Price Changes in Procurement Markets

Contract Design for Price Changes of Supplier Products

Price changes in raw material markets repeatedly take on dramatic proportions.

For manufacturers, this means that they face incalculable risks. On one hand, they are often bound by framework agreements with customers for years in terms of price, but on the other hand, they cannot sufficiently fix procurement prices due to lack of negotiation possibilities. There is a threat of a cost trap. The margin shrinks and can ultimately become negative. Each sold item then brings a loss over months or years.

How can one protect oneself here?

The German Civil Code provides for the possibility of price adjustment when a “significant” contractual basis has subsequently ceased to exist. This is now also regulated by law. Whether this is really so surprising for price adjustments, e.g. in the steel market, was already doubted by the courts after the first steel price crisis in 2006.

Even during the Corona crisis, price adjustments are being reported for important products that are in high demand, be it precursor products for the production of disinfectants, or end products such as respiratory masks and the like.

This means nothing other than that even with dramatically increased procurement prices, fixed agreed delivery conditions for the end products cannot be adjusted for customers. With a material share of 20%-50%, this can quickly have dramatic implications for a company’s viability.

Therefore, one should provide for clearly defined adjustment possibilities in good time when certain price change quotas are exceeded. This can be done in annual discussions or with reference to corresponding press reports or price indices. For such negotiations, it is necessary to have sample regulations ready. Although the Price Clause Act has created facilitations for price adjustment clauses, such adjustments are still only possible within narrow limits – and are not yet widespread.

To ensure effective regulations are made, legal advice is urgently required. We are happy to help .