An escalator bakes a raise into the contract up front — for example, "fees increase 5% annually." Unlike a unilateral increase, the number is agreed and predictable, which makes it easier to budget for. But predictable is not the same as small.
For an owner-operator, the thing to model is compounding. A 7% escalator does not just add 7% once; it stacks. Over a multi-year term a mid-single-digit escalator can add up to a large cumulative premium for the exact same service and scope.
Negotiate the escalator down, tie it to an inflation index rather than a flat number, or cap it. Also make sure the escalator applies to a rate you are happy with — a low escalator on an inflated base price is still a bad deal.
"Annual fees shall increase by five percent (5%) over the prior year's fees on each anniversary of the Effective Date."
Worried about this clause in your own contract?
Sidecar reads your vendor agreements and flags the clauses that put your business at risk — in plain English, before you sign. Your first review is free.