Most developers obsess over finding the site, nailing the design and securing the finance. But there is one piece of fine print that can quietly eat your profit if you are not careful: the escalation clause. Here is what it is and how to handle it.
What is an escalation clause?
An escalation clause simply lets a cost increase over time. In property development, costs almost always creep up, whether it is land, construction or consultant fees. An escalation clause builds that expected increase into a contract.
Where you will run into them
Most of the time it is the building contract. The reassuring part is that the vast majority of building contracts do not have one. They tend to surface when builders feel nervous about where prices are heading, like the post-COVID period when material shortages sent prices sky high.
It is usually the builder asking, not you
Developers do not generally ask for an escalation clause. Builders do, because they are unsure how material and labour costs will move over a build that might take ten to twelve months. The request is often fair. The trick is knowing how to handle it, and you can often isolate an escalation to specific items like steel and concrete rather than the whole contract.
The feasibility trap
Here is the big one. If you escalate your costs in a feasibility, you have to escalate your sale prices too. Construction is often around 40% of your end sale price, so escalating 5% on your build only moves 5% of 40%, while escalating 5% on your sale price moves 5% of 100%. Run both ends, or you are fooling yourself.
Listen to the full episode
We covered this in episode 262 of the Property Mastermind Podcast. Listen to the full episode here.
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