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What is a workable formula method of contract price adjustment?
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What is a fixed-price contract with economic price adjustment?
Jan 12, 2023 · Learn what a price adjustment clause is, how it works, and why it matters for contracts. See examples of different types of price adjustment clauses and how to review them in your agreements.
A workable formula method of contract price adjustment simplifies accounting procedures and generally provides for acceptable reimbursement. The CPAP reflects price changes as closely as possible within the philosophy of an index-based system.
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(a) A fixed-price contract with economic price adjustment provides for upward and downward revision of the stated contract price upon the occurrence of specified contingencies. Economic price adjustments are of three general types: (1)Adjustments based on established prices.
This document provides guidance on the development of price adjustment clauses in contracts that are to be tied to PPI data. Such clauses should be written with great care to avoid serious problems when contract adjustments are implemented.
- The Structure of Producer Price Indexes
- Guidelines For Developing Price Adjustment Clauses
- Example of Price Adjustment Procedures
- Appendix: An Overview of PPI Classification
- Footnotes
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Producer price indexes measure the average change in prices received by domestic producers for their output. A PPI is an output price index. That is, it measures price changes received by mining, manufacturing, services, and construction providers. It does not directly measure the cost of producing a good, providing a service, or building a structu...
(1) Establish the base selling price subject to adjustment.
The item price subject to adjustment should be specified as precisely as possible. State whether the base price refers to a per-unit quantity or a certain volume of units. Give the effective month and year of the base selling price; this time period is often called the base period. Indicate the length of time the base price will remain in effect. (Note that BLS no longer publishes unit prices for any item within the PPI system. From the Program's inception until 1985, unit prices were publish...
(2) Select an appropriate index or indexes.
A high-level FD-ID index, such as Final demand, Finished goods, Processed goods for intermediate demand, or Services for intermediate demand indicate the general trend of inflation at a broad level that may be appropriate for the price adjustment agreement. There are detailed FD-ID indexes that exclude food, energy, and trade, for users wishing to avoid the effects of volatile price movements in these goods and services. Detailed Intermediate Demand indexes under the category for Processed go...
(3) Clearly identify the selected index and cite an appropriate source.
The price adjustment clause of a contract should identify the index or group of indexes selected by providing complete titles and identifying codes. Please note that there is no single index titled "The Producer Price Index." The term "Producer Price Index" refers to a family of indexes compiled by the Bureau of Labor Statistics. Each index to be used should be cited specifically in the contract by referring to "the Producer Price Index for..." followed by the exact title and any identifying...
Suppose a manufacturer of widgets enters into a long-term sales contract with a customer. The buyer and the seller agree to include a clause that adjusts the selling price yearly, up or down, to account for changes in energy, machinery and equipment, business service, and labor costs. The following is an example of the terms that might be incorpora...
Final Demand-Intermediate Demand (FD-ID) Indexes
The PPI FD-ID structure measures price change for goods, services, and construction sold to final demand and to intermediate demand. The FD-ID system replaced the PPI stage-of-processing (SOP) system as PPI's primary aggregation model with the release of data for January 2014. The FD-ID system expands coverage in its aggregate measures beyond that of the SOP system through the addition of services, construction, exports, and government purchases. FD-ID indexes are constructed from commodity-b...
Commodity Indexes
The commodity classification structure of the PPI organizes products by similarity of end use or material composition, regardless of their industry of origin. This system is unique to the PPI and does not match any other standard coding structure, such as the NAICS or the U.N. Standard International Trade Classification (SITC). The historical continuity of index series, the needs of index users, and a variety of ad-hoc factors were important in developing the PPI commodity classification. Pri...
Industry Indexes
A Producer Price Index for an industry is a measure of changes in prices received for the industry's output sold outside the industry (that is, its net output). Measures of price change classified by industry form the basis of sampling and data collection within the PPI. These indexes reflect the price trends of a constant set of goods and services that together represent the total output of an industry. Standardized industry-based index codes provide comparability with a wide assortment of i...
1 See, Highlights of the 2013 PPI User Survey, Bureau of Labor Statistics, Beyond the Numbers, August 2013, Volume 2, No. 20, Joseph Kelley and Antonio Lombardozzi. 2 Data requests and technical questions concerning the PPI may be addressed to the PPI Section of Index Analysis and Public Information. They can be reached at telephone number 202-691-...
Learn how to use Producer Price Index (PPI) data to develop effective price adjustment clauses in long-term contracts. This guide explains the structure, methodology, and limitations of PPI indexes and provides examples of contract provisions and calculations.
Aug 30, 2021 · Price adjustment clause: What is it? After parties enter into a contract, changes to general economic, financial and commercial conditions can leave the parties dissatisfied with the agreed upon price. Each year, the inflation rate and the corresponding price of many commodities fluctuate.
Jan 12, 2023 · Learn about different types of price adjustment clauses and how to negotiate them in commercial contracts. Find out how to protect yourself from inflation, supply chain costs, currency fluctuations and other risks.
