Increased costs: Overview, definition, and example
What are increased costs?
Increased costs refer to additional expenses incurred by one party in a business or financial agreement due to changes in external factors, such as new laws, regulations, taxes, or market conditions. These costs are typically addressed in contracts to allocate responsibility and ensure transparency when unforeseen increases occur.
For example, a lender might incur increased costs if regulatory changes require higher capital reserves, and a loan agreement may allow the lender to pass those costs to the borrower.
Why are increased costs important?
Increased costs clauses are important because they protect parties in agreements from bearing unexpected financial burdens alone. By clearly defining how these costs will be handled, contracts can ensure fairness and maintain the financial viability of the agreement for all parties.
For businesses, addressing increased costs proactively helps avoid disputes and ensures that the relationship can adapt to changes, such as inflation, regulatory shifts, or supply chain disruptions.
Understanding increased costs through an example
Imagine a manufacturing company signs a long-term supply agreement with a raw materials provider. The agreement includes an increased costs clause stating that if new environmental regulations increase the supplier’s operating costs, the supplier can adjust the prices it charges the manufacturer. This ensures the supplier remains financially stable while giving the manufacturer clear notice of potential price changes.
In another example, a bank provides a loan with a fixed interest rate but includes an increased costs clause. If new regulatory requirements increase the bank’s cost of maintaining the loan, the clause allows the bank to pass those costs to the borrower through additional fees.
An example of an increased costs clause
Here’s how an increased costs clause might appear in a contract:
“If, as a result of any change in law, regulation, or governmental policy, the costs incurred by [Party A] in performing its obligations under this Agreement increase, [Party A] shall have the right to adjust its fees to recover such increased costs, provided that [Party A] gives [Party B] prior written notice of the adjustment.”
Conclusion
Increased costs clauses provide a way to address unforeseen financial changes in business or financial agreements, ensuring fairness and transparency between parties.
By including an increased costs clause, businesses can protect themselves from unexpected financial burdens, maintain stable relationships, and adapt to changes in laws or market conditions effectively.
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.