Glossary
De-escalation
De-escalation is the downward half of a price adjustment clause: when the chosen index falls below its base value, the covered portion of the price is reduced by the same ratio mechanism that would have raised it.
Also called: downward adjustment, price decrease clause, two-way escalation.
A clause that only adjusts upward is an escalation clause; a clause that
adjusts both ways is symmetric, and the downward direction is
de-escalation. If a base index of 130 falls to 108, the ratio is
108 / 130 = 0.83, and 17 percent of the covered scope is removed rather
than added.
Buyers ask for symmetry so they are not paying inflated prices after an
input has come back down. Sellers sometimes accept de-escalation only
below a floor, so a moderate fall changes
nothing and only a large fall gives money back.
De-escalation and a cap are independent
choices: a clause can be symmetric with no cap, or upward-only with a cap.
See the de-escalation clause explainer and
cap and floor.
Related terms
Economic price adjustment is the US federal government's term for a price escalation clause in a fixed-price contract. The Federal Acquisition Regulation defines three standard EPA clauses at FAR 52.216-2, -3, and -4.
The Employment Cost Index measures the change in employer labor cost, wages plus benefits, holding the mix of jobs fixed. Labor-heavy service and construction contracts use it to escalate the workforce portion of a price without re-pricing the whole contract.
An escalation clause (also called a price escalation clause or price adjustment mechanism) is contract language that adjusts a price up or down over time using a named index, a formula, and a schedule, so neither party carries the full risk of cost changes between signing and delivery.
The escalation factor is the multiplier a clause produces by dividing the current index value by the base index value. A factor of 1.10 means a 10 percent increase; it is applied to the covered portion of the price, not always the whole contract.
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