The indexation nobody carried out

Carriage and forwarding contracts often contain a clause on price indexation: once a year, or whenever an index moves, prices are adjusted by a fuel formula, a consumer price index or a change in road charges.

This clause has one property that sets it apart from every other clause in the contract: failing to perform it stops nothing.

If you do not issue an invoice, you will not be paid. If you do not produce the documents, the cargo will not move. If you do not carry out the indexation — everything carries on exactly as before, only at lower prices.

Why it does not happen

Because it is assigned to nobody.

The contract was negotiated by sales. The invoices are issued by accounting. The carriages are run by operations. Indexation is an action that requires reading the contract, finding the index value, calculating the change, informing the customer and changing the rate in the system. It belongs to the work of none of the three departments, and so it does not happen.

Two years later the contract is being performed at prices which, under that same contract, should have risen twice.

When it can be applied retrospectively

Care is needed here, because the answer is often “it cannot”.

A clause under which indexation can be applied retrospectively has to contain three elements.

A formula. Not “prices may be adjusted if market conditions change”, but a specific index and a method of calculation. Without a formula there is nothing to apply.

A frequency. When the adjustment is made — once a year from a given date, once a quarter, whenever the index moves by more than a set percentage.

A notice period. How far in advance the customer has to be informed before the new prices take effect. This element is the one most often forgotten, and it is precisely the one that decides whether the adjustment can be applied retrospectively: if the clause requires thirty days' notice, then last year's indexation cannot be applied today, because the notice was not given back then.

If even one element is missing, the indexation works forward only — and that is valuable too, just not as an invoice for last year.

What to do this week

Open your three largest customer contracts and find the clause on price adjustment. Write down, for each of them, whether the three elements are present.

If the clause is there and all three elements are there, work out when it was last carried out. If the answer is “never”, then the difference between the agreed price and the actual price can be calculated, and it works forward from the first properly given notice.

If there is no clause at all, that is a topic for the next renewal — and it is worth asking for all three elements, not just the formula.

On the other side

The same clause in your purchase contracts works against you. A carrier that has not carried out its indexation will not carry it out in future either — but the one that did has applied it, and it is worth checking whether correctly.

Indexation is one of the few clauses whose both directions are worth checking at the same time.