Material Price Escalation Clauses as a Strategic Tool in Plant Construction

The following comments relate to contracts between companies in the plant, industrial and infrastructure construction sectors (B2B sector).

The situation: fixed-price contracts face rising raw material prices

In plant engineering – for example, the expansion and new construction of rail infrastructure, bridges, hydrogen refuelling stations or large photovoltaic plants – so-called EPC contracts (Engineering, Procurement and Construction) are regularly concluded on a fixed-price basis. Typically, the contractor, such as the plant engineer or general contractor, is obliged to deliver a fully successful project (‘turnkey project’); the agreed remuneration for this is usually fixed as a lump sum or fixed price at the time the contract is concluded. If the contract adheres to this basic structure, the contractor bears the risk of all price increases for steel, copper, aluminium and other essential building materials alone, unless otherwise agreed.

During periods of highly volatile raw material prices, this fixed-price approach can pose a significant risk to the contractor. Standard risk premiums included in tender calculations are often insufficient for projects spanning a longer period to offset current and anticipated increases in steel prices or sudden spikes in copper prices. The result: margins are eroded and previously profitable projects fall into deficit; in extreme cases, this can even threaten the contractor’s very existence. At this point, at the latest, it is in the client’s own best interests to mitigate such a development contractually. This is where so-called material price escalation clauses – also known as price escalation clauses, material price escalation clauses or steel price escalation clauses – come into play: they enable the risk of changes in raw material prices to be distributed between the parties in a structured and transparent manner.

For which projects are material price escalation clauses important?

Not every plant construction project necessarily requires a contractual material price escalation clause. However, such provisions become particularly relevant when several risk factors converge. The project duration is the primary determining factor: for large-scale projects with a construction period of more than six to twelve months – such as bridge construction, extensive railway projects or complex industrial plants – as well as for high-volume supply contracts with a corresponding duration, the risk increases significantly that the relevant raw material prices will change substantially during the contract period.

Added to this is the material composition of the project. The higher the proportion of material-intensive trades, the greater the impact of price changes. Typical examples include structural steel in steel structures, halls and bridges, extensive steel pipe systems, pressure vessels and support systems, or large volumes of copper cables, electrical installations and control technology; the same applies to other non-ferrous metals such as aluminium. Traditional large-scale infrastructure and energy projects are therefore particularly exposed: in the fields of rail and bridge infrastructure, road construction and the construction of wind farms, large PV plants or hydrogen infrastructure, material volumes are high and, as experience shows, building material prices are volatile.

Against this backdrop, public procurement under the VOB/A expressly provides for the inclusion of material price escalation clauses in long-term construction contracts where significant changes in the price basis are to be expected. In principle, this approach under public procurement law can be directly applied to large-scale private projects: here too, a well-designed material price escalation clause serves to appropriately address exceptional raw material price risks and maintain the economic stability of the contractual relationship.

The problem of a fixed price without an escalation clause: who bears the risk?

If no material price escalation clause is agreed in a plant construction contract, the law governing contracts for work and services applies: the agreed fixed price remains unchanged – even if the material prices for steel or copper rise significantly. The contractor then bears the cost increases. This applies even if the price increases were unforeseeable at the time the contract was concluded and the market situation has changed significantly.
Legally, the contractor is essentially “trapped”: they have accepted the fixed price and therefore bear the full price risk for the materials used. The only theoretical way to extricate oneself from this situation is provided by Section 313 of the German Civil Code (BGB) (‘interference with the basis of the contract’). This provision allows for a contractual adjustment if the circumstances underlying the contract have changed significantly after the contract was concluded and the unpredictability of this change is unreasonable for one party.

In practice, however, Section 313 of the German Civil Code (BGB) applies only in extremely rare cases. Case law sets high hurdles here: the price increase must have been drastic and completely unforeseeable and must have thrown the contractual balance so far out of kilter that continuing the contract under the original terms becomes unreasonable. The courts are reluctant to allow price adjustments due to increases in material costs, as they fundamentally emphasise the parties’ freedom of contract and personal responsibility.

For businesses, this means that relying on Section 313 of the German Civil Code (BGB) is an unsuitable strategy for hedging against raw material price fluctuations. The legal uncertainty is too great, the hurdles too high, and the risks of (unjustified) termination or claims for damages remain. In practice, a contractual provision in the form of a material price escalation clause is usually the only reliable way to make price volatility calculable and to be able to adapt contractually to market developments.

What is a material price escalation clause and what is its purpose?

A material price escalation clause sets out the conditions under which the originally agreed price may change during the term of the contract. In particular, it determines how the remuneration is affected if the prices of certain building materials – such as steel or copper – rise or fall, and the calculation method to be used to determine the resulting additional or reduced costs.

