Escalator clause

What is an escalator clause?

An escalator clause is a contract term that raises the price each year by a set percentage or by an index such as inflation. Service agreements often use a fixed annual increase. Longer contracts may tie it to a published index. The Bureau of Labor Statistics notes that its Consumer Price Indexes are often used this way, and it publishes guidance on clauses tied to Producer Price Index data.

Why it matters to a revenue leader

Labor, parts and vehicle costs tend to rise every year. Without an escalator, a multi-year service agreement loses margin each year it runs at the old price, and the seller has to reopen price at every renewal. For a revenue leader, escalators are price realization written into the paper. BLS cautions that index-based clauses need care: name the exact index, state how often the adjustment happens and plan for discontinued data. Then check whether billing applies the clause as written.

A waste and environmental services company has 900 agreements averaging $12,000 a year. Only 360 of them carry a 4% annual escalator, and billing applied it on half of those. Applying the clause on the other 180 agreements would add about $86,000 a year.