Index-linked pricing
A pricing clause that ties part of a part's price to a published commodity index, so the price follows the raw material up and down.
Also called: Indexation, Raw material price adjustment, Commodity pass-through, Escalation clause
A copper-wound motor, an aluminium casting, a steel bracket: a large share of their price is metal, and metal prices move every day. Index-linked pricing writes that into the contract. The price is split into a material part that follows an index, and a conversion part that stays fixed for the year.
How it works
Say a die-cast housing weighs 1.2 kg of EN AC-46000 and the contract references an aluminium alloy index. The agreed formula might be:
price = conversion (€2.10) + 1.2 kg × 1.08 (scrap factor) × index average of the previous quarter
When the index goes from €2.40/kg to €2.70/kg, the price moves by 1.2 × 1.08 × 0.30 = €0.39. Nobody needs to renegotiate, and nobody can hide an increase in the material line.
What to watch
- The reference period. Monthly, quarterly, a three-month lag? The lag decides who carries the risk between two adjustments.
- The weight. Gross weight, including runners and offcuts, or net weight on the drawing? A 15% difference here is common.
- The way down. Clauses that adjust only above a threshold, or only upwards, are not indexation. They are a price increase with paperwork.
Without indexation, suppliers price in a risk premium, and buyers find out about raw material increases from a letter. With it, both sides argue about the conversion cost, which is the part they actually control.