1.29 Although authorities should ensure that they obtain competitive prices by holding well-run competitions, they will take additional comfort if there are contractual means for maintaining value for money during the contract period. For example, authorities will wish to ensure that the price they have agreed to pay in future years will not be in excess of future market prices for such services. Authorities can do this through benchmarking services, both in terms of price and quality, against market comparators, or through market testing. Where it is not possible to market test for services the authority and contractor need to have an agreed pricing system in the contract.
1.30 Profit and other gain-sharing mechanisms can incentivise contractors to reduce costs to the authority. Such mechanisms may allow the authority to share in any profits above a certain defined level. A particular example where such gains may arise is where a project is refinanced.
1.31 Any mechanism for profit sharing will require the contractor to supply relevant information to the authority. The inclusion of open book accounting will help to ensure that these value-for-money mechanisms are working as they should.
5 |
| The level of performance that can lead to replacement of service providers and termination of the contract | ||
|
| Period | Replacement of service provider if performance points awarded exceed a given percentage of the maximum points available: | Termination of the contract if performance deductions exceed: |
|
| In any six-month period | 35% | £1,107,000 |
|
| In any one-year period | 25% | £1,845,000 |
|
| In any three-year period | 20% | £4,428,000 |
|
| Source: Ministry of Defence |
|
|
1.32 In this deal: