How much margin does indexation cost you over the term?

Your costs rise on their own dates. Your price only as the contract allows: with a given index, on a given date, sometimes only after a few years. Enter the indexation clause and see what the gap costs you, and which starting price closes it. For services, supplies and works.

Start with an example

Fictional examples. Services follows a clause common in Dutch tender documents: as of 1 January, using the collective wage index for August against August a year earlier.

1. Your price and your costing

Annual price in your bid (€)

Price level: month of your costing

Year

Your price covers your costs at that moment. Every cost increase after that has to be made up by indexation.

2. The contract

Start: month

Year

Fixed term (years)

Option years

3. Your costs

Labour share of costs (%)

Wage increase per year (%)

Wages rise on

Materials and products share (%)

Purchase price increase per year (%)

Purchase prices rise on

Increase in other costs per year (%)

Other costs: 20%

Wages rise in one step on the date in your collective agreement, purchase prices on the date of your supplier’s price list. Other costs rise evenly through the year. For services, supplies and works.

4. Indexation in the contract

Which index?

The CBS index of collective wages per hour, for all sectors or yours. Rises in steps, when collective wages rise.

Expected wage index increase per year (%)

Price is adjusted on

Using the index figure for

First indexation in contract year

Cap per adjustment (%, empty = none)

The index for that month is compared with the same month a year earlier. A cost increase only counts if it falls before that month.

What you enter stays on your own computer. Nothing is stored or sent.

RESULT

Over the fixed term of 4 years you miss out on

€ 131,772

A 3.1% higher starting price closes that gap. Your annual price then becomes € 1,031,031.

IF THE TERM IS NOT FIXED

Priced for 4 years3.1%higher starting price

Priced for 6 years2.8%higher starting price

Here the gap does not grow in the option years. The risk is mainly in the first years.

The competitor who does not do the maths

A bidder who only prices today’s costs bids 3.1% less than you. That may win on price. But over the fixed term they lose € 131,772 themselves, and the buyer notices later, in delivery.

For your results and annual accounts

Here it is the other way round: even with the higher starting price you run a shortfall in the first years, which you earn back later. The shortfall peaks at the end of year 2: € 6,133. Allow for it in your cash flow, and judge the contract over its whole term, not year by year.

Your costs and your price, month by month

Your costsYour indexed priceDashed line: end of fixed term

Per contract year
Year	Needed	You get	Difference	With higher starting price	Set aside, end of year
1	€ 1,035,534	€ 1,000,000	− € 35,534	− € 4,503	− € 4,503
2	€ 1,073,902	€ 1,040,000	− € 33,902	− € 1,630	− € 6,133
3	€ 1,113,729	€ 1,081,600	− € 32,129	€ 1,434	− € 4,699
4	€ 1,155,071	€ 1,124,864	− € 30,207	€ 4,699	€ 0
5 (option)	€ 1,197,986	€ 1,169,859	− € 28,127	€ 8,175	–
6 (option)	€ 1,242,535	€ 1,216,653	− € 25,882	€ 11,872	–

Difference: without adjustment. With higher starting price: using the starting price that closes the gap over the fixed term.

How it is calculated

Per month: what you need if your price grows with your costs, against what you get with your starting price and the contract’s indexation. The starting price that closes the gap makes those two totals over the term equal. Without interest or inflation discounting.

ASK ABOUT IT

Use the clarification round

The biggest risk is not your own sum. It is the bidder who does not do it. They bid lower, may win, and suffer for years themselves. You lose the contract with a price that was right.

A clarification question helps twice. The buyer can change the clause: an index that fits your costs better, indexation from the first year, or on the date wages rise. And every bidder reads the answer. Whoever had not seen the risk is pointed to it, and may still price it in.

Does the CPI fit a contract that is mostly labour or purchased products, or can the sector wage index or a producer price index be used?
Can indexation take effect when wages or purchase prices rise, rather than a year later?
Does the first indexation apply from the second contract year, and what is the price level of the bid?

How to ask such a question, read in the clarification round. Which CBS series to use and how it works, read in CBS indices for price indexation. The method in full: price indexation.

All knowledge articles

Atvalio reads the indexation clause from the draft contract itself

Which index, which month, which date, from which year and with which limits, with the page it comes from. Atvalio Tenders is in development.

Email info@atvalio.com