Whole-volume or shortfall drafting: one phrase in a volume band clause, a factor of 14.28 in what it costs.
A minimum volume surcharge charged on the whole year's volume costs the buyer, per unit short, the surcharge rate times the price of every unit bought that year, divided by the units it was short. In the worked case a 4.5 per cent surcharge on all 51,400 units, against a 55,000 threshold, costs 253,072.96: 70.30 for each of the 3,600 units short, or 64.2 per cent of the unit price. Drafted on the shortfall alone, the same clause would cost 17,724.95, 14.28 times less.
Worked in full in Contract Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Volume band clauses are usually read as a modest price adjustment: miss the band, pay a few per cent more. The arithmetic depends entirely on one drafting choice, whether the surcharge applies to the whole volume or only to the units below the threshold, and that choice is often made in a late redline nobody prices.
The case is Larchmere Industrial, the fictional buyer in the companion files of Contract Management, which signed a three-year supply agreement on a tender volume of 62,000 units a year.
| Year | Units taken | Average price | Below 55,000? | Units short |
|---|---|---|---|---|
| 1 | 58,400 | 104.00 | no | 0 |
| 2 | 51,400 | 109.41 | yes | 3,600 |
| 3 | 49,900 | 116.32 | yes | 5,100 |
| Term | 159,700 |
The clause: if annual volume falls below 55,000 units, a surcharge of 4.5 per cent applies to the price of every unit bought that year. Prices rise in years two and three because the contract is indexed.
Whole-volume surcharge = units taken × price × rate (if units < threshold)
Cost per unit short = whole-volume surcharge ÷ (threshold − units taken)
Shortfall surcharge = (threshold − units taken) × price × rate
=IF(B2<B1,B2*B3*B4,0) with the threshold in B1, units in B2, price in B3 and the rate in B4.| Year | Whole-volume surcharge | Per unit short | Shortfall-only surcharge | Ratio |
|---|---|---|---|---|
| 1 | 0.00 | 0.00 | ||
| 2 | 253,072.96 | 70.30 | 17,724.95 | 14.28 |
| 3 | 261,190.72 | 51.21 | 26,694.84 | 9.78 |
| Term | 514,263.68 | 44,419.80 | 11.58 |
Over the term the clause as signed costs 514,263.68, about 3.22 for every unit bought. Drafted on the shortfall it would have cost 44,419.80. The difference, 469,843.89, was decided by a few words in the operative sentence.
The per-unit-short figure is the one that matters in a negotiation. A unit not bought in year two still costs the buyer 70.30, nearly two thirds of its price, without the part. That is not a price adjustment. It is close to a take-or-pay obligation, and it should be negotiated as one.
The clause also has a cliff. At 55,000 units the surcharge is zero; at 54,999 it is 270,792.99. One unit of volume moves the cost by more than a quarter of a million, because the rate switches on for all units at once. Each surcharged unit costs 4.92, multiplied across the whole year.
| Threshold | Whole-volume drafting | Shortfall drafting |
|---|---|---|
| 48,000 | 0.00 | 0.00 |
| 50,000 | 261,190.72 | 523.43 |
| 52,000 | 514,263.68 | 13,946.15 |
| 55,000 | 514,263.68 | 44,419.80 |
| 58,000 | 514,263.68 | 74,893.44 |
| 60,000 | 787,575.68 | 102,697.21 |
Under the whole-volume drafting the exposure moves in steps: a threshold of 50,000 catches year three only, and anything above 51,400 up to 58,400 catches both weak years, which is why 52,000, 55,000 and 58,000 cost the same. Under the shortfall drafting it moves smoothly with the gap. A buyer who cannot change the drafting should at least find the threshold at which the exposure disappears on its low case, here anything at or below 49,900, and ask for that one.
The clause is tested against the base case. At the tender volume of 62,000 units it never bites, so the approval paper records it as costless. Year one, at 58,400, cleared the threshold with 3,400 units, 6.2 per cent, to spare. Year three came in 19.5 per cent below the tender volume. A volume band is a bet on the downside, and it has to be priced on the downside: test it against your low case, never your base case.
The second mistake is to compare the surcharge rate with the price gap between bids. Four and a half per cent sounds smaller than most negotiated price differences. Expressed per unit short, it is 64.2 per cent of the price, and that is the comparison a buyer should carry into the room.
The free workbook for this case on the Contract Management companion page prices the volume band alongside the other clauses of the Larchmere agreement. The indexation that sets the prices above is worked in when an indexed price overtakes a dearer firm bid, and another clause whose drafting matters more than its headline is in is a longer warranty worth more than a better remedy.
It depends on the drafting. If the surcharge applies to the shortfall, multiply the units short by the price and the rate: 3,600 times 109.41 times 4.5 per cent is 17,724.95. If it applies to the whole year's volume, multiply all 51,400 units instead, which gives 253,072.96, 14.28 times more for the same miss.
Take-or-pay charges for units not taken, usually at a large share of price. A whole-volume surcharge looks smaller but can behave like it: here a 4.5 per cent surcharge costs 70.30 for each of 3,600 units short, 64.2 per cent of the 109.41 price. Express any volume clause per unit short before comparing it.
Run it against the low case, not the tender volume. At 62,000 units the band never bites. Volumes of 51,400 and 49,900 trigger 514,263.68 of surcharge over three years. Then find the threshold at which the low-case exposure is zero, here 49,900 or below, and negotiate for that.
This article is one calculation from Contract Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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