Using Index-Linked Contracts to Share Price Risk in Construction
How index-linked construction contracts can reduce contingencies, improve transparency, and fairly share price risk between clients and contractors
18 Jan 2026
One of the biggest challenges in construction pricing is deciding who carries price risk.
When risk is unclear, it usually ends up priced defensively. Contractors add contingencies. Clients pay more than expected. And trust across the supply chain erodes.
Index-linked contracts offer a more balanced alternative.
Rather than fixing a price that includes unknown future inflation, part of the contract value is linked to an agreed index. If prices move up or down, the contract adjusts transparently based on published data.
This approach avoids arguments about forecasts, assumptions, or renegotiation. Everyone can see how the price is moving and why.
The goal is not to eliminate risk, but to allocate it fairly and visibly.
Used well, index-linking can improve outcomes for all parties.
Contractors benefit from:
Lower upfront contingencies
Reduced exposure to extreme price movements
Clear mechanisms for adjustment
Clients benefit from:
More competitive tenders
Better visibility of cost drivers
Reduced risk premiums embedded in pricing
Funders and stakeholders gain confidence because price movements are governed by agreed rules, not disputes or ad-hoc renegotiation.
Index-linked structures work best when they are simple, clearly defined, and supported by robust benchmarks. They can also be combined with separate price protection agreements, giving flexibility depending on project duration and risk appetite.
In volatile markets, certainty does not come from guessing prices correctly. It comes from agreeing in advance how change will be handled.