3.10 Preparatory work undertaken by the public sector should identify contract lengths before going to market. The length of loan periods available in the debt capital markets must not be a material factor in dictating the contract length. Factors that may influence the duration of the contractual relationship between the contractor and the procuring authority may, amongst others, include:
• Duration of the requirement, particularly the ability to forecast quality and quantity outputs in the longer term;
• Life of the assets underpinning the service, including the timing of major maintenance and renewals. For instance, a second major refurbishment cycle within the contract will involve a tradeoff between certainty of service provision and a pricing risk premium to account for costs 20-30 years in the future being highly unpredictable;
• Importance of continuity in the delivery of the service including the degree of transition difficulties and inefficiencies that might be caused by changing contractors and the extent to which the incentives on the incumbent in run up to change of contractor will be weakened and can be mitigated;
• Ability and importance of maintaining performance incentives over time- for example what would the consequences be of the contractor performing at a level just above default for poor performance over a long period of time;
• Viability of re-competing the contract regularly including consideration of private sector capacity, bidders likely willingness to bid against the incumbent, and the bid and process costs involved;
• Ability of the contractor to accurately forecast its cost base, including the link between indexation mechanisms, market-testing and demonstrating VfM for long term fixed priced contracts;
3.11 Some of the issues raised by these factors are best resolved by forming a long-term relationship, while others through re-competing the contract at more regular intervals. The balance between these positions will also be affected by the nature of the asset being considered for instance, differentiating between the asset and associated services provided. When a long-term contract is chosen there will be a need to include specific mechanisms in the contract to address the downside of a long-term relationship, obvious examples in the case of soft services are the use of benchmarking and market testing and a robust mechanism for change.
3.12 In setting the contract length it is important to do so with reference to the period over which the need for the services can reasonably be predicted. For example, it would be poor value to enter into a long term contract for defined services if it is likely that the need for such services and how they are provided may change significantly due to demographic changes or changes in technology. It is poor value to rely on variation mechanisms under long-term contracts as an alternative to setting appropriately shorter contract terms initially.