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INDEXATION CLAUSE

An Indexation Clause, also referred to as an Index Clause, Inflation Clause, Stability Clause or Escalation Clause, adjusts payments and/or charges to take account of changes in categories of prices.

 

An Indexation Clause is useful in fixed term contracts, as it allows for a degree of flexibility in pricing by specifying the level and timing of any price rise, or by linking terms permitting price rises to a relevant published price index.

 

This Indexation Clause contemplates an annual fee increase in line with the Consumer Price Index (CPI), which is regarded as UK’s key measure of inflation.

 

The Consumer Price Index (CPI) means the index published by the Office for National Statistics (ONS) in the United Kingdom from time to time or, if that index number is no longer published, its substitute as a cumulative indicator of the inflation rate in the UK.

 

The Office for National Statistics Price Indices provide summary measures of the movements in various categories of prices over time. The ONS Price Indices are used in contracts by businesses to adjust payments and/or charges to take account of changes in categories of prices.

 

The decision to employ an indexation mechanism, as well as the choice of the most suitable index, is up to the parties involved.

 

If you want to increase pricing in accordance with the Consumer Price Index (CPI) you may wish to insert this Indexation Clause in your contract, as it contemplates an annual fee/price increase in line with the CPI.

 

Please note - This Indexation Clause assumes that price will increase each year during the term of the contract. If this is not appropriate you may need to make some amendments (e.g. if pricing is fixed for an initial term of 2 years then subject to annual CPI increases after that). You can also use a different index if appropriate.

 

Care should be taken when considering and using Indexation Clauses. The following guidelines published by the ONS shall be considered when using Indexation Clauses in contracts:

 

  • Define clearly the payment that is subject to review in line with the index. The item whose price is subject to indexation should be specified as precisely as possible.
  • Establish the base payment, selling or purchase price subject to indexation. Provide the effective date (e.g. quarter or year) of this base price; because it is the period from which the base payment, etc. will be indexed. Indicate the relationship between the effective date of the base payment, etc. and the price index being used in the indexation.
  • Select an appropriate index or indices. The index or indices selected will affect the price change recorded and should be chosen carefully to best represent the item subject to indexation and the intention of the parties.
  •  Clearly identify the selected index and cite an appropriate source. The indexation clause of a contract should identify the index selected by its complete title, index number and any identifying code(s).
  • State the frequency of price adjustment.  The indexation clause should specify whether price adjustments are to be made at fixed intervals, such as monthly, quarterly, semi-annually, or annually, or only at the expiration of the contract. Price adjustments have to be calculated over an interval whose beginning point is the contract's base period.
  • Provide for renamed, varied or discontinued price indexes. Occasionally price indexes can be reviewed or restructured, which may result in some component index series being renamed, discontinued or the timing of the publication of the index changed. Sometimes an index is permanently discontinued. Indexation clauses should contain a default mechanism for determining an equivalent appropriate index or price adjustment mechanism should this occur.
  • Specify that calculations of price adjustments shall always use the latest version of the index data published as of the date specified for such calculations. This requires that contracting parties explicitly agree on the date the price adjustment calculations are to be made.
  • Avoid locking indices used for indexation into any particular reference base period. Contracting parties should simply calculate percentage changes using indices expressed on the reference base period in effect when the contract indexation is carried out.
  •  Define the mechanics of price adjustment. Often the change in payments or price is directly proportional to the percentage change in the selected index between two specified time periods.

 

 

This Indexation Clause template provides several options which can be edited to suit any contract. This document template is in Microsoft Word format, written in plain English, easy to use and edit.



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