Glossary
Cap and floor
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.
Also called: price adjustment cap, ceiling and floor, adjustment limits.
A cap protects the paying party from an index spike passing through in
full. If a clause caps annual escalation at 8 percent and the index rises
14 percent, only 8 percent is applied and the remaining 6 percent is
either lost or, in a carry-forward cap, banked against a future year when
the index rises less.
A floor sets the smallest change worth processing, or the point below
which de-escalation does not apply. A common
pairing is a small dead band around zero (say plus or minus 2 percent) so
routine noise triggers no adjustment and no invoice.
Caps are per-period, cumulative, or both. State which, and state what
happens to an over-cap move: forfeited, carried forward, or renegotiated.
See caps and floors in practice
and collar.
Related terms
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.
De-escalation is the downward half of a price adjustment clause: when the chosen index falls below its base value, the covered portion of the price is reduced by the same ratio mechanism that would have raised it.
Economic price adjustment is the US federal government's term for a price escalation clause in a fixed-price contract. The Federal Acquisition Regulation defines three standard EPA clauses at FAR 52.216-2, -3, and -4.
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