Multi-year supply contracts: a fixed price leaves cost increases with the seller
16 October 2026, 09:47
On 15 October Ericsson, the Swedish group that makes the equipment for mobile phone networks, warned that more expensive components will weigh on its gross margin in 2027. Chief financial officer Lars Sandström explained that those cost increases will be passed on to customers when current contracts expire. Ericsson works with long agreements: in 2023 it signed a five-year contract with the American operator AT&T.
Until it expires, the signed price stands, even when purchases get dearer
A multi-year fixed-price contract, or a framework agreement that sets the terms of orders for the coming years, splits the risk in a precise way. The buyer knows how much it will pay. The seller commits to delivering on those terms, whatever happens to its own suppliers.
Ericsson had already flagged rising component costs in July, starting with memory chips, which demand from artificial intelligence data centres has made more expensive. The price charged to customers, on the other hand, adjusts in new tenders and in contracts as they are renewed. Until then, the difference between the old purchase cost and the new one is borne by the seller.
The pattern is the same for an Italian company that supplies components to an industrial group under a three-year agreement, or that maintains a plant under a multi-year contract. If steel or resins rise in price in the second year, the company pays more for its materials and still invoices at the signed price: until the contract expires, the difference comes out of its margin.
The Italian Civil Code provides for a price review only in contracts for works, and only for increases above one tenth of the price
Article 1664 of the Italian Civil Code applies to contracts for works and services, that is, a job carried out on the customer's commission. If, owing to "unforeseeable circumstances", the cost of materials or labour changes by more than one tenth of the total price, the contractor or the client can request a review, which is granted "only for the difference that exceeds one tenth". An increase equal to 8% of the contract price therefore falls entirely on whoever carries out the work; one equal to 15% is reviewed for 5 points. The Court of Cassation recognises that the parties can exclude this rule, provided they do so expressly in writing.
For the sale of goods and for periodic supplies, the Code provides for no review. What remains is Article 1467, which applies to contracts performed over time. If one party's performance becomes "excessively onerous" because of extraordinary and unforeseeable events, that party can ask to terminate the contract; the other can avoid this by offering to amend its terms. The same article excludes increases that fall within the normal risk of the contract.
A price review clause ties the contract price to an index chosen in advance
Real protection is written into the contract, before signing. A price review clause sets four things:
- the reference index, published by a third party: the exchange prices of a metal or the producer price indices that Istat, the Italian national statistics office, publishes every month;
- the share of the contract price that is adjusted, equal to the weight in the price of the raw material measured by the index; the part made up of processing and overheads stays fixed or follows a different benchmark;
- the threshold, meaning how far the index must move before the adjustment kicks in, and how often the comparison is made;
- validity in both directions: the contract price is adjusted both upwards and downwards.
The typical mistake lies in the choice of index and share. Linking everything to general inflation means using an index that does not measure one's own purchases: if resins rise much faster than consumer prices, the clause covers only part of the increase. Linking the whole amount to a raw material that makes up a third of it means asking the customer for more than was actually spent, and at renewal the clause is hard to defend.
The weight of each item is derived from a quotation model built on costs: if the price was set by gut feeling, there is no way to know which share to link to the index. That is the work of cost analysis, to be done before the negotiation.
In one's own contracts, sales expiry dates are compared with purchase expiry dates
The check starts from the list of contracts in force. For each customer whose terms are locked for more than a year, note the expiry date, the annual turnover covered and whether there is a price review clause. Alongside, set out the agreements with the main suppliers: how long they last and whether their terms can change.
The risk lies in the contracts where the selling price stays fixed for longer than the purchase prices. In the months between the two expiry dates, a supplier price increase enters the accounts while the customer keeps paying as before.
This article was prompted by a news item published in Bloomberg on 15 October 2026.