A town is contracting for the purchase of a firetruck. The vendor requests this clause to be included in the contract: “The Town will be responsible for any unforeseen tariff/surcharge from suppliers.” Should the town agree?

The answer is no. At first glance, it may seem reasonable to accept tariff or escalation clauses requiring the buyer to “cover any future tariffs” or “pay for any increases in material prices,” especially when those costs are outside the vendor’s control. However, agreeing to pay unspecified, unlimited future costs violates North Carolina’s preaudit requirement set forth in G.S. 159-28(a).

Open-Ended Tariff Clauses Violate the Preaudit Requirement

The preaudit is a statutory internal control designed to prevent budget overruns. It requires that, before a local government obligates public funds—whether by ordering goods, issuing a purchase order, or signing a contract—the finance officer or duly appointed deputy finance officer must:

1. Verify a budget appropriation authorizing the transaction,
2. Confirm that sufficient funds remain in the annual budget ordinance appropriation to cover the amount payable in the current fiscal year (or preaudit the full obligation if the obligation is budgeted in a capital or grant project ordinance),
3. Encumber the funds for the amount verified in step 2, and
4. Affix and sign a preaudit certificate to the face of any written agreement evidencing the obligation (e.g., contract, purchase order, email agreement, or other writing).

The goal of the preaudit is to ensure that funds are available to cover the cost of financial transactions before the unit is legally bound to pay for a good, service, or construction or repair work. This process helps ensure that funds will still be available when payment comes due. (For additional discussion of the preaudit requirement, see Kara Millonzi’s blog on the preaudit and disbursement process.)

Open-ended price adjustment clauses are risky (and violate the preaudit requirement) because they obligate the local government to cover an unspecified amount of future price increases—no matter how large. Their indefinite nature makes it impossible for a finance officer to certify during preaudit that sufficient funds are available. An unanswered question will always remain: How much might the unit ultimately be required to pay?

“Not-to-Exceed” Clauses as a Solution

A practical alternative is to include a not-to-exceed (NTE) clause in a contract in which the price term may increase. An NTE clause caps the local government’s financial liability by setting a maximum dollar amount or percentage increase above the contract price. NTE clauses are beneficial because they allow vendors to recover unforeseen costs while limiting the local government’s exposure to a known, budgeted amount. For example, an NTE clause agreeing to cover future tariff costs and corresponding price increases might state:

• Not-to-Exceed Pricing. “If, after the Effective Date of this Agreement, any applicable tariff, duty, or governmental surcharge is imposed by law or increased in a manner that directly and materially raises the cost of performance under this Agreement, the Vendor may request an adjustment to the Contract Price. Any request for adjustment must be made in writing within [__] days after the Vendor becomes aware of the increased cost and must include documentation substantiating the increase. The Contract Price may be increased only to the extent of the documented increase and shall not exceed [__]% of the Contract Price.”

The sample contract language in this post is for illustrative purposes only. Local governments should consult with their attorneys for specific legal advice. My colleague Crista Cuccaro’s blog, “What Goes Up Must Come Down? Price Adjustment Clauses and Tariffs,” provides additional details on the contracting process when price increases may result from tariffs.

Preauditing Contracts with NTE Clauses

As mentioned earlier, the preaudit process is triggered at the point of obligation, and the preaudited amount must be based on a reasonable estimate of the total obligation. Even contracts with uncertain price terms are subject to the preaudit requirement. See Watauga County Bd. of Educ. v. Town of Boone, 106 N.C. App. 270, 416 S.E.2d 411 (1992) (declaring that a resolution passed by the town requiring 18% of ABC store profits to be given to the school system was subject to the preaudit requirement).

When preauditing a contract that includes an NTE clause, the preaudited amount must cover the maximum potential liability under the contract—that is, the reasonable estimate of the original contract price plus the estimated NTE allowance. Because governmental tariffs are inherently uncertain, it can be difficult to estimate the exact amount of a potential price increase. To address this, the finance officer or deputy finance officer performing the preaudit should: (1) establish a reasonable estimate of the total base contract price (excluding any potential price increase), and (2) determine the percentage increase above the base contract price that the unit is willing to obligate to cover additional costs. The percentage determined in step 2 becomes the cap for the not-to-exceed amount.

For example, if a firetruck is estimated to cost $1,000,000 and the unit is comfortable obligating an additional 5% ($50,000) to cover unanticipated price increases, the finance officer will preaudit and encumber $1,050,000. The contract would reflect the final agreed-upon price plus the 5% NTE clause obligating the unit to pay up to that additional amount.

A drawback of using an NTE clause is that it requires the finance officer to encumber not only the estimated contract amount but also the additional NTE allowance. Because this allowance may never be used, the unit effectively ties up funds that could otherwise be obligated for other purposes until the contract is complete and final costs are determined. Still, many vendors prefer some protection against unforeseen increases in tariffs, surcharges, or material cost increases, making NTE clauses useful tools for balancing risk between the parties.

Price Adjustment Clauses: Another Tool in the Toolbox

As Crista Cuccaro notes in her blog on tariffs and price adjustments, there’s no one-size-fits-all approach to drafting a price adjustment clause. In general, price adjustment clauses define the circumstances under which a contract price may be adjusted and should clearly establish the triggering events, request procedures, review and approval process, and scope of the adjustment. For example, a price adjustment clause may provide:

• Price Adjustments: Adjustments to contract unit pricing may be considered in the event of new or increased tariffs, duties, governmental surcharges, verified market volatility, or sudden material cost increases beyond the contractor’s control. The contractor must submit a written request for a price adjustment to the Engineer within [X] days of becoming aware of the cost increase. The request must include adequate supporting documentation, such as supplier invoices, published price indices, or official tariff notices, to substantiate the change. The Engineer may approve or deny the requested adjustment. If approved, the parties shall negotiate in good faith an equitable adjustment to the Contract Price, which shall be documented through a written change order in accordance with contract terms and applicable law. Any approved adjustment shall apply to materials only and shall not include labor, equipment, taxes, profit, markups, or transportation charges.

Price Adjustments Require a New Preaudit

Agreed-upon price adjustments are typically documented in a change order. Under G.S. 159-28, any time a local government obligates public funds, the preaudit requirement applies—even if the underlying contract was already preaudited and the additional obligation stems from a change order. In preauditing a change order, the finance officer must confirm that sufficient unencumbered funds remain in the appropriation, encumber those funds, and attach a signed preaudit certificate to the face of the change order.

Key Takeaways

Preauditing is a critical legal control that ensures local governments only obligate funds that are actually budgeted and available. Open-ended commitments, such as blanket tariff or escalation clauses, undermine this protection by creating undefined future liabilities. Instead, local governments should use contracting tools such as NTE clauses or carefully drafted price adjustment clauses that set clear caps, define approval processes, and tie any increased costs to formal change orders. This approach maintains compliance with G.S. 159-28 and strikes a balance between protecting public funds and offering vendors protection against unforeseen price increases.