Inflation doesn’t care about your IT contract

Let’s talk about a problem many IT companies don’t think about until it’s too late: escalation clauses.

At first glance, they don’t seem like a big deal. But trust me, these clauses are the backbone of fairness in any long-term deal.

Here’s what typically happens.

The Problem

You sign a three-year IT contract.

• Year one? Smooth sailing. The pricing works, margins are healthy, and everyone’s happy.

• Year two? Inflation kicks in. Operational expenses creep up—software costs, salaries, and even office rent.

• By year three? You’re barely breaking even.

Why? Because your contract locked in the same price for three years. Your costs went up, but your revenue stayed flat.

And the worst part? You’re stuck. The contract doesn’t allow for adjustments.

Now, what started as a profitable deal is burning a hole in your balance sheet. That’s the problem with ignoring escalation clauses.

What Can You Do Instead?

The good news? There’s a way to fix this.

Here are three strategies I suggest you can build into your contracts to ensure fairness for both sides:

1. Link Pricing to Inflation

• Use an agreed-upon inflation index to adjust costs annually.

• This ensures your margins stay intact, even as the cost of doing business rises.

Example: If inflation rises by 3%, your pricing adjusts by the same percentage.

2. Plan for Periodic Reviews

• Set renegotiation checkpoints within the contract.

• This keeps the deal fair and prevents either side from feeling trapped.

For example: Every two years, both parties review pricing based on market conditions.

3. Account for Big Changes

• Include a clause that triggers price adjustments if costs rise beyond a certain threshold.

• This protects you from extreme scenarios, like sudden spikes in software subscription rates or labor costs.

Example: If operational costs increase by more than 10%, the contract allows for renegotiation.

Why It Matters

When you build escalation clauses into your contracts, you’re not just protecting your margins, you're also building trust.

And this is why it's happening for both sides:

• For You: You avoid running projects at a loss, ensuring long-term sustainability.

• For Your Clients: They avoid sudden, unexpected price hikes. Instead, they get predictable, transparent adjustments.

Both sides win.

But remember - escalation clauses aren’t just about numbers. They’re about setting up a deal that works for the long haul.

Without them, you’re leaving your financial health at the mercy of rising costs.

With them, you’re creating contracts that are fair, balanced, and built to last.

Final Thoughts

Every IT company should take escalation clauses seriously.

• Link pricing to inflation.

• Build in regular reviews.

• Prepare for big changes.

Because a great contract doesn't just lock in the deal. A great contract ensures the deal works for you and your clients for years to come.

If you need my help with drafting such contracts, then reply "HELP" and I'll send you ways we can work together.