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Definition of price escalation clause
The price escalation clause is an agreement in sales contracts with which the determination of the price is postponed to a later date or a later price change is agreed. It is taken into account - together with the delivery conditions - in the context of calculations in domestic and foreign trade.
In domestic trade will the Procurement prices subsequently - by agreeing price escalation clauses - adjusted to price increases. As a result, the buyer bears the price or calculation risk due to price fluctuations on the part of the supplier. Price escalation clauses can be found in the plant and systems business. There they are often integrated into framework supply contracts for raw materials and long-term contract manufacturing.
In foreign trade there are often longer periods of time between the time the exporter submits the offer and the importer makes payment. The sales price determined in the exporter's calculation may no longer be up-to-date. Such clauses have disadvantages for the importer if the inflation-related depreciation of his currency compared to the invoiced currency is large. He then has to spend considerably more money on the payment than he could have expected when the contract was signed. Therefore, those affected have to carefully weigh the advantages and disadvantages of these regulations.
When are price escalation clauses agreed?
Price escalation clauses are agreed not only in order to be able to adjust the price of a changing market situation for larger deliveries, but also for:
- Long production time, e.g. B. in large industrial plants
- Long delivery times, e.g. B. with custom-made products
- Inflation-related price fluctuations, e.g. B. in countries with high inflation rates
- Comprehensive currency uncertainties, e.g. B. international business