Glossary
Cap and floor
Short answer
A cap and floor are limits on how much an indexed contract price can change in one adjustment period. The cap sets the maximum increase, the floor sets the minimum, which is often zero so prices never fall. Together they bound the effect of an index on the price.
By Pactinel editorial teamReviewed on October 22, 2026
Index-linked pricing exposes both parties to the index. Caps and floors manage that exposure.
- Cap: the highest percentage increase allowed, such as 5% per year.
- Floor: the lowest change allowed, often 0% or 2%.
- Collar: a cap and floor together.
Example
Annual fee: USD 100,000. Clause: "increase by the change in CPI, with a cap of 5% and a floor of 2%."
| CPI change | Applied increase | New fee |
|---|---|---|
| 1.0% | 2% (floor) | USD 102,000 |
| 3.4% | 3.4% | USD 103,400 |
| 8.0% | 5% (cap) | USD 105,000 |
Questions to settle
- Is the cap per year or cumulative over the term?
- Does unapplied increase carry forward ("catch-up"), or is it lost?
- Does a floor of 0% mean prices can never fall when the index is negative?
- Is the cap applied to the percentage or to the absolute amount?
Banked or carried-forward increases are a frequent source of invoice disputes, so confirm the wording before applying an uplift.
See price escalation clause and indexation.
This is general information, not legal advice.