Price escalation clause
A clause letting prices rise during the contract by a fixed percentage, by an index such as inflation, or when specific costs go up.
What it means
A price escalation clause lets the seller raise prices during the contract without renegotiating. The increase may be a fixed annual percentage, tied to a published index such as the Consumer Price Index (CPI), or tied to specific input costs such as fuel, materials, or labor. Some clauses also lower prices when costs fall, which makes them two-way adjustment clauses rather than one-way escalators.
These clauses are common in multi-year service agreements, auto-renewing subscriptions, construction contracts, and supply deals. A restaurant with a three-year linen service contract might see a CPI-based increase each year. If inflation spikes, so does the price, which protects the supplier but can strain the restaurant’s budget.
Escalation clauses favor the seller, especially when increases are uncapped or left to the seller’s discretion. Buyers typically push for a cap on each increase, advance notice, a clearly named index, and a right to terminate if an increase goes above a threshold. A clause letting the seller raise prices “from time to time” with no limit offers very little price certainty.
What to watch for
- Check whether increases are capped, both per year and over the life of the contract.
- See exactly which index or cost measure is used, and whether decreases are passed through too.
- Look for a notice period before any increase takes effect and a right to terminate if you do not accept it.
- Check whether increases are allowed during the initial term or only on renewal.
Example clause
On each anniversary of the Effective Date, Provider may increase the Fees by the percentage change in the Consumer Price Index over the preceding 12 months, not to exceed 5 percent per year, by giving Customer at least 60 days’ written notice.
Your price can rise with inflation once a year, but by no more than 5 percent and only after two months’ notice.