Increased costs generally: Overview, definition, and example
What are increased costs generally?
Increased costs generally refer to situations in which the costs of fulfilling an agreement, performing obligations, or conducting business activities rise due to unforeseen circumstances or changes in external factors. These increased costs may result from factors such as inflation, changes in law or regulations, supply chain disruptions, or other economic conditions that affect the cost structure of a business or contract.
In contracts, clauses related to increased costs generally often address how parties should manage or share the burden of such cost increases. These clauses typically specify the conditions under which a party can claim that their costs have increased and may seek additional compensation or adjustments to the terms of the agreement.
Why are increased costs generally important?
Increased costs generally are important because they help manage risks associated with unexpected financial burdens that arise during the execution of a contract. Businesses and parties involved in contracts need to consider the possibility that external factors may increase the cost of goods, services, or performance. By having provisions for increased costs, contracts can ensure that there is clarity on how such situations will be handled, reducing disputes and protecting both parties from unfair financial strain.
For businesses, addressing increased costs in contracts can ensure that they are not held responsible for factors outside their control. For clients or purchasers, it ensures that the terms of the contract can accommodate genuine cost fluctuations, preventing misunderstandings over cost increases.
Understanding increased costs generally through an example
Imagine a company that has entered into a contract to supply goods to another business at a fixed price. However, midway through the contract, there is a significant increase in the cost of raw materials due to a supply chain disruption. As a result, the supplier faces higher production costs. If the contract includes a clause for increased costs, the supplier can notify the buyer of the higher costs and request an adjustment to the contract price or the terms of delivery.
In another example, a service provider might enter into a fixed-price agreement with a client to deliver software updates. If new government regulations are introduced that require additional compliance efforts, leading to higher operational costs, the service provider could invoke an increased costs clause to renegotiate the price or extend the timeline.
An example of an increased costs generally clause
Here’s how an increased costs generally clause might look in a contract:
“In the event that any costs associated with the performance of this Agreement increase due to factors beyond the control of the performing Party, including but not limited to changes in law, inflation, or supply chain disruptions, the performing Party shall notify the other Party in writing of such increased costs. The Parties agree to discuss in good faith any necessary adjustments to the contract price or terms to accommodate these increased costs.”
Conclusion
Increased costs generally refer to the unforeseen financial burdens that may arise due to changes in external factors during the term of a contract. By including increased costs provisions, businesses and individuals can ensure that their contracts provide a framework for addressing these situations fairly. This helps manage risks, prevent disputes, and maintain flexibility in the face of changing economic conditions, ensuring that both parties remain protected and able to fulfill their obligations under the agreement.
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.