The aim of such a clause is to distribute the typical market risks of fluctuating raw material prices fairly between the client and the contractor, rather than leaving them solely with the contractor. In practice, this regularly means that the contractor must factor lower risk premiums into their quotation, both parties gain greater certainty in their calculations, and the risk of insolvency for construction companies in volatile markets is significantly reduced.

Legal pitfalls: when are price adjustment clauses invalid?

Price escalation clauses are legally permissible but are only valid if they are clearly understandable to the contracting parties and their effects are fair to both parties’ interests. Many disputes arise precisely because clauses are subsequently classified as ‘surprising’ or ‘non-transparent’.

The Federal Court of Justice, for example, deemed the well-known federal ‘HVA B-StB material price escalation clause (03/06)’ to be invalid because it diverted the contractor from the usual calculation without sufficient notice. The clauses obliged the contractor to base their quotation on a ‘market price’ specified by the client, rather than on their actual, at that time higher, purchase prices. In practice, this could result in the contractor receiving less remuneration than they themselves had to pay for the building materials. In the view of the Federal Court of Justice (BGH), a contractor may expect that a material price escalation clause will relieve them of the burden in the event of price increases, but conversely, they must also pass on part of the benefit to the client when prices fall. However, without a clear and prominent indication, they cannot be expected to abandon their usual costing principles and work with a ‘foreign’ price. The implication for contract drafting is clear: price escalation clauses must be linguistically clear, transparent and recognisable in their economic mechanism; hidden deviations from the norm are highly vulnerable to challenge.

For a price escalation clause to meet these requirements, it should clearly explain the specific materials to which it applies (such as structural steel or copper cable), from what point in time it takes effect, and according to which formula or index the price adjustment is calculated. Equally important is a recognisable, balanced allocation of risk: the clause must not grant the contractor a unilateral, unlimited right to adjust the price upwards, but should comprehensibly offset the actual additional or reduced costs – and not generate additional profits beyond that. Provisions that only take price increases into account but disregard price reductions, which operate without reference to specific indices or cost components, or that do without thresholds and upper limits (‘caps’) entirely are therefore problematic. Such clauses are not only difficult to justify economically but are also legally vulnerable.

What should companies look out for in material price escalation clauses?

For companies in the plant engineering sector – whether on the client or contractor side – certain drafting principles may be appropriate when formulating material price escalation clauses; these are discussed in practice and appear to make economic sense. First, it must be clarified which cost categories are to be covered by the escalation clause (for example, labour costs in addition to material costs) and which price indices these costs are linked to in each case. The following drafting options are merely practical examples and do not replace an assessment of the specific case. A sensible and effective structure always depends on the individual case and is determined in particular by the project structure, risk profile, industry-specific characteristics and the negotiating position of the parties. This regularly requires individual legal advice. Practical and comprehensive price escalation clauses are often based on abstract calculation models and mathematical formulas, the development and consistent application of which can be challenging – even for lawyers.

Applicable in both directions (‘up and down’)

A material price escalation clause should not only apply in the event of rising prices but should be structured to work in both directions. If the prices of the relevant building materials rise, this should then lead to appropriate additional remuneration; if prices fall, a corresponding reduction in remuneration in favour of the client may be provided for. Such a symmetrical arrangement is often regarded as helpful in practice, as it promotes acceptance by the client and tends to strengthen the legal position under the General Terms and Conditions of Business (AGB) if the clause is recognisably not ‘working’ one-sidedly in favour of the contractor, but rather distributes the market risk in a manner that is fair to both parties’ interests.

Linking to objective price indices

Instead of using abstract or open-ended wording, it may be advisable to link price escalation clauses to objectively measurable price indices. In practice, the producer price indices published by the Federal Statistical Office for specific product groups (e.g. steel and metal products) are particularly suitable; depending on the project, specific commodity indices for non-ferrous metals may also be used. In this way, it is clearly defined which external benchmark the clause ‘follows’, and both contracting parties can track the development of the relevant prices using publicly available data without having to disclose internal purchasing terms. Which index is appropriate in a particular case depends on the specific project and the relevant procurement structure. However, choosing an unsuitable index carries the risk that the clause will not withstand a legal review of its content under the General Terms and Conditions Act and will consequently be deemed invalid; therefore, careful examination and, where necessary, legal advice are recommended when selecting and structuring the index.

Threshold values and excess

It has also proven effective not to trigger price adjustments at the first sign of minor market fluctuations. A typical approach is to set a threshold whereby remuneration is adjusted only once the relevant index deviates by a certain percentage from the agreed base value. Below this threshold, the risk remains with the contractor.

In addition to or as an alternative to this, an excess clause may be agreed: a specific proportion of the additional or reduced costs is to be borne by the contractor on a permanent basis. Case law accepts such arrangements because, without any escalation clause, the contractor would have to bear the full price risk. The combination of a threshold value and an excess can thus achieve a reasonable balance between protection against extreme risks and entrepreneurial responsibility; here too, the specific details must always be developed on a project-by-project basis.

