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De-escalation clauses in contracts allow customers to request a decrease in price if the supplier’s costs decrease significantly. This is opposite to escalation clauses, which allow suppliers to increase prices if costs increase. It is recommended that customers request de-escalation clauses in contracts.
De-escalation clauses are provisions in contracts that address the question of obtaining a decrease in the price of goods and services in the event that the costs to the supplier decrease significantly in some way. The rationale behind the de-escalation clause is that if the provider of the goods and services does not have to use as many resources to meet the general provisions of the contract, the customer should realize a part of that decrease. Essentially, the de-escalation clause gives the customer the right to request a price decrease despite the fact that a price or rate is specified in the contract, if it can be shown that the supplier has to pay less to produce and deliver the product. product. .
The de-escalation clause is the opposite of an escalation clause. With an escalation clause, the supplier reserves the right to increase contracted prices if costs associated with production and delivery can be shown to increase beyond a certain point. When an escalation clause is invoked, the guaranteed prices contained in a contract are considered not to be in effect until the cost of production and delivery returns to the previous level.
An example of how a de-escalation clause works can be illustrated by looking at the trucking industry. One of the ongoing expenses a trucking company incurs to provide services to customers is gasoline. In the event that gasoline prices drop significantly after the trucking company enters into a contract with a customer, the de-escalation clause would allow the customer to be charged a rate lower than the price stated in the contract. The trucking company would retain part of the savings from the reduced expense of providing services. At the same time, the client receives a break in projected prices for cargo services.
Not all contracts include a de-escalation clause within the terms and conditions of the agreement. However, it is generally in the best interest of the client to request this type of clause. Even if the likelihood of the seller experiencing a reduction in production and delivery costs seems remote, the addition of the clause opens the door for the customer to request a decrease in the price specified in the contract from time to time.
Smart Asset.
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