. Depending on the definition of “applicable laws,” an argument could be made that the contract provider may or may not be responsible for the costs of tariffs enacted after contracting.

Change in law

Some contracts allow extra compensation for changes in law that occur after the parties sign a contract. How the term “change of law” is defined in the contract and the timing of the change in law will impact whether the contract provider is entitled to more money.

Tax clause

Similarly, contracts can include a tax clause that a contract provider could rely on to adjust prices when new or increased federal excise taxes or duties (such as tariffs) are imposed after a contract award. This type of provision may only apply to the tariffs the contract provider paid directly. If tariffs indirectly increase domestic supply costs, this provision may not apply.

Termination

As a last resort, an agency may seek to terminate a contract for convenience if this is allowed by the contract. An agency may explore this route if it decides it is too much of a financial risk to complete performance under the contract terms. Depending on the contract language, this could come with or without a financial penalty.

Other Legal Theories

Mutual mistakes, impracticability, impossibility, and frustration of purpose are additional legal theories that agencies could argue for relief from their contractual obligations. However, courts are generally hesitant to accept these theories as an excuse for failing to perform a party’s obligations under the contract.

To the extent that a price increase would cause the contract amount to exceed any bid thresholds, MRSC takes the position that so long as the agency originally estimated the cost of the project in good faith, the increased price will not trigger a reconsideration of the bidding statute thresholds.

Final Thoughts

When facing a potential price escalation request, it is critical for an agency to be knowledgeable about the applicable contract language, including any notice requirements. Failing to provide proper notice could waive a party’s rights under a contract.

Additionally, maintaining an open line of communication with the contract provider will help your agency avoid surprises and may assist all parties in reaching a collaborative resolution should a dispute arise. Once an agency receives a price escalation request, the agency should ensure it has the proper documentation to support all cost increases.

Finally, consult with your attorney early and often. Solving these types of complex contractual disputes is a team effort.