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Indexation clauses: base month, cap, floor and notice rules
Understand each part of an indexation clause and what must be clear before recalculating a contract amount.
What is an indexation clause?
An indexation clause links an agreed price to a specified index. It should identify the index, base period and when an adjustment may take effect.
Six facts you need
Read the clause as an instruction, not as general prose.
- Index series, such as CPI or a specified labour cost index.
- Base period and the amount tied to it.
- Comparison period or reference month.
- First effective date and frequency.
- Caps, floors and whether decreases are allowed.
- Notice deadline and any right to retroactive adjustment.
Index participation is not a cap
If the contract permits 75% of the index change, multiply the change by 0.75. A 3% cap instead means that a single adjustment step may never exceed 3%. These operators must remain separate.
When the clause is unclear
Do not force a monetary result from a clause that lacks essential operators. Flag it for manual review, document the interpretation issue and calculate only when every critical field is supported by the contract wording.
Frequently asked questions
What is a base month?
The recurring month whose index value is used as the reference under the clause, for example October.
What does a floor mean?
A floor limits how far an adjustment can move down or defines a minimum change. Its precise meaning must come from the wording.
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