The Stealth Bomber of Automatic Rate Increases

stealth bomber dropping moneyThe other day we quoted a full maintenance contract to a local school.  They called back and said “I really don’t want to keep using Bigg Elevator, but their rate is $20/month less than yours.” Rather than price match, I asked to see a copy of the contract with the names and rates redacted.

Sure enough, as I expected, at the bottom of page 4 was this little stealth clause that is, unfortunately, quite common among the Bigg Elevators and their ilk:

“The price in section 1.3 shall be adjusted annually on January 1 of each year of the Agreement.  100% of the current price will be increased or decreased by the percent increase or decrease in the labor cost.  The labor cost is the sum of the straight time hourly rate plus the cost of fringe benefits paid to elevator mechanics in the locality the equipment is maintained.”

English translation:  If their labor costs (including benefits) go up 5%, your contract rates go up 5%.  They don’t propose a rate increase that you can accept or reject.  You’ve agreed in advance that they can impose a new rate on you every year without your consent. Or input.

The school that we quoted checked their records and their actual monthly rates were now higher than what we were proposing. But even if they weren’t outrageously high, is that a fair provision?  Do you have contracts with your customers that are cost-plus?  You probably wish you did, because then you wouldn’t need to control your costs. And how do you know that the rate increase really does reflect their actual labor cost increases?  Do you really want to get in the business of auditing their payroll?  And do you really think they’ll allow you to?  Nope, you’ve just got to trust them.  Feeling like a sucker yet?

Should a business be able to analyze its costs and tell their customer, “sorry, we need to raise our prices to you?”  Absolutely.  But you should also be able to answer with, “sorry, we’re going elsewhere.”  This is America, after all.

Lessons for you:

1.  Don’t agree to automatic rate increases.  If they give you a sob story about their hard-to-control cost increases, then remind them that since you’re only signing a one-year contract, they’re only locked into the rate for a year.  After that, they can propose a higher rate for the subsequent year.  But you will have to agree to it.  So chances are they’ll be much more reasonable about it.

Share your thoughts, success stories, horror stories, comments or questions:

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