The need for cost escalation clauses
June 29, 2021 By Bob Dale and Frank Kerr
Lately, the industry is facing paper and substrate price increases. The potential for quarterly adjustments is estimated to be in the range of four to 10 per cent.
Reasons for increases
There are several reasons for price hikes. There were few or no increases since 2018. Also, for the first three quarters of 2020, the demand for printing and copy paper grades evaporated due to the pandemic. During that time, North American mills removed capacity by more than 20 per cent, and converted offset and copy paper grade equipment to more profitable grades.
In 2021, Asian paper export supply reduced, as shipments were routed to meet Chinese demand. To complicate matters, a shortage of shipping containers raised costs.
North American and European mills have been at the end of their financial ropes for many years. Due to a tight supply situation, mills had to raise prices.
It is true customers are reluctant to accept price increases. In some cases, they threaten to pull out work if the printer insists on passing on the cost.
Further, terms and conditions (T&C) of sale can be unclear. Quotations need to include T&C clearly identifying that the quoted prices are only valid for 30 days and they are based on the cost of materials at the time of estimate. The printer has the right to pass on cost adjustments that happen up to the time of the order. However, it becomes the printer’s responsibility to confirm and lock in the paper price promptly after receiving order confirmation.
Print contracts limit the ability to raise prices. As a buyer, we include appropriate material escalation clauses in our contracts. The clauses indicate that all price increases must have documents to validate, plus an accounting for the effect of the material increase on the total cost of the work. For example, if paper represents 50 per cent of the cost of the order, then a 2.5 per cent cost increase was acceptable within the contract terms.
Most commercial print jobs are not tied to binding contracts. Also, printers suffer from a market base that is notorious for slow payments. Printers have to deal with collecting money on a timely basis. This puts the viability of many printers at risk.
Many businesses operate with budgets, which cannot be changed in the middle of the year. If the printed product is to be re-sold, buyers may not have the ability to pass on cost increases to their customers. However, some customers do pass on 100 per cent of the printed product cost to clients. In such cases, it is advisable to negotiate an arrangement where legitimate, documented increases would be paid through another channel, subject to contract T&C.
So, how do you fairly deal with this issue? Ensure estimates include current T&C that accurately and fairly address material cost hikes.
Keep a close eye on material prices when customers accept your quotes and act promptly to secure material. If prices increase, then have an honest discussion with the customer to negotiate adjustments.
Understand the customer’s perspective, and try to get past people who are unwilling to be flexible.
When entering into fixed price agreements for printed goods, ensure there is a paper or material escalation clause.
Offer alternatives to price increases, such as reducing paper grade or run length or making other changes that bring down the cost so as to offset material price hikes.
Good luck with your efforts. Also, if you want to be treated fairly, you must treat your customers and suppliers in the same way.
Bob Dale and Frank Kerr are with Connecting for Results Inc. They can be reached via email at firstname.lastname@example.org.
This article originally appeared in the June 2021 issue of PrintAction.
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