Glossary
Escalation factor
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.
Also called: escalation multiplier, adjustment factor, price factor.
The core of almost every escalation formula is:
factor = current index / base index
adjusted portion = covered portion x factor
If a $500,000 material scope has a base index of 320 and a current index
of 368, the factor is 368 / 320 = 1.15, and the material scope becomes
$575,000, a $75,000 increase. Non-covered costs such as fixed overhead or
already-hedged items stay flat.
More elaborate clauses build a composite factor: a weighted blend of
several indices, for example 0.6 times a steel factor plus 0.4 times a
labor factor, reflecting the real cost make-up of the scope.
A cap limits how far the factor is allowed to
carry through; an averaging window controls
how jumpy the factor is month to month.
See the escalation clause base period.
Related terms
A not-seasonally-adjusted index reports the actual measured price change, including regular seasonal swings. Price escalation clauses use NSA data because the seasonally adjusted version is a modelled estimate that agencies revise and that two parties cannot independently reproduce.
The Producer Price Index measures the average change over time in the selling prices domestic producers receive for their output. It is the index most business-to-business escalation clauses use, because it tracks wholesale input costs rather than retail prices.
Publication lag is the gap between the month an index measures and the date the statistical agency releases that value. A clause has to say whether it uses the preliminary figure available at adjustment time or waits for the final, revised one.
The reference period is the year a statistical agency sets an index equal to 100, so all other values read as a percentage of it. It is a property of the index itself, not of any contract, and it is not the same as a clause's base period.
Browse the full glossary →