Managing Inflation Risk on Multi-Year Construction Contracts
A practical way to manage inflation risk on long construction projects without relying on forecasts or heavy contingencies.
18 Jan 2026
Inflation is one of the hardest risks to manage on long-term construction projects.
Contractors and developers are often asked to commit to prices today for work that will be delivered months or years in the future. During that time, material prices, energy costs, labour, and logistics can all move in ways that are impossible to predict with confidence.
The usual responses are familiar:
Build in large contingencies
Shorten price validity periods
Push risk down the supply chain
Or avoid fixing prices altogether
Each option comes with a cost. Contingencies make bids less competitive. Passing risk down often means paying for it indirectly. And avoiding fixed prices can limit growth or delay investment decisions.
What’s missing is a way to separate price risk from delivery and operational performance.
That is the gap price protection and index-linked agreements are designed to fill.
Rather than trying to forecast inflation, these tools allow parties to agree today how future price movements will be handled, using transparent benchmarks and simple settlement mechanics.
A practical approach is to link part of a contract to a recognised price index, or to use a separate price protection agreement alongside the physical contract.
In simple terms, this works as follows:
The physical contract focuses on scope, quality, programme, and delivery
A separate agreement manages the price risk using an agreed benchmark
At a future date, the difference between the agreed price and the index is settled financially
No material changes hands under the price protection agreement. There is no requirement to buy early, store stock, or change suppliers. Existing commercial relationships stay in place.
This approach gives each party clarity:
Contractors can fix margins with confidence
Clients gain better price transparency and fewer hidden contingencies
Funders see reduced downside risk on long-duration projects
The key benefit is certainty. Instead of guessing where inflation might go, all parties know in advance how price movements will be handled, whether prices rise or fall.
That certainty supports better bidding, clearer contracts, and more confident long-term investment decisions.
If you’re pricing work over multiple years and want clarity on how inflation risk can be managed, we’re happy to talk through practical examples.