What is the purpose of a price adjustment agreement?

The purpose of a price adjustment agreement is to allow for price changes based on market conditions. Such agreements are particularly important in contracts where the cost of materials or labor may fluctuate due to external factors such as inflation, supply chain issues, or changes in demand. By incorporating price adjustment clauses, both parties can ensure that the contract remains fair and equitable throughout its duration. This flexibility helps to mitigate the risks associated with price volatility, enabling suppliers to maintain margins while allowing buyers to adapt to changing market conditions.

The other options, while related to price management, do not encapsulate the fundamental purpose of a price adjustment agreement. Fixing prices for the duration of a contract is more characteristic of fixed-price contracts, where price certainty is paramount, but it lacks adaptability to market shifts. Similarly, ensuring that all costs are predetermined by the buyer does not consider the dynamic nature of the market, and limiting the duration of price negotiations doesn't allow for the ongoing adjustments that a price adjustment agreement is designed to address.