How to structure this contract
- Split chips from fab equipment. They are priced by different forces and need separate formulas.
- Index chip prices. Use the BLS Semiconductor and Related Device Manufacturing PPI, PCU334413334413.
- Index fab equipment separately. Use PCU333242333242 plus controls, labor, and cleanroom construction inputs.
- Add a cap and floor. Chip prices are structurally cyclical, so size a cap and floor into the clause.
Chips and fab equipment are different markets
A memory chip and a lithography machine are both "semiconductor manufacturing," but they are priced by completely different forces. Chip prices swing hard with global supply and demand cycles. Fab equipment prices move on a steadier capital-spending cycle tied to how many new fabs are under construction. Price them separately.
Chips: memory, logic, and related devices
Use the BLS Semiconductor and Related Device Manufacturing PPI, series PCU334413334413. This index covers the chips themselves.
Chip prices are notably cyclical. A shortage year can see prices spike well above a normal year, followed by an oversupply year where the same chips are cheaper than they were two years earlier. An escalation clause on chip supply needs a cap and floor more than most categories, since the swings are structural to the industry, not occasional noise. See the cap and floor guide for how to size one.
Fab equipment: lithography, etch, and deposition tools
Use the BLS Semiconductor Machinery Manufacturing PPI, series PCU333242333242. This covers the capital equipment used to fabricate chips, not the chips themselves.
| Component | Benchmark | Note |
|---|---|---|
| Precision machinery and tooling | PCU333242333242 | The equipment itself |
| Specialty electronics and controls | PCU334511334511 (proxy) | Guidance and control systems, closest available proxy |
| Skilled engineering labor | Regional semiconductor-industry wage index | |
| Cleanroom construction | General commercial construction cost index | Fabs require specialized cleanroom build-out |
A worked example
A wafer supply contract indexed to PCU334413334413 signs during an oversupply year at a base index of 25. A shortage hits eighteen months later and the index reads 40, a 60% increase. Without a cap, the buyer absorbs the full 60% pass-through. With a 15% per-period cap, the buyer's exposure in any single review is bounded, and the excess either carries forward or is absorbed, depending on how the clause is written, a detail that needs to be specified up front, not argued about after the spike.
Don't cross-index chips and equipment
Never benchmark a chip supply contract against the fab equipment index, or the reverse. PCU334413334413 and PCU333242333242 measure different markets moving on different cycles. A contract priced against the wrong one will be systematically wrong in whichever direction that cycle happens to be running.
Live index data
- US PPI: Semiconductor and Related Device Manufacturing: current value, year-over-year change, and a free calculator
- US PPI: Semiconductor Machinery Manufacturing: current value, year-over-year change, and a free calculator