Indexation clauses — what CPI+3% really costs over a contract term

Pactis Partners · 2026

“Prices may be increased annually by CPI plus 3%” reads like small print because it is small print. Compound it across a term and it is often the largest single cost in the agreement — agreed in a clause that took nobody's attention on signing day.

The worked numbers

Take a £200,000-a-year agreement on a five-year term, with annual increases of CPI plus 3%. Assume CPI runs at 3% — so 6% a year.

That is roughly £127,419 of extra cost over the term, from one clause. If CPI runs higher than 3%, so does the number; there is normally no cap.

Everything in the clause is negotiable — before signature

• The margin above the index. "CPI plus 3%" is a supplier's opening position. CPI alone, or CPI minus an efficiency factor, is a normal outcome for a buyer who asks.
• The index itself. CPI, RPI, CPIH and sector-specific indices move differently. RPI has historically run higher than CPI; a clause quoting RPI is worth challenging.
• A cap. "The increase in any year shall not exceed 4%" removes the tail risk of an inflation spike.
• A floor of zero — or not. Many clauses allow increases but not decreases. Symmetry is a fair ask.
• The first review date. Pushing the first increase to year three of a five-year term removes two compounding steps.
• Notice and evidence. A requirement that the supplier notify the increase in writing, with the index figure used, before it applies. This alone catches errors.

After signature

Once signed, the clause is simply your price — but it still has to be applied correctly. Check every increase against the index the clause names and the date it names. Escalators applied a month early, or using the wrong index, are a quiet and common form of leakage; recovering them is part of what we do in the twelve months after a deal.