GlossaryKind of term: Cost and economicsPrice adjustment clause
What is a price adjustment clause?
A price adjustment clause is a contract term that lets the price follow named costs such as material, energy or labour, usually through an index.
A price adjustment clause is a term in a quote or contract under which the price is revised when a named cost moves. The revision usually follows a public series: a producer price index for metals or energy, a collectively agreed wage index, or the alloy surcharge that steel producers publish for stainless and alloy steel. The clause sets which share of the price moves, against which base value and reference month, how often it is reviewed and from what threshold. Whether it also works downwards depends on the wording.
What does a price adjustment clause depend on?
A common form splits the price into a fixed share and index-linked shares: P1 = P0 × (a + b × M1 / M0 + c × L1 / L0), with a + b + c = 1. P0 is the agreed price, M and L the material and labour indices at base and review date, a, b and c the shares for the fixed part, material and labour. Those shares should follow from the part's cost build-up: a turned part from stainless bar carries a different material share from a complex milled part in aluminium. Also record what happens if the index is discontinued or rebased.
How does a price adjustment clause work in practice?
In a one-year framework agreement the price is fixed while material, energy and wages move. Without a clause you carry that movement; with one, the risk is shared through a formula both sides can check. That calls for an estimate that keeps the shares separate, with a material line you can tie to an index. An index follows the market, not your purchasing, so a revision can differ from what your own supplier actually charges.
What is a price adjustment clause often confused with?
A price adjustment clause is not an alloy surcharge: the surcharge is one cost component set by steel producers and passed on by stockholders, the clause is the agreement with your customer through which such a surcharge or index can be passed on. Nor is it the validity period: validity says how long a quoted price stands, the clause how an agreed price moves afterwards.
How do you see a price adjustment clause in Blake?
In Blake your purchase prices sit with their source and history, and beside them public market references with source and date. That puts the price you estimated with next to a public series. A market reference is a comparison, never a purchase or live price. More on materials.
Frequently asked questions
How does an index-linked price clause work?
You agree an index, a base value and the share of the price that moves. At each review you divide the new index value by the base value and adjust only that share in the same proportion; the fixed share stays as it is.
When do I need a price adjustment clause?
Mostly in a framework agreement or with a long validity, where material is a large share of the cost and its price is volatile, such as stainless, alloy steel or brass. On a one-off quote, a short validity period is often protection enough.
Which index should I use for material?
One that tracks the cost of your stock material as closely as possible, is public and is published regularly. Record which series, which reference month, and what happens if the series is discontinued or rebased.