How to Make Indexation Table like subcontract payment

▢  Write down the name of the subject matter to index according to the delivery price indexation agreement.

○ ‘Subject matter, etc’ means subject matter(goods), parts, semi-product and raw materials.

- For example, write "Coating solution" for the subject matter, etc. of delivery price indexation when "coating solution" is delivered to commissioning enterprise by commissioned enterprise.

▢  Describe Major raw material amounted more than 10/100 of delivery price.

▢ Raw materials do not include gratuitous materials for which the subcontracting company does not bear the cost, but they do include chargeable materials for which costs are incurred.)

* (Ex): Payment-based supplied material cost=For 1,000 Korean Won (Assumed as cost for one raw material), subcontractor's price before deducting payment-based supplied material=10,000 Korean Won, the raw material is categorized as over 10% of subcontractor's price because payment-based supplied material cost is 10% of subcontractor's price.

○ However, the indexation system may be applied by deciding as raw material to be indexed through mutual agreement even though the raw material is not categorized as Major raw material.

- For example, "nickel" may be decided as a raw material to be indexed by the agreement between commissioning enterprise and commissioned enterprise in spite that the cost of "nickel" is less than 10% of coating solution supplied to commissioning enterprise by commissioned enterprise.

- In principle, separate delivery price indexation table shall be made for more than two materials, but one indexation table may be made when indexation criteria are same for the raw materials to be used for the same subject matter, etc..

▢  Describe the indexes which become criteria to measure the portion of increase or decrease in 'price of subject matter, etc. of raw material' related to delivery price indexation.

○ The criteria index shall be decided by the index or equivalent level index noticed periodically by authoritative agencies.

(Example) The indexes notified in public by London Metal Exchange (LME), Bank of Korea (www.bok.or.kr), e-Naraindex (www.index.go.kr), Public Procurement Service (www.pps.go.kr), Ministry of Trade, Industry and Energy (www.motle.go.kr) and professional price investigation agencies registered to Minister of Economy and Finance.

- The price in Korean Won by reflecting exchange ratio may be set for the basic price in case of using international indexes.

※ Exchange rates may also be considered in the subsequent delivery price indexation formula.
   · If the exchange rate is reflected in the basic index, exchange rate fluctuations can be reflected in the determination of indexation requirements
   · However, when exchange rates are included in the indexation formula, exchange rate fluctuations do not affect the determination of indexation requirements

▢ However, any of the following may be chosen when improper indexes noticed in public by authoritative agencies or there are no indexes.

① Price directly negotiated by the prime contractor with the seller of raw materials or Price sold by the prime contractor to the subcontractor.
    - The case of payment-based raw material supply may be decided as follows.

② Price that can be verified by the commissioning enterprise as the selling price per unit of the raw material sold by the seller of the raw material to the relevant commissioned enterprise
   - The following indexation methods may be decided when actual raw material purchasing price is modified by reflecting actual manufacturing cost of commissioned enterprise.
   - Commissioned enterprise shall cooperate with commissioning enterprise to check the unit price of raw material like offering the breakdown of cost.
    * In this case, the Commissioned enterprise must submit proof of raw material costs in good faith, and thecommissioning enterprise must actively cooperate to protect the submitted data from being used for purposes other than the indexation contract.


③ The price determined based on the mutually agreed data (Agreement, cost breakdown and quotation sheet)

   - The contractors may establish the basic indexes under free discussion like the case of using any of the market prices, international index and mixed price of actual purchasing cost and international index.

○ In case of more than two raw materials for indexation, all of them shall be described as follows.

▢  Describe 'base time' and 'comparison time ' to calculate the fluctuation rate of raw material basic price* on adjustment date.

* Unit price of raw material at particular time according to raw material price basic index

○ The rate of change in the basic price of raw materials refers to the rate of change in the price of raw materials between "base time" and "comparison time."

- For example, when the raw material basic price of “copper” is 10,000 Korean Won/kg, and 12,000 Korean Won/kg at comparison time , the fluctuation rate is * 100 = 20%

○ Previous adjustment date may be decided for 'base time' and current adjustment date may be decided for 'comparison time ."

- For the following case, the comparison time is April 2023 when current adjustment date is May 10, 2023, and January 2023 becomes the base time when the previous adjustment date is February 10, 2023.

○ Describe in all as follows when more than two materials are to be indexed and base time and comparing are differently decided.

▢ Adjustment condition shall be described by deciding less than 10/100 between the commissioning enterprise and the Commissioned enterprise

○ For example, in case of deciding over 3% or under -3%, the delivery price shall be adjusted when the fluctuation rate between base time and comparing falls on adjustment condition, otherwise, the delivery price may not be adjusted.

○ Regardless of the rate of change, commissioning enterprise and commissioned enterprise can also decide to adjust the subcontract price on each adjustment day.

○ The case of selling of raw material to subcontracting company by contracting company may be decided as follows.

○Describe all as follows when more than two raw materials to be indexed and adjustment conditions are different.

▢ Describe adjustment period for deciding Y/N for delivery price indexation depending on the satisfaction of raw material basic price fluctuation rate to adjustment condition.

○ Adjustment period may be decided like, day, week, quarter, half year and year.

○ The case of selling raw material by contracting company to commissioning enterprise may be decided as follows.

○ It may be adjusted at each satisfaction to adjustment condition.

○ Describe all as follows when more than two raw materials to be indexed and adjustment periods are different.

▢ Describe the date for deciding delivery price indexation according to adjustment period.

○ It may be decided as '1st day of every month' when adjustment period is 1 month or '10th of the first month of each quarter' when adjustment period is a quarter.

○The case of selling of raw material to commissioned enterprise by commissioning enterprise may be decided as follows.

○ Describe all as follows when more than two raw materials to be indexed and adjustment dates are different.

▢ Describe the date of applying adjusted delivery price on the goods, etc.

○ Contracting company shall pay based on adjusted amount according to delivery price indexation on the goods to be delivered after adjusted price reflection date according to Clause 4 Article 6 of Standard Indexation Agreement.

○ Describe all as follows when more than two raw materials to be indexed and adjustment price reflection dates are different.

▢ Describe formula for estimating delivery price to be adjusted according to delivery price indexation.

○ In case of indexing the delivery price in consideration of basic price and weight of the raw material, it may be decided as follows.

○ In case of multiple raw materials to be indexed, it may be decided as follows.

○ It may be decided as follows when the points of delivery price indexation for a few specification details on single item are defined in one indexation agreement

▢ It may be decided as follows in case of using reflection rate concept like partial reflection of fluctuation rate of raw material price.

* Deciding 100% of reflection rate meets the purport of introducing delivery price indexation, but it may be decided differently in consideration of the independent situation of contracting company and subcontracting company. However, only the agreement with over 50% of reflection rate is approved at the penalty score estimation according to 3. A, 6 of [Table 3] in Enforcement Decree Of The Act On The Promotion Of Mutually Beneficial Cooperation Between Large Enterprises And Small And Medium Enterprises.

※ The above formula may be expressed as follows.

▢ In case of difficulty for direct clarifying the weight and unit price of raw material (Due to issues like management information, etc.), it may be decided by reflecting fixed ratio (in consideration of the ratio of unit price out of delivery price) to delivery price.

▢ Describe the points required for delivery price indexation out of the points in the above. (Criteria on delivery price truncation, etc.)