To successfully manage a long-term contract with a variable pricing arrangement based on indices, the buying organisation must possess strong market knowledge. This knowledge is crucial for several reasons: selecting the most appropriate and relevant index, understanding the supplier's cost structure to validate the formula, and continuously monitoring whether the indexed price remains competitive against actual market prices. Without this insight, the buyer risks being locked into a formula that does not reflect true market conditions, potentially leading to significant overpayment and failing to achieve value for money over the contract's term.

B. Selection of base year: This is a critical component decided during the initial contract negotiation, not an ongoing capability required to manage the contract.

C. Value for money: This is the strategic objective or desired outcome of the procurement process, not the specific capability needed to manage this type of pricing mechanism.

D. Economy of scale: This is a purchasing principle related to gaining cost advantages from volume, which is not directly required for managing a price adjustment clause.

---

1. Chartered Institute of Procurement & Supply (CIPS). (2019). Commercial Contracting L4M3 Study Guide. Profex Publishing. In the section covering pricing arrangements (Chapter 5)

the guide emphasizes that for variable pricing mechanisms like indexation to be effective

the buyer must have a thorough understanding of the market to select a relevant index and to monitor its continued appropriateness. It states that market intelligence is key to preventing prices from becoming uncompetitive. (Specific reference: Chapter 5

Section 3: Variable pricing arrangements).

2. Lysons

K.

& Farrington

B. (2020). Procurement and Supply Chain Management (10th ed.). Pearson. Chapter 15

"Price and Total Cost of Ownership

" discusses contract price adjustment clauses. The text explains that the successful application of such clauses is contingent on the buyer's knowledge of the specific market

its cost drivers

and the availability of reliable

relevant indices. This knowledge is essential to negotiate a fair mechanism and manage it effectively. (pp. 388-389).

3. Bailey

P.

Farmer

D.

Crocker

B.

Jessop

D.

& Jones

D. (2015). Procurement Principles and Management (11th ed.). Pearson Education. Chapter 11

"Price and Cost Analysis

" details the use of price adjustment formulae and indices. It highlights that the buyer's ability to analyse market trends and cost breakdowns is a prerequisite for using these tools

ensuring the formula is fair and the resulting price remains aligned with the market.