Increasing Your Prices: Contract Clauses and Notification

Whichever economic circumstances your company operates in, or whatever it anticipates in the following years, it is crucial to plan ahead of time. That is mainly for businesses that usually enter into long-term contracts because of set-up costs or other factors, such as the nature of products.

Price escalation clauses are essential because they can;

? Reduce contractual disputes and court processes because the agreement is future-proofed.

? Enhance relationships between parties of the contract as both know where they stand when pricing.

? Minimize the risk of having one party terminates the agreement to negotiate a better deal with you or want to move to a new supplier. Once you have established what price escalation clause is suitable for your main contracts, you may need to get a lawyer to look at your other existing agreements to check if any clauses for price rises fit current long-term contracts. Companies are frequently offered an option of including price escalation clauses in their contracts that rise in line with indexation. The benefits of this type of price clause are that:

? The clause is not considered controversial, mainly because the other party does not consider the cost of the rise in price throughout the contract.

? Negotiation is not required on a price rise since a previously agreed formula exists. Therefore, there is a low risk of commercial litigation over commercial contract disputes. Some contracting parties will prefer to negotiate fixed-price increases. If you want to involve an automatic price rise in your contract, it is vital to evaluate the following;

? The price increase proposals go hand in hand with your other agreements.

? Whether your contracts are automatically renewable or not.

? The circumstances in which the agreement can be ended. Flexible price escalation clauses In some business sectors, flexible price escalation clauses that are not connected to an index or specified percentage increase are the preferred option if you have future-proofed your contracts.

It is because with an escalation clause is too rigid, your company could subsidize the parties the company it contracts with, as your price escalation clause needs to be more flexible to adapt to trading conditions. While flexibility allows you to increase your prices to reflect market conditions, this type of clause doesn't allow the same degree of control as a price escalation clause with index-linked price rises or automatic.

Termination clauses working with price escalation clauses Suppose a termination clause allows a party to terminate a contract without giving the other party a valid reason. In that case, there is no need to carefully analyze and assess price structures in a contract. The information of the termination clause needs to work with and be compatible with your selected price escalation provisions.

When establishing a termination clause, you need to ensure the termination notice period gives you enough time to agree with another party to provide continuity and avoid being left with no supplies. However, it is essential that the notice period is not so long that you end up paying a very high price for goods or services during this period when you could have easily and quickly sourced an alternative supplier.

Timing on Price Increase If you have a price escalation clause in your contract, you do not have to wait until the contract ends to increase the price of your goods or services. If you need more information or need the increase in price clauses drafted for your company, you can contact us.