It is a tough world out there and businesses often give away every single advantage they have to win work ..but that is life. Once the work is won, both parties should be protected with a fair escalation (rise and fall) formula…yet often (without intent) a poorly drafted rise and fall formula prevents the supplier from fair recovery of extra costs. The issues are:
- Lagging recovery. Extra costs have to be experienced before they are recovered
- Delayed publication of indices. Since indices are an historic record of cost changes they always lag too.
- Fixed factor basis. Many Rise and Fall formulae include fixed factor declaration ..but cost components rarely change at the same rate.
- Discounting fixed costs. Some formulae allow say factors totalling only 90% on the basis that administration or profit are 10% and should be fixed. This is flawed thinking and results in further erosion.
Well ..what is the answer? In my opinion the only fair (fair for all parties) solution is an adjusting factor formulae. If this interests you and you want to learn more …drop me a line.