Glossary
Averaging window
An averaging window is the number of consecutive published index values a price escalation clause averages before using the result in its formula. A 3-month window smooths a single volatile month; a 1-month window tracks the latest value exactly.
Also called: averaging period, rolling average, smoothing window.
An averaging window trades responsiveness for stability. Suppose an index
reads 240, 250, 290 over three months. A 1-month window uses 290. A
3-month window uses (240 + 250 + 290) / 3 = 260, which ignores part of the
spike but also ignores a one-month data revision.
Pick the window from how the underlying price actually moves. A commodity
that whipsaws on spot-market news suits a 3-month or 6-month window so one
outlier month does not drive a large payment. A price that steps once a
year suits a 1-month window near the step, because averaging across the
step blurs the change the clause is meant to capture.
Whatever the choice, name it in the contract for both the base and the
current value, and apply the same window to both.
See choosing an averaging window,
the base period, and
publication lag.
Related terms
The base period is the month whose published index value a price escalation clause treats as the starting point. Every later adjustment compares a current index value to the value from this fixed month, usually the month of contract signing or bid submission.
A cap is the maximum price adjustment an escalation clause will pass through in a period; a floor is the minimum. Together they bound how far the covered price can move regardless of how far the index moves.
A collar is a cap and a floor used together on the same escalation clause, so the price adjustment is confined to a band, for example no more than plus 6 percent and no less than minus 6 percent in any year.
The Consumer Price Index measures the average change over time in the prices urban households pay for a fixed basket of goods and services. In contracts it is used for rent reviews, wage-linked terms, and long service agreements rather than for raw-material costs.
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