From the 2008 Recession to the COVID-19 pandemic to the current activity surrounding global tariffs, businesses have always faced market volatility. While the causes may vary, the result is the same: supply-chain shortages lead to increased uncertainty and financial pressure on business. Fortunately, businesses can prepare for and respond to market volatility. With the right legal tools in place, market swings become manageable, not devastating. We have outlined below a few key strategies to help businesses flourish in turbulent times.
1. Price Escalation Clauses
One of the most immediate impacts of market volatility, especially in the construction and manufacturing industries, is the rising costs of material and labor. When prices spike due to supply shortages, tariffs, or inflation, businesses locked into fixed-price contracts can see profits evaporate or even find themselves operating at a loss.
Price escalation clauses can provide much-needed protection in these scenarios. These clauses allow for certain prices within a contract to be adjusted in response to changes in the cost of specified items—like steel, lumber, or fuel. There are different ways to structure a price escalation clause:
- Index-based adjustments. Here, the parties may agree to use published pricing data (e.g., Producer Price Index or another third-party metric) and increases in this index will trigger a price adjustment.
- Direct cost pass-throughs, where the contractor provides documentation of actual increased costs and prices are adjusted accordingly.
- Threshold-based triggers, where pricing is only adjusted if costs increase by a certain percentage.
At Skufca Law, we tailor these clauses to fit the nature of the work, the duration of the project, and the risk tolerance of each party. The key is clarity—both in what costs are covered and how adjustments will be calculated.
2. Termination provisions
Uncertainty doesn’t just affect pricing—it affects timelines. Supply delays, labor shortages, permitting backlogs, and project financing disruptions can all slow down work before it even begins or while in the middle of a project. That’s where exit clauses come into play. Termination clauses allow a party to walk away from a contract—or renegotiate its terms—if work hasn’t started within a defined timeframe or is paused for a certain duration.
For example, a contract might state that if construction doesn’t commence within 60 days of the agreed-upon start date, either party can terminate the agreement without penalty. This avoids the situation where a contractor is bound to outdated pricing.
Exit clauses are a powerful way to ensure that a deal makes sense not just at the time of signing, but when performance actually begins. They help preserve flexibility and protect your business from open-ended exposure.
3. Force Majeure Clauses and “Acts of God”
We’ve all seen how unexpected events—like the COVID-19 pandemic—can upend even the best-laid plans. Force majeure clauses are designed to address these kinds of extraordinary, unforeseen events that make contract performance impractical or impossible.
A strong force majeure clause can excuse or delay performance without penalty if events like natural disasters, war, government orders, or global supply chain failures occur. The language must be carefully drafted to specify what qualifies as a force majeure event and what relief is available (e.g., time extensions, suspension of obligations, or termination).
It is important to regularly review and update your force majeure provisions to reflect modern realities, including cyberattacks, pandemics, and other risks that didn’t always make the list a decade ago, and to clearly outline the responsibility of each party in these scenarios.
NEXT STEPS:
Market volatility isn’t going away, and the best time to address volatility is at the contract stage—not when the market shifts. By using legal tools like price escalation clauses, exit provisions, and strategic contract terms, you can respond to uncertainty with confidence and clarity.
Whether you’re negotiating a new construction contract, revisiting your supplier agreements, or planning your next major project, the attorneys at Skufca Law are here to provide the legal support you need to negotiate commercial fair contracts while protecting your business. Contact us today at 704.376.3030.