Price Escalation Clause in Engineering Contracts 1

[LOTE]

I am working on my first multiyear contract for a project that will last many years. I am thinking through the price escalation clause. This would be for engineering services only, and I charge based on the square footage of material I provide designs for.
Do you tie your escalations to a particular index? CPI or ENR index?
Increase it once a year or more often?
Anything else I should consider?

 

[phamENG]

My contracts don't run that long, so I only have a clause for adjusting my firm's hourly rates at the beginning of each new calendar year.

I calculate them based on a mix of things. I consider CPI to adjust labor compensation, I look at direct and indirect costs/operating expenses and how they've changed, and I also look at construction costs in the region where I practice. The first two set a baseline to determine what I have to do in order to maintain my margins given my rising costs, and the second tells me what the market can likely bear so I can see what I can do to potentially increase my margins.

Best case scenario, the market increases more than my costs increase, and my margins increase. Worst case, my costs increase and the market contracts and my margins get gobbled up in the middle. (I suppose going into the red and having to shut down would be worse, but we'll not consider that here...)

Because these two both have a direct impact on my profitability but are not necessarily tied together, I'd be hesitant to tie the contract to them. If I had to choose, though, I'd probably go with CPI or whatever you tie your labor rates to. Because it's better to leave some money on the table but be sure that you can pay your bills than to see the market contract and your contract can no longer cover your expenses to do the work.

 

[GC_Hopi]

One item I have seen in contracts is re-negotiation, there is some risk to this since the owner could cancel the contract on you. Put a clause that if metric (CPI or something) exceeds a certain value say 7% in a year then the contract is subject to re-negotiation. Or you can put a date in your contract when you want to re-negotiate like 5 years into a 10 year contract. Also take advantage of change orders and have a system for documenting them.

Think like a contractor is probably the best advice since they know all the tricks.

 

[Enable]

Not sure about consulting contracts since my consulting activities are pretty quick turnarounds. But my standard clauses for contracting are below. Note that I am usually a subtrade not a GC which is why I am a little more lenient with the stipulated amount of overage (20%). I've found that anything less is fighting territory; for some reason once you hit 20% everyone seems to go "ahhh that's reasonable". Not sure how that plays in the consulting world.