Tooling Amortization
Meaning ~ Procurement cost-spreading structures distribute custom mold and die development fees across a specific part volume instead of billing the expense upfront
True-up Clause
Meaning
Contractual provision enables the retroactive adjustment of prices or quantities to align actual performance with initial estimates. In supply agreements, a true-up clause protects both parties from variations in raw material costs or order volumes that were impossible to predict at the start. It mandates a scheduled reconciliation where the figures on paper are matched against physical reality.
Price Adjustment
Financial settlements occur at fixed intervals like the end of a quarter or a project phase. If the volume used was lower than planned, the true-up clause specifies how much credit is returned to the buyer. This ensures that the vendor remains whole while the client only pays for actual consumption.
Settlement Mechanism
Calculations rely on objective data logs from the factory or warehouse. When commodity prices swing wildly, the true-up clause allows the unit price to migrate according to a pre-defined index. This prevents contracts from becoming unprofitable and keeps the supply stable during volatile market periods.
It reduces the stress of forecasting by providing a safety valve for estimation errors.
Volume Realization
Adjustments prevent long-term imbalances in the ledger. The presence of a true-up clause encourages transparency between partners by sharing the risk of uncertainty.