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What is a De-Escalation Clause?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 September 2016
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    Conjecture Corporation
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De-escalation clauses are provisions contained in contracts that address the issue of obtaining a decrease in the price of goods and services in the event that the costs to the provider are significantly decreased in some manner. The rationale behind the de-escalation clause is that if the provider of the goods and services does not have to utilize as many resources in order to service the general provisions of the contract, the client should realize a portion of that decrease. Essentially, the de-escalation clause provides the client with the right to ask for a price decrease even though a price or rate is specified in the contract, if it can be proven that the supplier is having to pay less to produce and deliver the product.

The de-escalation clause is the opposite of an escalation clause. With an escalation clause, the vendor reserves the right to increase contracted pricing if it can be demonstrated that the costs associated with production and delivery increase beyond a certain point. When an escalation clause is invoked, the guaranteed pricing contained in a contract is considered to not be in force until the cost of production and delivery returns to the former level.

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One example of how a de-escalation clause works can be illustrated by looking at the trucking industry. One of the ongoing expenses that a trucking company incurs in order to provide services to clients is gasoline. In the event that gasoline prices drop significantly after the trucking firm enters into a contract with a client, the de-escalation clause would make it possible to charge the client a rate that is lower than the pricing that is quoted in the contract. The trucking firm would retain part of the savings from the reduced expense of supplying services. At the same time, the client receives a break on the projected pricing for freight services.

Not every contract includes a de-escalation clause within the terms and conditions of the agreement. However, it is usually in the best interests of the customer to request this type of clause. Even if the probability of the vendor experiencing a reduction in production and delivery costs seems remote, the addition of the clause does open the door for the client to request a decrease in price specified in the contract from time to time.

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