Increased cost claims: Overview, definition, and example
What are increased cost claims?
Increased cost claims refer to requests made by a party (usually a contractor or service provider) for additional compensation due to unexpected increases in the costs of completing a contract or project. These claims arise when unforeseen circumstances, such as material price hikes, regulatory changes, or delays beyond the party's control, result in higher expenses than originally anticipated. Increased cost claims are typically addressed in the terms of the contract and may require proof of the additional costs incurred.
For example, if a construction company agrees to build a building at a fixed price, but the price of materials unexpectedly rises due to supply shortages, the company may submit an increased cost claim to the project owner to cover the higher costs.
Why are increased cost claims important?
Increased cost claims are important because they help protect parties from financial losses caused by factors outside of their control. Contracts often contain provisions to account for unforeseen circumstances, and the ability to claim additional costs ensures that contractors or service providers are not unfairly burdened by situations they couldn’t predict or control. However, these claims must typically be substantiated with evidence and may be subject to negotiation or dispute resolution.
Understanding increased cost claims through an example
Imagine a construction company enters into a contract to build a residential development for $1 million, with the project expected to take one year. However, during the project, new environmental regulations require additional safety measures, causing the company’s costs to rise. The company submits an increased cost claim, requesting an additional $50,000 to cover the new costs of compliance. If the claim is approved, the project owner will need to pay the extra $50,000.
In another example, a supplier agrees to deliver goods for a fixed price under a contract, but a sudden spike in fuel prices causes transportation costs to surge. The supplier submits an increased cost claim to the buyer, requesting compensation for the higher transportation costs that were not anticipated when the contract was originally negotiated.
An example of an increased cost claims clause
Here’s how a clause related to increased cost claims might appear in a contract:
“In the event of an unforeseen increase in costs due to circumstances beyond the control of the Contractor, including but not limited to material price hikes or regulatory changes, the Contractor may submit a claim for additional compensation. Such claims must be supported by appropriate documentation and will be subject to the approval of the Client.”
Conclusion
Increased cost claims are an essential aspect of contract management, providing a mechanism for addressing unexpected cost increases that may arise during the execution of a contract. By allowing for these claims, parties can avoid financial hardship due to unforeseen circumstances and ensure that projects continue smoothly despite changing conditions. Properly managing increased cost claims ensures fairness and transparency for both parties involved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.