How to Build Price Increases Into Contracts Before You Need Them

A facilities management contract signed in 2019 without CPI escalators is effectively a different contract today. Wage costs, supply chain, and utilities have all moved. The revenue line hasn't. Whatever margin that contract was earning five years ago, it's earning less now -- assuming it's still profitable at all.

This is the core problem with long-duration service contracts priced without escalation mechanisms. The original economics made sense. Over time, they don't. And the time to address it isn't at the renewal negotiation -- by then the client has already internalized the current price, and any increase looks like you're taking something from them.

ISS ran this problem at scale before 2020. Contracts across 70+ countries, many structured as single-service agreements with annual renewals and no systematic escalation mechanisms. Organic revenue growth of 2-4% annually was barely covering wage inflation in the UK, France, and the Nordics. In high-inflation years, it covered nothing. Operating margin declined from 5.7% to 4.2% between 2017 and 2019 as costs rose faster than contractually permitted rate increases.

The fix, implemented under CEO Jacob Aarup-Andersen through the OneISS strategy, was structural. New and renewed key account contracts were required to include escalation mechanisms linked to local labor cost indices and CPI. ISS's description: contracts with "risk sharing, inflation indexation and scope clearly defined." Not ad-hoc rate negotiations at renewal -- systematic pass-through rights baked into the commercial terms at signing.

The results compounded. Organic revenue growth recovered from 2.0% in FY2021 to 9.7% in FY2023, with management explicitly attributing a meaningful share to price increases flowing through indexed mechanisms. Key account retention reached 95% -- ISS's highest in its 120-year history. The inflation environment that hit unprotected competitors amplified ISS's advantage: indexed contracts automatically captured the pricing headroom that inflation created. -> ISS contract structure

Conduent ran a version of the same logic on government services contracts. Starting in 2020, the company negotiated 2-3 year extensions on key contracts by offering technology modernization roadmaps in exchange for longer commitment periods and built-in annual price adjustments of 2-3%. Average contract term for new signings moved from approximately 2.5 years to over 4 years. The adjustments were modest -- but cumulative, and the negotiation happened once, at the moment Conduent held the most leverage. -> Conduent contract restructuring

Aramark applied the same principle in reverse during 2022-2023: food and labor inflation became an emergency test of which contracts had pass-through provisions and which didn't. Contracts structured with explicit inflationary pass-through rights held margin. Contracts without them required renegotiation in a market where clients had already absorbed inflation from every other supplier. -> Aramark margin recovery

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Clients don't reject escalators on principle. They push back on the rate and the mechanism. A fixed 4% annual increase in a deflation environment looks punitive; a CPI-linked adjustment in the same environment costs you nothing but maintains the right. The companies that negotiate these terms successfully offer a clear value exchange: longer commitment in exchange for escalation rights, or a technology investment in exchange for annual adjustments. The client gets certainty on term; the provider gets certainty on margin.

The leverage window is narrow. It opens when the contract is being negotiated and closes at signature. Once the contract runs, the pricing structure is fixed until renewal -- and at renewal, the balance of power has shifted to whoever has better alternatives. ISS explicitly accepted near-term revenue decline and contract exits to rebuild the portfolio on better terms rather than carry the existing structure forward.

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Start with a simple question: what share of your contract portfolio has embedded price escalation mechanisms? If the answer is less than half, the revenue line is systematically exposed to cost inflation with no contractual recourse. Contracts coming up for renewal in the next 12-18 months are the window -- the moment to introduce escalation rights as part of the negotiation, ideally in exchange for a term extension or committed scope.

For new contracts, write inflation indexation in from the start. The negotiation is significantly easier before work has begun than after the client is receiving service and has leverage over a transition. The mechanism matters less than the principle: CPI-linked, fixed percentage, or hybrid -- any of them is better than none.