Where the Contractor fails to meet the Performance Standards, Performance Deductions are applied to the Unitary Charge through the Payment Mechanism. The Output Specification should include clear Performance Standards and a comprehensive Performance Measurement Framework. The Payment Mechanism should provide a clear and comprehensive mechanism for calculating the total deductions based on the number of performance failures quantified using the Performance Measurement Framework.
The level of deductions should be set for each performance failure to reflect the severity of the impact of failure to comply with that Performance Standard.7 It is useful to categorise "severity" into a limited number of classes, for example high, medium and low. It is important that the level of the deduction is calibrated to be higher than the cost of the service being provided so that it is not cost effective for the Contractor to abandon the service. Guidance is provided in Section 9 of SoPC4.
Minimum deduction levels may be considered which apply for all classes of Performance Standard Failure so as to ensure that the deduction is sufficient to incentivise the Contractor to remedy the failure.
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7 Deductions set at an excessively high level may be deemed to be penalties and therefore unenforceable under English law. The deductions should reflect a genuine pre-estimate of the Authority's costs or losses where the Contractor fails to meet the Performance Standards.