Understanding Inflation Fixes: Locking Cost Certainty Without Changing Your Contract
You don’t need to renegotiate your construction contract to manage inflation risk. An inflation fix allows you to stabilise costs alongside existing agreements.
1 Nov 2025
What is an Inflation Fix?
An inflation fix is a financial agreement that runs alongside your construction contract.
It allows two parties to exchange the difference between a fixed inflation rate and a published inflation index, without changing the underlying contract terms.
It is commonly linked to indices such as RPI or CPI and is used to manage the risk of cost escalation on long-duration projects.
It works in a similar way to other risk management tools used in energy and infrastructure markets.
One party agrees to a fixed rate of inflation.
The other remains exposed to the actual index outcome.
At the end of each period, the difference between the fixed rate and the observed index movement is settled in cash, based on an agreed notional value.
The physical contract stays exactly as it is.
The inflation risk is managed quietly in the background.
What makes up an inflation fix?
Each inflation fix typically includes:
Notional value – the portion of contract value being protected
Duration – how long the protection runs (for example 1–5 years)
Index – such as RPI or CPI
Fixed rate – the agreed inflation rate used for protection
It is a separate agreement that does not amend your construction contract, payment mechanism, or supplier arrangements.
Why index alignment matters
For the fix to work properly, it must reference the same inflation index used in your contract or cost assumptions.
For example:
Physical contract: “Costs adjusted annually in line with RPI”
Inflation fix: Fixed at 3.5% against RPI
This keeps the exposure aligned and ensures the protection behaves as intended.
How inflation fixes create cost certainty
Inflation fixes do not stop inflation.
They neutralise its financial impact.
If inflation rises above the fixed rate:
Costs increase under the contract
The inflation fix pays out the difference
If inflation is lower than the fixed rate:
Costs rise less under the contract
The inflation fix settles the difference the other way
In both cases, the net outcome is predictable.
The same logic applies whether you are a contractor protecting margins, or a client seeking budget certainty.
Why parties use inflation fixes
Contractors
Protect margins on long-term fixed-price work
Reduce contingency and pricing defensively
Improve confidence when bidding
Clients and funders
Gain clearer long-term cost visibility
Reduce volatility in project budgets
Support more transparent risk sharing
Inflation fixes are not about forecasting or speculation.
They are about stability and control.
Final word
At Terra Fortis, we help parties structure inflation fixes that align with real construction contracts and real cost exposure.
You do not need to change your contract.
You just need a clearer way to manage inflation risk.
One index. One agreement. Fewer surprises.