A) Pass-Through-System Applied Step-by-Step

Objective:
Protect margin, FCF, ROCE, and market value when external costs rise.

Core logic:
Cost Shock → Cost Driver → Contract Clause → Price Adjustment → Customer Communication → Invoice → Margin Protection

B) The 10-Step Pass-Through Process

Step 1 — Detect the Cost Shock
Identify where the external cost increase comes from.

Examples:

Cost ShockTypical Source
Energy cost increaseElectricity, gas, hydrogen, oxygen production
Logistics cost increaseFuel, drivers, tolls, delivery distance
Compliance cost increaseCO₂, safety, regulation
Asset cost increasecylinders, tanks, maintenance
Service cost increaseemergency delivery, telemetry, field service

Question:
Which cost increased, by how much, and since when?

Step 2 — Separate Controllable vs. Non-Controllable Costs

Not every cost should be passed through.

Cost TypeAction
External, uncontrollablePass through
Internal inefficiencyFix internally
Mixed costSplit: pass-through + productivity action

Rule:
Customers should not pay for your inefficiency, but they must pay for external volatility.

Step 3 — Calculate the Cost Delta

Use a clean formula:

Cost Delta = Current Cost − Baseline Cost

Example:

Baseline electricity cost: €100/MWh
Current electricity cost: €160/MWh

Cost Delta = €60/MWh

This is the amount that must be recovered.

Step 4 — Define the Pass-Through Formula

Simple model:

Pass-Through Amount = Cost Delta × Customer Consumption Factor

Example:

Customer consumes production volume equal to 1,000 MWh equivalent.

Cost delta: €60/MWh

Pass-through amount:
€60 × 1,000 = €60,000

Step 5 — Check the Contract Clause

Before applying the increase, verify:

ClauseMeaning
Energy surcharge clauseAllows energy adjustment
Fuel surcharge clauseAllows logistics adjustment
CO₂ clauseAllows carbon cost recovery
Indexation clauseLinks price to published index
Extraordinary cost clauseAllows adjustment under exceptional volatility

No clause?
Then use a structured renegotiation letter instead of automatic invoicing.

Step 6 — Classify Customer Sensitivity

Not all customers react the same way.

Customer TypePass-Through Strategy
Strategic key accountExplain early, show formula
Low-margin customerApply firmly
High-volume customerUse index-based transparency
Price-sensitive customerOffer efficiency option
At-risk customerPhase adjustment with review date

Step 7 — Communicate the Increase Before the Invoice

Customer communication must happen before the invoice change.

Message structure:

  1. What changed externally
  2. Why it is outside your control
  3. Which contract clause applies
  4. How the formula works
  5. When the adjustment starts
  6. How the customer can reduce exposure

Feynman sentence:
“We are not increasing margin; we are passing through external cost pressure to keep supply reliable.”

Step 8 — Apply the Invoice Adjustment

Make the pass-through visible.

Example invoice lines:

Invoice LineDescription
Base product priceNormal gas/product/service price
Energy adjustmentLinked to production energy cost
Logistics surchargeLinked to fuel/delivery cost
CO₂ adjustmentLinked to compliance cost
Service adjustmentLinked to special service cost

Rule:
Transparency increases acceptance.

Step 9 — Measure Pass-Through Effectiveness

Use the key KPI:

PTE = Passed-Through Cost Increase ÷ Total External Cost Increase × 100

Example:

External cost increase: €1,000,000
Passed through: €850,000

PTE = 85%

Interpretation:

PTE LevelMeaning
90–100%Excellent pricing discipline
75–89%Good, but leakage exists
50–74%Margin under pressure
Below 50%Value destruction risk

Step 10 — Close the Margin Leakage Loop

After implementation, review:

Review AreaKey Question
Revenue recoveryDid we recover the cost delta?
Margin protectionDid EBITDA stay stable?
FCF effectDid cash flow remain protected?
Customer reactionDid we lose volume or improve discipline?
Sales behaviorDid sales apply the system or discount it away?
Contract qualityDo clauses need upgrading?

C) CEO/CFO Pass-Through Control Board

Control PointCEO/CFO Question
Cost ShockWhat changed?
ExposureWhich customers/products are affected?
FormulaIs the recovery logic fair and simple?
ClauseAre we contractually protected?
CommunicationIs the customer message clear?
InvoiceIs recovery visible?
KPIWhat is our PTE score?
ResultDid we protect FCF and ROCE?

D) Applied Industrial Gas Example

Situation:
Energy prices rise sharply. Production cost for liquid oxygen and nitrogen increases.

Step-by-step application:

  1. Electricity cost rises from €100/MWh to €160/MWh
  2. Cost delta = €60/MWh
  3. Affected product: bulk oxygen supply
  4. Affected customer: steel processor
  5. Contract includes energy index clause
  6. Customer consumption equivalent: 1,000 MWh
  7. Pass-through amount = €60,000
  8. Customer receives explanation before invoice
  9. Invoice includes separate Energy Adjustment Line
  10. CFO measures PTE and margin impact

Result:
The company protects cash flow without hiding the cost increase inside general pricing.

E) RapidKnowHow Pass-Through Action Formula

1. Detect the external cost shock.
2. Prove the cost delta.
3. Link it to contract and customer usage.
4. Communicate transparently.
5. Invoice visibly.
6. Measure recovery.
7. Improve the contract system.

F) Final Strategic Insight

A weak Pass-Through-System says:

“We hope customers accept higher prices.”

A strong Pass-Through-System says:

“We operate a fair, transparent, contract-based cost recovery system that protects supply reliability, free cash flow, and long-term customer value.”

RapidKnowHow Board Sentence:
Pass-through converts volatility from a margin threat into a managed cash-flow mechanism. – Josef David

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