Price Escalation Clause in UK Contracts: What It Means & Example Wording

A price escalation clause allows the supplier to increase the price of goods or services during the contract term, typically on an annual basis. The increase may be linked to an objective index (such as the Consumer Prices Index or Retail Prices Index), set at a fixed percentage, or subject to negotiation. Price escalation clauses are essential in long-term contracts to protect the supplier against inflation and rising costs.

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Last updated: February 2025

When to Include a Price Escalation Clause

  • In contracts with terms longer than 12 months where inflation could erode the real value of the agreed price
  • In supply agreements where raw material costs, energy prices, or labour costs are likely to increase over the contract term
  • In service agreements where the supplier's wage costs increase annually and need to be passed on to maintain margin

Example Wording

The Supplier may increase the Charges on each anniversary of the Commencement Date by an amount not exceeding the greater of: (a) the percentage increase in the Consumer Prices Index (CPI) published by the Office for National Statistics for the 12-month period ending on the most recent date for which figures are available; or (b) [X]%. The Supplier shall give the Client at least [60] days' written notice of any price increase, specifying the new Charges and the basis for the increase. If the CPI is discontinued or materially changed, the parties shall agree on a suitable replacement index. Note: This is illustrative wording only and should be tailored by a qualified legal professional.

This example wording is illustrative only. Customise it to your specific circumstances and consider seeking legal advice.

Is a Price Escalation Clause Enforceable in the UK?

Price escalation clauses are enforceable in UK B2B contracts provided they are clearly drafted and the mechanism for calculating the increase is objective and ascertainable. Index-linked clauses (CPI, RPI) are widely used and accepted. Clauses giving the supplier unilateral discretion to increase prices by any amount may be challenged as unreasonable, particularly in consumer contracts. In consumer contracts, unfettered price increase clauses may be deemed unfair under the Consumer Rights Act 2015 — the CMA expects consumers to have a right to exit if prices increase beyond the agreed mechanism.

Common Mistakes

  • Using RPI instead of CPI — the UK government has moved away from RPI in favour of CPI as the official measure of inflation. RPI is generally higher and has been criticised for methodological flaws. CPI is now the preferred index for most purposes
  • Not specifying what happens if the index is discontinued or rebased — without a fallback, the clause may become inoperable
  • Allowing unlimited unilateral price increases without a right for the customer to terminate — this may be considered unfair, particularly in consumer contracts or where the customer has committed to a minimum term

FAQ

What is the difference between CPI and RPI?

CPI (Consumer Prices Index) and RPI (Retail Prices Index) both measure inflation, but they use different formulas and cover different items. CPI uses the Jevons formula and excludes housing costs like mortgage interest payments. RPI uses the Carli formula and includes housing costs. RPI is generally higher than CPI. The UK government now uses CPI as its primary inflation measure, and RPI has been criticised for overstating inflation.

Can a supplier increase prices without a price escalation clause?

In a fixed-term contract without a price escalation clause, the supplier cannot unilaterally increase prices — the agreed price is binding for the contract term. Any price change would require a formal variation agreed by both parties. In a rolling contract, the supplier may be able to increase prices by giving reasonable notice, depending on the contract terms.

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This is guidance for UK businesses, not legal advice. Example wording is illustrative. Consult a solicitor for complex matters.

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