How to decide
- Estimate the publication lag. Compare how long the index takes to publish against how often the contract adjusts.
- Check who the lag favours. Under a prospective structure with rising prices, the buyer gets the old price a little longer, every cycle.
- Choose prospective if the lag is short. Simpler to administer, rarely creates a meaningful gap.
- Choose retroactive if the lag is long. Closes the gap, at the cost of correcting invoices already sent.
The difference in one sentence
A prospective adjustment changes the price only for work done from the adjustment date forward. A retroactive adjustment changes the price for work already done, back to when the new index value technically took effect, even if it published later.
Why this matters more than it sounds
Publication lag means the index value for a given month is not known until later. If a contract adjusts prospectively on the 1st using the prior month's index, a real cost change happens during that lag and never gets priced in. Retroactive adjustments close that gap, at the cost of reopening and correcting invoices already sent.
A worked example
A clause has a 2-month publication lag and adjusts prospectively every month. Every single cycle, the buyer pays the old, lower price for roughly 2 months before the new number catches up. Over a 3-year contract with rising prices, that structural gap is worth real money to the buyer, not a rounding error, and the supplier absorbs it every cycle without the contract ever naming it.
When prospective works fine
If the publication lag is short relative to the adjustment frequency, or the index is stable enough that a one-period lag rarely matters, prospective adjustment is simpler for both sides to administer and rarely creates a meaningful gap.
When retroactive is worth the complexity
If the publication lag is long, or the index moves fast enough that a one-period delay is a real cost, retroactive adjustment protects whichever side would otherwise absorb that gap every period. This is common in fast-moving input categories, where a systematic one-period lag compounds into an ongoing loss for one side.
Check who the lag favours
Check who benefits from the lag under a prospective structure, by default. If rising prices mean the buyer always gets a period of the old, lower price before the adjustment catches up, prospective adjustment is quietly biased in the buyer's favour, and the supplier should know that before agreeing to it.