6 Strategies to Reduce Price Risk and Strengthen Supply Chain Stability

More than five years since the start of the COVID-19 pandemic, manufacturers across the globe continue to face pressure and cost increases from volatile supply chains, including increasing cost for raw materials, labor, energy, and other inputs, as well as disruptions from natural disasters, wars, tariffs, export restrictions, and other governmental actions. These issues can be particularly acute for automotive suppliers in an industry that historically operates on a just-in-time basis while relying on long-term sole-source contracts that require a lengthy validation process and OEM customer approvals to switch suppliers. While there is no silver bullet, this article will consider some of the contracting and pricing strategies that companies can employ to mitigate their risk.

At the basic level, nearly every provision of a long-term contract allocates some share of risk to each side of the deal, and pricing is no different.

If the parties enter into a contract with a fixed price for the entire duration of the program, the seller is assuming the risk that the market price will go up (including increases due to a rise in cost to manufacture), while the buyer is assuming the risk that the market price will go down (including decrease due to reductions in the cost to manufacture). Any deviation from a fixed price represents different allocation of risk that may, or may not, be offset by changing the risk allocation provided for in other terms.

For example, a contract that allows the seller freedom to raise prices relieves the seller from the risk that its costs may increase substantially without an ability to increase prices accordingly, but it creates a new risk for the buyer that the seller may seek to increase the price beyond what is justified by the market, particularly if the buyer is obligated to purchase only from the seller. However, these risks can be offset by changing other clauses including, for example, giving the buyer a right to terminate the contract for convenience and go elsewhere if it can get a better price on the open market.

In a world where costs to manufacture are only increasing with few, if any, reductions, a fixed-price contract would seem, on its face, to impose significantly more risk on the seller. In many cases, this will be true. However, buyers also can suffer costs from this approach. Namely, sellers faced with a likelihood that their costs will go up may be left with little choice but to try and project what their cost structure will look like over the life of the contract and inflate their quotations, increasing the price that the buyer has to pay beyond what it might have paid if it was willing to share in some of the future risk.

The following list, while not exclusive, summarizes some of the more common alternative pricing clauses and strategies that many suppliers are now seeking to incorporate into their contracts to better approve the risks between buyers and sellers.

Indexing Clauses – On the simpler end of the scale, many suppliers seek to negotiate indexing provisions in their agreements. Under an indexing provision, the price for the goods is adjusted (up or down) at regular intervals based on the changes in certain third-party indexes. Traditionally, such clauses have most often been used for products where raw material costs, such as steel, aluminum, or resins, make up a high proportion of the cost for the goods. However, with costs for labor, energy, and other inputs becoming a more significant issue for many suppliers, parties can also consider more creative arrangements in which cost inputs beyond material, or even the full purchase price of the goods, may be adjusted based on measures of inflation or other indexes.
Volume Bands/Commitments – The parties may agree to pricing that is tied to anticipated purchase volumes, with the quoted price applying only if the buyer meets specified volume thresholds, forecasts, or minimum purchase commitments. If actual volumes fall below agreed bands or targets, the price may adjust upward to reflect the seller’s higher per-unit costs, lower economies of scale, or unrecovered capital and labor assumptions that were built into the original quotation. Conversely, higher volume bands may support lower pricing. These provisions can help align pricing with the commercial assumptions underlying the deal, but they should be drafted carefully to address how volumes are measured, the applicable review period, whether shortfalls caused by force majeure or buyer-directed schedule changes are excluded, and whether the adjustment is automatic or subject to further negotiation.
Material Resale – In the automotive industry, many OEMs utilize a form of material resale program under which the OEM uses its bargaining power and overall volumes to negotiate pricing with suppliers for steel, aluminum, and other raw materials which they then make available to their suppliers.
Review, Adjustment and Negotiations – In some cases, where parties are unable to agree on a specific formula or mechanism for future price adjustments, they may compromise on a more general statement that prices will be “reviewed” or that the parties will “negotiate” or “adjust” prices in the future. While such general clauses provide some level of protection for sellers against being locked into a fixed-price contract, they are often ambiguous and can lead to disputes down the road as far as what adjustments are actually required to be made.
Multi-Sourcing – While traditionally not common in the automotive industry, some suppliers are adjusting their purchasing strategy to include more multi-source arrangements, particularly for raw materials or other fungible inputs. Multi-sourcing can mitigate the risk of supply interruptions, while also providing suppliers with greater leverage over their sub-suppliers in any pricing discussions. However, multi-souring can also come with trade-offs, including potentially higher prices based on lower volume purchases, and challenges with ensuring that both contracts have sufficiently enforceable quantity terms that meet the requirements of the Uniform Commercial Code.
Tariff Clauses – Over the last 16 months, clauses seeking to address the impact of changing tariffs have become a particular point of emphasis for many suppliers. In their simplest form, such clauses may allow for a direct pass-through of tariff’s paid by the seller, or changing the location of delivery so that the buyer must assume responsibility to pay tariffs directly as the importer of record. However, accounting for tariffs paid on the end product itself often is only part of the picture, as sellers may face additional costs due to price increases imposed by sub-suppliers, which may require negotiation of additional cost shifting provisions.

Not all of these provisions are appropriate in all situations, and negotiation of such terms ultimately still depends on the relative leverage between the parties. However, these are examples that highlight the kind of creative contracting strategies that may be available to automotive suppliers in order to mitigate the risk posed by entering into long-term contracts in an environment that remains, and is expected to remain, volatile.

This article originally appeared on Supply & Demand Chain Executive in May 2026.

Disclaimer

This blog is made available by Foley & Lardner LLP (“Foley” or “the Firm”) for informational purposes only. It is not meant to convey the Firm’s legal position on behalf of any client, nor is it intended to convey specific legal advice. Any opinions expressed in this article do not necessarily reflect the views of Foley & Lardner LLP, its partners, or its clients. Accordingly, do not act upon this information without seeking counsel from a licensed attorney. This blog is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Communicating with Foley through this website by email, blog post, or otherwise, does not create an attorney-client relationship for any legal matter. Therefore, any communication or material you transmit to Foley through this blog, whether by email, blog post or any other manner, will not be treated as confidential or proprietary. The information on this blog is published “AS IS” and is not guaranteed to be complete, accurate, and or up-to-date. Foley makes no representations or warranties of any kind, express or implied, as to the operation or content of the site. Foley expressly disclaims all other guarantees, warranties, conditions and representations of any kind, either express or implied, whether arising under any statute, law, commercial use or otherwise, including implied warranties of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Foley or any of its partners, officers, employees, agents or affiliates be liable, directly or indirectly, under any theory of law (contract, tort, negligence or otherwise), to you or anyone else, for any claims, losses or damages, direct, indirect special, incidental, punitive or consequential, resulting from or occasioned by the creation, use of or reliance on this site (including information and other content) or any third party websites or the information, resources or material accessed through any such websites. In some jurisdictions, the contents of this blog may be considered Attorney Advertising. If applicable, please note that prior results do not guarantee a similar outcome. Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status.