1 / 38

Price Adjustment Provisions for Long-term Contracts - A Guide

Learn why and when to use price adjustment provisions for long-term contracts, types of adjustments, and how to calculate adjusted prices. Find relevant indices and resources to assist in determining adjustments.

lsenter
Download Presentation

Price Adjustment Provisions for Long-term Contracts - A Guide

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Presenters’ Contact Information Jim Essman Team Leader Team 11 – Medical Procurement Services Group Office of General Services james.essman@ogs.state.ny.us (518) 474-4501 Jim Malone Purchasing Officer Team 6 – Road Materials Procurement Services Group Office of General Services james.malone@ogs.state.ny.us (518) 474-2428 OGS Website: www.ogs.state.ny.us 1

  2. Introduction • WhyWould You Consider Using Price Adjustment Provisions? • Long Term Contracts (over a year) • Volatile Conditions • Keep Pace with Product Changes • Time and Cost of Repeated Bidding 2

  3. Introduction (continued) Questions? When should we begin to adjust? How often should adjustments occur? Should Adjustments be Automatic or Adjusted on request? 3

  4. Introduction (continued) • More Questions • What type of adjustment do we use? • What should the adjustment be based • on? • How do we calculate the adjusted price? 4

  5. Introduction (continued) • Types of Price Adjustments • General Business (Operational) Adjustments • Product or Component Specific Adjustment • Price List Updates 5

  6. Types of Price Adjustments General Business (Operational)Adjustment May be considered when no one cost component dominates the price structure. This is sometimes referred to as: “Keeping Up With Inflation” 6

  7. General Business Adjustments Let’s discuss The Bureau of Labor Statistics (BLS) website 7

  8. General Business Adjustments (continued) • BLS Website • http://www.bls.gov • This site is the Federal Government’s directory of economic and business statistics 8

  9. General Business Adjustments (continued) • Use the site to plan your adjustment! • Select from lists of the most popular CPI statistics including: • Average Price Data • Consumer Price Index – • for All Urban Consumers • (Current) • Consumer Price Index – • Urban Wage Earners & Clerical Workers • (Old Series) • Department Store Inventory Price Index 9

  10. General Business Adjustments (continued) 500 kwh Electricity - APU000072621 Utility Gas, 40 Therms - APU000072601 Gasoline, Unleaded Regular - APU000074714 Bread, White - APU0000702111 Ground Beef, All Types, Per Pound - APU0000703111 Red Delicious Apples - APU0000711111 Coffee, Ground Roast, All Sizes - APU0000717311 10

  11. General Business Adjustments (continued) Consumer Price Index - Average Price Data Series Id:  APU0000717311 Area: U.S. city averageItem:       Coffee, 100%, ground roast, all sizes, per lb. (453.6 gm) 11

  12. General Business Adjustments • Its decision time • Try to narrow down to your specific • situation • Note that some CPI’s are regional • If in doubt, consider the US City • Average for All Goods 12

  13. Introduction (continued) • How do we calculate the adjusted price? 13

  14. General Business Adjustments • The Rules and Calculations • Once established, the BASE Date and BASE Value NEVER CHANGES • and • Once established, the BASE Date and BASE Value NEVER CHANGES! 14

  15. General Business Adjustments The Calculations The Adjustment Factor Divide the current index value by your Established Base Index The Adjusted Price Multiply the Contract Price by the Adjustment Factor 15

  16. General Business Adjustments Hypothetical Example Contract begin date is 01/01/08 Price at beginning of contract is $200 CPI value for October 2007 is 150 (The BASE) CPI value for October 2008 is 160 Divide 160 by 150, for 1.0667 (Adjustment Factor) Multiply 1.0667 times $200.00 The new price for 01/01/09 is $213.34 16

  17. Introduction (continued) • Product or Component Specific Adjustment 17

  18. Product Specific Adjustments • Sometimes there is a component that accounts for the majority of the cost for a product or service • Some components might include: • Specific raw materials • A certain type of fuel 18

  19. Product Specific Adjustments • The method and calculations are similar to the General Business Adjustments • Narrow down the specific situation • Determine your Base • Calculate the adjustment 19

