Escalation Clause in contract costing.

Meaning: 

• In Fixed Price Contracts, the contract price is fixed and pre-determined. If there is an increase in prices of materials, rates of labour etc. during the period of execution of a contract, the total contract costs may rise and the Contractor's profit may be
• This increase in prices may induce the Contractor to use materials of lower quality and price in order to maintain his profit margin on the
• To overcome such a situation, the agreement generally contains a stipulation that the Contract Price will be increased by an agreed amount or percentage, if the prices of materials, wages etc. rise beyond a particular limit. Such a stipulation is called Escalation

Accounting Treatment:

• The amount of reimbursement due should be determined by reference to the Escalation Clause.
• The amount due from the Contractee should be recorded by means of the following Journal Entry 

                                Contractee's Account   Dr.

                                       To Contract Account