Checking the formula and the date of a price indexation clause
A price increase can be perfectly legitimate, because the contract provides for it. It still has to be calculated with the right formula and applied on the right date.
What the clause provides
An indexation clause, or price revision clause, states the reference index, the calculation formula and the date on which the revision takes effect. It often adds a frequency (annual, half-yearly), caps and floors, and a scope: all items or only some. The supplier does not get to improvise, everything is written down. For the buyer, the point is to check that each increase is provided for and that its amount results from the contract formula, not from the supplier's estimate.
Many contracts use a parametric formula of the form P = P0 × (a + b × I / I0). P0 is the initial price or the last revised price, a the fixed part that is not indexed, b the variable part that is indexed (with a + b = 1), I0 the value of the index at the contract's reference date and I its value at the revision date. The main trap is the fixed part: applying the index variation to 100% of the price, when the contract indexes only 85% of it, systematically overstates the increase.
A worked example
Initial price of €100, fixed part of 15%, variable part of 85%. The index goes from 112.0 (reference) to 118.2 at the revision date, a variation of 5.5%. The index values are fictitious.
| Method | Calculation | Revised price |
|---|---|---|
| Contract formula | 100 × (0.15 + 0.85 × 118.2 / 112.0) | €104.71 |
| Supplier (variation applied to 100%) | 100 × 118.2 / 112.0 | €105.54 |
| Discrepancy per unit | €0.83 |
On 200,000 units bought a year, that €0.83 represents €166,000 a year. A formula error repeats on every line concerned, not only on one invoice.
Common errors
Discrepancies most often come from the index: an index different from the one in the contract, a series replaced in the meantime, a value taken on the wrong date (reference month shifted, provisional value instead of the final one) or a change of base that was not restated, which distorts the I / I0 ratio. Then come errors of timing and scope:
- an increase applied before the planned effective date;
- an indexation applied to items that the contract excludes;
- a cap or floor on the variation that is not respected;
- a cumulative increase when the contract provides for a single annual revision;
- an indexation applied to a price already revised by amendment, which counts the same increase twice.
The legal framework
In a framework contract, the French Civil Code allows the price to be set unilaterally by one of the parties, who must justify the amount in the event of a dispute (article 1164). The French Monetary and Financial Code in principle limits the choice of index, which must have a direct link with the purpose of the contract or the activity of one of the parties (article L.112-2). An unforeseeable change of circumstances that makes performance excessively burdensome opens, for its part, a renegotiation procedure (article 1195), separate from indexation. Between traders, sums billed in excess can be claimed for five years.
How to check
- Read the clause and its amendments: index, formula, fixed and variable parts, reference date, effective date, caps.
- Find the official value of the index on the contractual dates, in the series provided for (final value, base in force).
- Recalculate the revised price with the contract formula.
- Compare with the price billed from the effective date, item by item.
- Quantify the discrepancy over the whole period concerned, then tie it to the clause.
Done by hand, the exercise becomes tedious as soon as there are many items, while a formula discrepancy repeats on every line concerned. The other financial clauses to check are described in discounts, tiers and year-end rebates.
Frequently asked questions
Can a supplier raise its prices without an indexation clause?
As a general rule, a price agreed in a contract cannot be changed unilaterally during performance, unless there is a revision clause or the parties agree. Particular situations (framework contracts, unforeseeable change of circumstances) are assessed case by case: have your lawyer validate them.
What if the index provided for in the contract is no longer published?
Contracts often provide for a replacement index. Failing that, the solution is negotiated with the supplier, or discussed on the basis of the official linking series published by the body that produces the index. In all cases, keep a written record of the agreement reached.
Can an indexation be applied retroactively?
Only if the contract provides for it. Otherwise, a revision applies only from its effective date, and earlier invoices stay at the previous tariff. Applying it early or retroactively without a contractual basis is a classic source of discrepancy.
Key points
- An increase is only legitimate if it respects the clause: index, formula and date.
- The fixed part of the formula is the most common error.
- The contract and its amendments prevail: they have to be reread.
References: French Civil Code, articles 1164 and 1195. French Monetary and Financial Code, article L.112-2. INSEE, publication of price indices and their bases (insee.fr).
This article is provided for information only and does not constitute legal advice.
