If you have not made a decision, my advice would probably be to walk....and let the builder know that you are willing to revisit the possibility of putting the deal back together if and when he can agree to modify this clause. He may come back; he may not. If not, it wasn't worth the risk.
Late but hopefully NOT sorry......we agree the best course of action is to "walk away." This may result in their viewing things a little clearer and favorable to your position. Stick to your position, it is very reasonable.
The "Eckler Team"
Many builders do include clauses like this. The best way to contend with this issue is to have a real estate lawyer represent you. That person will review, revise & try to negotiate terms to protect you with your purchase.
In my case, the builder was taking payments, then trying to get more for already agreed upon estimates. One way around this is to negotiate a labor only contract. They provide you the list of materials, and you make the purchase. This removes the 'carrying' charges for the builder, also ensures your builder isn't building somewhere else with your resources, but it does take involvement and quick response to needs. I pretty much spent 1/2 my days on this alone.
What ever you choose, DO NOT give a builder your purse, which is what this contract clause is equal to. If he doesn't agree to your stipulation, it sounds like it isn't a clean transaction. Steer Clear!!
You want your new home, but the builder wants price protection. Perhaps as someone else mentioned, putting a percentage or dollar limit on the possible price increase is a good way for a comprimise.
Unless you have an unlimited budget, I personally would be very wary of a basically unlimited price increase on a home in the construction phase.
Hope you can work it out.