Hello my fellow procurement gurus. Let’s talk about something that often comes up in service contract negotiations: how do you handle cost adjustments over time? Do you tie them to the Consumer Price Index, Wage Inflation, or the Employment Cost Index? Let’s break these down so you can make the best decision for your contracts.
First, there’s the Consumer Price Index, or CPI. This measures the average price change of a basket of goods and services—everything from groceries to fuel to housing. It’s a common benchmark for inflation because it reflects what end consumers, like you and me, experience daily. But here’s the catch: in service contracts, where 70 to 80% of costs are tied to wages, does CPI really align with the cost structure? Probably not. It doesn’t directly account for changes in labor costs.
Next, we have Wage Inflation. This is simply the rate at which wages increase over time. It feels more relevant, right? After all, wages are the biggest expense for service providers. But here’s the downside: wage inflation doesn’t capture rising benefit costs or other employer expenses, like payroll taxes. So while it’s closer to the mark than CPI, it still misses a big piece of the puzzle.
Finally, there’s the Employment Cost Index, or ECI. This is published by the Bureau of Labor Statistics and measures total labor costs—including wages, benefits, and payroll taxes. The ECI covers all employment costs. However, with rising healthcare costs, perhaps it’s not the most advantageous to the buyer.
So, here’s the big question: which metric should you use for your service contracts? CPI is simple and widely used but doesn’t align with labor cost drivers. Wage inflation is more relevant to services but doesn’t capture the entire picture. And ECI? It’s the most accurate but at this point in time is less favorable than wage inflation. What do you think? Vote on our LinkedIn poll https://lnkd.in/gTWJ3ic8.
I will post the summary results on the K2 Sourcing LinkedIn page, and if you like this information join our webinar about economic trends impacting procurement in 2025.
