Standard Cost Baseline Setting and Purchase Price Variance Tracking
Standard cost baselines set full landed charges while purchase price variance tracking prevents distorted stock valuations and credit covenant breaches.
Price Adjustment Clause
Meaning
Contractual provisions allow for the modification of agreed prices based on changes in external costs like raw materials or labor. Including a price adjustment clause protects both parties from unforeseen shifts in the global economy during a multiyear supply agreement. It governs the specific index or trigger that allows a price change and ceases to operate once the contract expires.
Market Volatility
Rapid shifts in the cost of steel or energy can make a fixed price contract unviable for a manufacturer. A price adjustment clause allows the unit cost to float within a defined range to maintain a fair profit margin. This flexibility prevents the supplier from going out of business or being forced to lower the quality of the product.
Cost Escalation
Long term inflation reduces the purchasing power of the currency agreed upon at the start of a project. Using a price adjustment clause linked to a consumer price index ensures that the revenue stays in line with the rising costs of doing business. This protection is necessary when a project takes several years to design and build.
Contractual Stability
Risk sharing between the buyer and the seller reduces the likelihood of litigation or contract cancellation. When a price adjustment clause is present, neither party is incentivized to walk away from the deal if the market moves against them. This stability allows for better long term planning and investment in the supply chain.
Agreements without such a provision often lead to disputes when market prices move more than ten percent from the original quote.