It may be appropriate to have a ratchet mechanism to increase the incentives for the Contractor to provide long-term solutions to re-occurring performance failures and avoid persistent failures. This can be useful where the financial deductions that accrue following a performance failure are initially insufficient to provide an appropriate incentive on the Contractor to rectify the failure. A key advantage of a ratchet mechanism is that poor performance relating to what may be perceived as less key aspects of the project will, if such poor performance continues for a significant period, cause increased financial loss to the Contractor thereby providing a greater financial incentive to perform.
Authorities should avoid ratchet mechanisms, which are unduly complicated and should avoid including onerous measures in the Payment Mechanism, which may lead to poor value for money because Contractors introduce additional risk premiums.
A simple ratchet mechanism should be included that works by increasing the level of deduction for a particular failure that persists for longer than a given time period. With such ratchets the Performance Measurement Framework will need to cater for monitoring a fault that may persist for some time and the Payment Mechanism will need to define the deduction that arises month by month.
An additional ratchet mechanism can be included which increases the level of deduction for a particular failure that occurs in excess of a given number of occurrences in a stipulated time period. Given that it is recurrence of the "same failure" that triggers this type of ratchet the Authority should ensure the definition of "same failure" is thought through in detail early in the development process.
Where ratchets are used it is important to consider the practicalities of monitoring and recording failures and the interaction of the ratchet mechanism with other aspects of the Contract, such as rectification periods and termination triggers.