Index Adjustment Floors
Identify protected amounts.
Estimated reading time: 1 minute
BLS guidance says escalation agreements should specify their base payment, index, reference periods and adjustment formula, including any floor. Different floors can produce different payments.
Fictional monthly service fee: initially $2,000. A consistent, unadjusted index moves from 120 to 126 at the first annual review, then 123 at the second. These are invented observations, not published CPI.
Method A adjusts the previous fee by each annual index change but never permits a decrease. First review: $2,000 × 126 ÷ 120 = $2,100. Second review: the index falls, so the fee remains $2,100.
Method B recalculates from the original fee and index, with a $2,000 minimum. First review also gives $2,100. Second review gives $2,000 × 123 ÷ 120 = $2,050, above that minimum.
The second-review difference is $50 monthly, or $600 over twelve unchanged payments. Both methods have a floor; they protect different amounts.
Check the contract’s actual base, comparison dates and decrease rules before forecasting payments. Neither invented method interprets a real agreement or authorizes changing a payment.
