A fixed-price construction contract is usually just that. Sometimes, however, prices for materials or commodities such as asphalt or fuel are stipulated in the bid documents, with payment to the contractor adjusted to reflect the actual costs indicated in periodic published indexes.
From a project owner’s point of view, a price adjustment clause promotes accurate bidding. Bidders are not forced, or allowed, to speculate on future costs. There is no need for bidders to carry large contingencies as protection against volatile swings in cost. And of course for the successful bidder these features reduce the risk and uncertainty of contract performance.
In order for price adjustment clauses to work fairly and effectively, however, they must tie adjustments to the contractor’s real costs. The Mississippi Supreme Court recently struck a provision from a state highway contract because it froze “actual” costs at the contract completion deadline. By failing to account for subsequent contractor costs, the clause violated the statute authorizing the use of price adjustment clauses.
I invite comments on this topic from both the project owner and contractor point of view. Are price adjustment clauses a good way to go? In actual practice, are they applied fairly and consistently?
Bruce Jervis, Editor
Construction Claims Advisor