Fixed-price contracts when input costs outrun prices

A fixed-price contract is a bet that your costs will stay put. When they do not, the loss rarely shows up as a single bad invoice. It shows up as a margin that is a little thinner each month, and an average margin figure hides which contracts are doing the damage.

The problem: the price is fixed, the inputs are not

Suppose you agreed a price in the spring for delivery through the winter. Your supplier has since repriced materials, energy and freight. Your customer's price has not moved, so every extra pound of input cost comes straight out of gross margin.

The pain is uneven. Contracts signed last year, with long terms and no review clause, carry the most risk. Spot orders you can reprice tomorrow carry the least. A blended margin averages the two together and tells you nothing about where to act.

What the numbers say

The Office for National Statistics reports that producer input prices rose by 8.3% in the year to September 2026, up from a revised 6.7% in the year to August. Over the same twelve months, producer output (factory gate) prices rose by 4.6%, the largest rise since April 2023 (ONS, Producer price inflation, UK).

The gap between those two figures is 3.7 percentage points. In plain terms, across the producer economy, what businesses pay for inputs is rising far faster than what they charge. Many of them are absorbing the difference. If your own prices are locked, you are likely absorbing more than most.

One caution: these are economy-wide averages. Your own input basket may look quite different, so treat the ONS gap as a prompt to check, not as your number.

The solution: find which contracts leak, then act in order

You do not need a large model for this. You need a list and a few ratios.

Tips and tricks you can apply this week

1. List every fixed-price contract with its end date, volume and any price review clause. Sort by end date. This takes under an hour and is the most useful page you will produce this month.
2. Work out the input share of each price. If materials and energy make up 60% of the selling price and they rise 8%, that is roughly a 4.8% hit on the price. For illustration: a £100 selling price with £60 of inputs becomes £104.80 of cost against £100 of revenue before labour or overhead.
3. Calculate the price rise that restores the margin on each contract, then rank the contracts by that number. The largest gaps go first.
4. Write a review or indexation clause into every new quote. Even a simple "price reviewed if a named input index moves more than 5%" shifts the risk back to a shared footing.
5. Give customers notice with reasons. A short note with the cost evidence and a date lands better than a surprise increase, and it keeps the conversation commercial.

For contracts you cannot reprice, decide whether to serve them last when capacity is tight, or to decline renewal at the old terms.

Why this approach holds up

The principle is simple: over a long term, cost movements are hard to forecast, so tie price changes to a published measure rather than to a supplier's invoice. Both sides can then see where an adjustment comes from.

Timing also matters. The Bank of England's next Monetary Policy Committee decision is due on 5 November 2026 (Bank of England, MPC dates), and the next ONS producer price release is on 18 November. Having your contract list ready before those dates lets you act on new information instead of reacting to it.

What to check this month

• Which contracts have no price review clause, and when do they end?
• What share of each selling price is made up of inputs that have moved?
• Which three contracts need the largest price rise to restore margin?
• Which customers have you already given notice to?
• Which new quotes still go out without an indexation clause?

If you want a structured view of where margin leaks, the Business Health Check is one place to start.