Upper limits (caps) and resolution mechanisms

Particularly in the case of large-scale, long-term projects, it may be advisable to cap the upward effects of the escalation clause. It is common practice, for example, to set a cap at which the cumulative claim for additional remuneration exceeds a certain percentage of the relevant cost block. If this cap is reached or exceeded, contractually binding adjustment negotiations may be provided for or – as a last resort – a special right of termination or other right of termination for both parties. This prevents a project from spiralling out of control financially due to extreme spikes in raw material prices, without calling the entire price escalation mechanism into question. Whether and in what form caps and termination mechanisms are appropriate is a strategic and legal decision to be made on a case-by-case basis.

Evidence and documentation

To avoid subsequent disputes, the price escalation clause should define clear obligations regarding evidence. This includes, in particular, the contractor providing organised documentation of the quantities concerned, the respective installation or delivery dates, and the associated invoicing items. Furthermore, the clause should specify how the actual additional or reduced costs are to be calculated and presented on the basis of the agreed index. Case law requires that it be possible to demonstrate in a comprehensible manner which specific cost components have changed by what amount over what period. Clear documentation is therefore an integral part of a functional price adjustment clause.

Back-to-back arrangements in the supply chain

Anyone who accepts or agrees to price escalation clauses within a supply chain should ideally take their effects into account consistently in the respective downstream and upstream contracts (with suppliers, subcontractors and clients). Otherwise, there is a risk of being obliged to make price adjustments without being able to enforce corresponding compensation claims within the rest of the contractual structure. ‘Back-to-back’ does not necessarily mean a 1:1 pass-through of all adjustment mechanisms; what is decisive is that the economic effects of the clauses are consistent throughout the entire supply chain and reflect the company’s chosen risk profile. A conscious decision to bear certain risks wholly or partly oneself requires an understanding and assessment of the interactions between the individual price escalation clauses within the overall project contract structure. Experience shows that the specific structuring of such back-to-back arrangements – particularly in multi-tier supply chains – is complex and should therefore be individually reviewed and agreed upon from a legal perspective.

What happens without a material price escalation clause?

The omission of a material price escalation clause or the use of an invalid clause remains common in plant engineering; however, given the current volatile geopolitical and raw material market developments, this is increasingly proving to be an economically risky model. If the contract remains on a rigid fixed price, the contractor bears the full cost of any price increases for steel, copper and other key construction materials entirely on their own.
Particularly in large-scale projects with a high proportion of materials, this can result in contracts that were originally profitable slipping into the red, significantly increasing the contractor’s risk of insolvency. Nor is the client necessarily better off without a price adjustment clause: to protect themselves against unforeseeable spikes in raw material prices, contractors regularly factor in generous safety margins. These ‘risk premiums’ make the project more expensive from the outset, even though it is unclear whether the assumed price increases will materialise at all.

Anyone relying solely on a correction under Section 313 of the German Civil Code (BGB) (fundamental change in circumstances) in such a scenario accepts a considerable litigation and evidential risk. Case law has traditionally been cautious regarding price adjustments due to cost increases; there is no reliable entitlement to an adjustment of remuneration. Section 313 of the German Civil Code ( ) is therefore, at best, an uncertain fallback mechanism, but no substitute for a clearly drafted material price escalation clause.

Conclusion: Material price escalation clauses as a strategic tool in plant engineering

For major projects in general plant engineering, infrastructure construction and the renewable energy sector, the following can be noted for the year 2026:

Firstly, fixed prices without any price escalation for large-scale projects involving significant use of steel and copper carry a considerable raw material price risk – with potentially existential consequences if market conditions turn against the contractor.

Secondly, carefully drafted material price escalation clauses increase cost certainty for both parties: they distribute the risk of rising building material prices fairly and appropriately between the client and the contractor and make it possible to significantly reduce risk premiums in the quotation, as certain price scenarios are already addressed in the contract.

Thirdly, the usefulness of these clauses stands or falls on their legally sound drafting. Case law from the Federal Court of Justice (BGH) shows that poorly worded or ‘surprising’ material price escalation clauses may be invalid and thus fail to serve their purpose. Transparency and a sensibly structured and comprehensible system are therefore key.

Companies currently negotiating large-scale EPC contracts, contracts for work and services, construction contracts or infrastructure projects should therefore treat the issue of material price escalation clauses not as a mere detail, but as a central topic of negotiation. A legally sound and economically balanced provision in the form of a material price escalation clause is now an essential component of a modern risk management strategy in plant engineering – and can, in individual cases, provide a significant competitive advantage.

Note: This article does not constitute individual legal advice. It merely provides a general overview of selected aspects of material price escalation clauses in B2B plant engineering and cannot replace an examination of the specific individual case, considering current case law.