Formula Pricing

Where prices are subject to regular fluctuations, rather than negotiate the rates at every price review, the parties to the negotiation may agree a formula that is transparent so that each party can validate the price that should apply. For example, sugar is sold at the ruling market price, as published in a trade journal, with an agreed premium of 20% to the supplier for the purchase, storage, processing, packaging and delivery of the good. The buyer can validate the supplier’s price by referencing the published index for unrefined sugar. Buyers and sellers of more complex goods and commodities can also modify the formula they use to their specific purposes and refer to published indices for labour, overheads and materials using an agreed cost build-up. For example, as each index number changes, so the cost model can calculate the overall impact to the price of a quarterly increase in labour costs, or a 5% reduction in the cost of steel. Formula pricing may appear to be fair, logical and transparent. However most buyers note that usually published indices rise, rather than fall. See also Price Variation Formula.

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With over 800 Procurement specific terms (and growing) you will find everything you need to know or thought you knew about the Procurement function. Our aim is to provide you with a comprehensive list collated from the Comprara Groups hub of training and consulting source materials.The Procurement Glossary has been compiled by industry expert Paul Rogers.