For some projects, it may also be appropriate to establish price variation mechanisms to address unforeseen changes in operating costs. Price variation mechanisms may involve formal periodic benchmarking or market testing exercises to test the private party's cost structure. While, in theory, benchmarking and market testing assist in maintaining value for money, they are sometimes difficult to undertake in practice.
Benchmarking is the process by which the private party compares its own costs (which may include payments made to a sub-contractor) against the market costs of the contracted services. If the costs differ significantly from those charged by the market, a variation to the service charge might be proposed under an agreed benefit/cost-sharing mechanism.
Market testing is the periodic re-tendering in the market by the private party to test the value for money of the sub-contracted service. Usually only 'soft' services are subject to market testing. Soft services do not involve a significant outlay of capital, for example, information technology, cleaning and security services. Where market testing of sub-contracted services results in the replacement of a sub-contractor, this should be reflected in a price adjustment. Market testing is likely to be more disruptive to a private party than benchmarking, as it may involve replacing a sub-contractor.
Benchmarking or market testing of parts of the services may be particularly valuable when applied to facilities management services.
A proper benchmarking and market testing mechanism should:
• incorporate a regular timetable for conducting benchmarking or market testing (for example, every three to five years)
• ensure the market cost comparison only incorporates the services being benchmarked
• ensure the market services share a similar risk profile to the contracted services
• determine whether it is more appropriate to benchmark services collectively or individually
• ensure the reliability of the benchmark material.