Glossary
Collar
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.
Also called: price collar, banded adjustment, symmetric cap.
A collar makes the adjustment predictable for both sides: the buyer knows
the worst-case increase, the seller knows the worst-case give-back. It is
common on multi-year framework agreements where neither party wants a
single volatile year to dominate the contract economics.
Example: a collar of plus or minus 5 percent per year. The index rises 9
percent; the clause applies 5. The next year the index falls 7 percent;
the clause applies minus 5. Over two years the covered price is roughly
flat even though the index was not.
A collar is a cap and floor chosen as a
matched pair, usually symmetric. It only makes sense on a
de-escalation-enabled clause, since an
upward-only clause has nothing for the floor to limit.
See caps and floors.
Related terms
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.
The Employment Cost Index measures the change in employer labor cost, wages plus benefits, holding the mix of jobs fixed. Labor-heavy service and construction contracts use it to escalate the workforce portion of a price without re-pricing the whole contract.
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