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How the Producer Price Index is Used for Contract Adjustment

The Producer Price Index, or PPI, is widely used by the government and

businesses to make better informed decisions. One of its uses is contract

adjustment, which will be our focus in this video. So imagine that you're a

buyer entering into a long-term contract, but the economy is unpredictable and you

want to make sure that you're charged a fair price in the future. To ensure this

happens, you can write a contract-adjustment clause. These clauses are used

for adjusting prices in long-term sales and purchase contracts and typically

specify dollar amounts to be paid at some point in the future. Creating a

contract-adjustment clause provides a form of protection for both you and your

business from the unknowns of the future. With this in mind, you may be wondering

how you can use PPI data to create your own contract-adjustment clause. There are

at least two parties involved in any contractual agreement: the buyer, who is

purchasing a particular product or service, and, of course, the seller, who is

providing the product or service. Whether you're the buyer or the seller will

influence your decision to use particular PPI indexes, as both the buyer

and seller will want to measure price change from different perspectives.

The buyer will be most interested in PPIs that track the price change for the

actual good or service they are buying. On the other hand, many sellers will be

interested in choosing PPIs that track the individual input costs used for

their production. Many businesses employ price-adjustment clauses in long-term

sales and purchase contracts. These types of clauses protect the buyer and seller

from changes in input costs, economic uncertainties, and unfair price changes.

An extensive contract-adjustment guide is conveniently located on the PPI

website. This guide explains the structure of the Producer Price Indexes,

offers guidelines for developing adjustment clauses, and gives examples of

adjustment procedures. Finding the information you need is as easy as the

click of a mouse. BLS staff can help you understand

different price indexes, determine which index best fits your needs, and answer

general questions about contract-adjustment clauses. However, please keep

in mind that a contract is a legal document, so BLS staff can't help you

write a contract or resolve contract disputes. So give it a try, and if you

need help, contact the Producer Price Index at ppi-info@bls.gov or

(202) 691-7705.