  20. Product Specific Adjustments • There may be specific indices for such raw materials or components such as: • EIA Diesel Prices • Polypropylene in Plastics News • Steel in American Metal Markets • Producer Price Indices 20

  21. Product Specific Adjustments • How can you identify the correct index for your specific situation? • Ask the vendor community • Research specific product yourself • Use the North American Industrial • Classification System (NAICS) 21

  22. Product Specific Adjustments • Every US company has an • NAICS number • It is found at the top of page 2 of every • company’s Federal tax form • There is nothing proprietary about it. • It’s a part of the U.S. Census Bureau: • http://www.census.gov/epcd/www/naics.html 22

  23. Product Specific Adjustments • The NAICS number has a corresponding PPI number which can be used to obtain your index • But You Must Use Caution! • Some companies handle a number of • different product lines • Consequently it may not be an exact • match to what you are looking for 23

  24. Product Specific Adjustments • Weighting • Sometimes you can apply a proportion • based on costs for one or two main • components • For example, Energy comprises 35% of • the cost of the Reflective Glass Spheres • used in pavement marking paint and we • adjust this commodity accordingly 24

  25. Product Specific Adjustments • You may be able to determine the appropriate weight by: • Reviewing annual reports of companies • in the industry • Looking at industry data • Asking a number of vendors • (This could include the suppliers of raw • materials, etc.) 25

  26. Product Specific Adjustments • Example: • The original contract/bid price for • Glass Spheres was $0.50 per pound • The settlement value for Natural Gas at • the time of bid was $8.40 • (The Base Index) • Now, if the price for Natural Gas goes to • $9.75, what do we do? 26

  27. Product Specific Adjustments • Find the Adjustment Factor: • Take the New Index Value ($9.75) • Divide it by the Base Index Value ($8.40) • This is the Adjustment Factor = 1.16 • Find the Adjustable Amount: • If 35% of price is energy related adjustable cost, • Multiply the contract price ($0.50) by 35% • This is the Adjustable Amount = $0.175 27

  28. Product Specific Adjustments • Find the Adjustment Amount • Multiply the Adjustable Amount by the • Adjustment Factor ($0.175 x 1.16 = $0.203) • Calculate the difference between the Product • and the Adjustable Amount • ($0.203- $0.175 = $0.028) • and round it off to 2 decimal places. • This is the Adjustment Amount = $0.03 • Add the Adjustment Amount to the Base Price • $0.50 + $0.03 = $0.53 per pound - Price Adjusted! 28

  29. Price List Updates • Why Would You Want a Contract Based on a Price List? • Many products from one source • No one product dominates overall • purchases • Product continuity and integration is • important 29

  30. Price List Updates • How Do You Implement An Adjustment For A Price List? • Research & Monitor the Commodity • Determine the Frequency of the • Adjustment • Review ALL updates - • Do they Reflect Market Conditions? 30

  31. Price List Updates • How Often? • At Specific Intervals: • Annual, Semi-Annual, Quarterly, etc. • Let the market decide; • Adjust when the manufacturers issue a • new price list • Remember • The discount rate remains the same or better throughout the Term of the Contract 31

  32. Reminders • Let’s Review: • Communicate • You need acceptance for an adjustment from your organization and the vendors. 32

  33. Reminders • Research • Chart past bid prices, or perhaps some • past full list prices, and index values to • visualize the trends • Share your information with involved • parties • Talk to both your vendors and end users 33

  34. Reminders • Don’t Forget! • Include a mechanism in solicitation and resulting contract that will allow flexibility • Perhaps an early cancellation provision • for your use • (Be aware of OSC G-214 Bulletin) • Language enabling change in index, • frequency of application, etc. 34

  35. Reminders • Be Clear • Show an example of calculations in bid • document • Make sure to state that adjustments may • go UP or DOWN • List specific dates for when adjustment • may take effect and the dates that • correspond to the index 35

  36. Questions and Answers ? 36

  37. Presenters’ Contact Information Jim Essman Team Leader Team 11 – Medical Procurement Services Group Office of General Services james.essman@ogs.state.ny.us (518) 474-4501 Jim Malone Purchasing Officer Team 6 – Road Materials Procurement Services Group Office of General Services james.malone@ogs.state.ny.us (518) 474-2428 OGS Website: www.ogs.state.ny.us 37

More Related