15.5.1 The following provisions of this Section 15.5 are relevant if a benchmarking process is included in the Contract, either as the sole value test or included along with market test provisions (as outlined in Section 15.4).
15.5.2 To ensure any benchmarking exercise provides a good comparison with the costs of a Sub-Contractor, the Contractor will have to ensure the following issues are addressed:
• that the cost comparison encompasses only the services being benchmarked;
• that the cost comparison includes factors relating to risks inherent in a change of service provider (such as mobilisation costs);239
• that Contractors' own costs are not used as a benchmark;
• whether individual services are to be benchmarked separately, in clusters, or all together;
• whether it is possible to rely on the information being provided by those persons contacted for benchmarking information;
• whether it is possible to verify the appropriateness of the benchmarking information as a comparator for the service being benchmarked; and
• whether there is any other reason or factor that would make benchmarking unrealistic or impracticable.
See further Operational Taskforce guidance referenced at Section 15.3.3.3 above.
15.5.3 The procedure for carrying out a benchmarking exercise is as follows:
• on certain fixed dates, the Contractor compares certain of its costs (e.g. what it pays its Sub-Contractors providing soft services) with equivalent prevailing market costs (e.g. what it would have to pay other Sub-Contractors to provide the equivalent service) and, if appropriate, proposes a variation to the Unitary Charge;
• the Authority and the Contractor should generally begin planning 40 weeks ahead of the benchmark adjustment date in order to allow sufficient time to complete the benchmarking process (and allow a market testing to occur, should this be needed and provided for in the Contract), though this period could be longer or shorter depending on the scale and nature of the relevant services;
• if the market cost is higher than the Contractor's current costs and the current Sub-Contractor is still obliged to provide the Service at the lower price, there is no need to adjust the Unitary Charge (it may be that the Sub-Contractor concerned is simply more efficient than the rest of the market);
• if the market cost is higher than the Contractor's current costs and the current Sub-Contractor is contractually entitled to review its price, the Unitary Charge may be adjusted (although this will not necessarily be the case - see Section 15.5.4);
• if the market cost is lower than the Contractor's current costs, there should be an adjustment to the Unitary Charge (see Section 15.5.4). It could be that the sub-contractor is not as efficient as its competitors. The price decrease should encourage the Contractor to take appropriate steps to reduce its costs (for example by replacing the sub-contractor, taking into account the costs of such replacement). The Authority should encourage efficiency, for example by comparing the Contractor's costs to those of the most efficient quartile of the market, rather than the median;
• the Authority must have the right to inspect the Contractor's and sub-contractor's cost information to confirm cost details. Full transparency of cost information is needed for benchmarking to function properly (see Clause 26.2 (Contractor's Records and Provision of Information); and
• if the Authority and the Contractor cannot agree on any price adjustment or the Authority is not satisfied that there has been a robust benchmark process, then if the Contract so provides the Service concerned should be market tested (see Section 15.4 (Market Testing)).
15.5.4 The outcome of the review should not necessarily be a direct pass-through to the Authority of the benefit or burden of all the cost change. There should instead be a formulaic adjustment that shares any cost increase or decrease in a way that incentivises the Contractor to control its costs. The sharing ratios need not be symmetrical on an upwards and downwards price variation, and the Authority should assess the likely value for money impact of a greater sharing in a price reduction than a price increase when deciding on such an approach.
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239 Another relevant consideration may be the credit standing of a replacement service provider. This will depend upon the particular service being benchmarked (or market tested) but will be of specific application where the particular service involves significant capital outlay over a long term.