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Contracts & Pricing

Price Escalation Clause

Also known as: Escalation clause

A price escalation clause is a contract term allowing prices to rise during the contract period under defined conditions, such as a cost or index increase.

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Escalation clauses share the risk of rising costs between buyer and supplier over longer contracts. Rather than fixing a price that a supplier may not honour if raw materials or labour spike, the clause sets out when and how prices may change — often tied to a named index, a cost formula, or capped percentage steps with advance notice.

The buyer's protection lies in the detail: a clear trigger, a transparent calculation, a cap on how much and how often prices can move, and a right to review the evidence. Without those limits, an open-ended escalation clause can quietly transfer all cost risk to the buyer. Well-drafted clauses keep long contracts both durable and fair.

Key points

  • Allows contract prices to change under pre-agreed conditions.
  • Often linked to a published index or a transparent cost formula.
  • Caps, notice periods and evidence rights protect the buyer.

Frequently asked questions

What is a price escalation clause?
It is a contract term that permits prices to rise during the contract under defined conditions — such as an index movement or cost increase — usually with limits and notice requirements.
How do you limit the risk of an escalation clause?
Tie increases to a transparent index or formula, cap the size and frequency of changes, require advance notice, and keep the right to review the supporting cost evidence.

Go deeper

Supplier price index (Malaysia)

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