1.5.1 As outlined in Section 1.3 above, the recommended approach is to provide for market testing of soft services in the Contract, as this is most likely to yield best value for money. The procedure for market testing should be as follows:
• on certain fixed dates, the Contractor re-tenders the relevant Project Document and conducts a competition for potential replacement sub-contractors (and normally the existing sub-contractor would be allowed to bid).3 Care must be taken to avoid any conflict of interest issues, for instance where the Contractor may be part of the same corporate group as any bidder;4
• if the competition shows that the Contractor can obtain better value for money with a new winning tenderer, then the Unitary Charge should be reduced (as described in Section 15.5.4) and the Contractor would obtain a reduction in cost by appointing the winning tenderer as a replacement sub-contractor; and
• if the competition shows that the Contractor's current sub-contractor is better value for money than any potential replacement, then the sub-contractor should continue, but with an appropriate change being made to the Unitary Charge to reflect the sub-contractor's bid price.
See further Operational Taskforce Note 1 Benchmarking and Market Testing Guidance (October 2006) on HM Treasury website.
1.5.2 Information will need to be collected by the Contractor and made available to tenderers for the market testing to be effective. For example, information relating to the terms and conditions, job title, age, length of service and benefits of the employees of the service provider engaged wholly or mainly in the provision of the market tested services may be required.5 The Contract should provide that this information is provided to the Authority (see Section 31, (Transparency and Information)).
1.5.3 The Contract should also make clear that the market testing of each Service is the responsibility of the Contractor who should ensure a smooth transition between sub-contractors. The Authority may however wish to actively support the Contractor in encouraging bidders for the relevant Services, perhaps by the appointment of an independent tender manager, in order to ensure there are sufficient bidders willing to compete against an incumbent Service provider to provide an effective competition.
1.5.4 Suitable drafting for a market testing programme is as follows:
1.5.4 Market Testing
(a) At least [40] weeks6 before each market testing date, the parties shall meet together as often as may be necessary in respect of all market tested services to be market tested on that date:
(i) to consider any changes required to the relevant services;
(ii) to discuss and seek to agree the appropriate manner of advertising the services required and the means of identifying prospective tenderers;7
(iii) to discuss and seek to agree the tender requirements which must include:
(A) a statement of the tender validity period;
(B) details of the tender evaluation criteria;8
(C) the terms and conditions under which the services will be contracted;
(D) information relating to employees and their conditions of employment;9
(E) the information that tenderers are required to provide;
(F) how many tenders are required for the market testing to be valid; and
(G) whether or not an independent tender manager needs to be appointed by the Contractor to manage the tender process.
1.5.5 Where a number of services are being market tested, the question may arise as to whether bidders must tender for all such services or whether they can select certain services and tender in respect of those only (for example, some bidders may only want to take over the catering function, whereas others may want a wider role). One way of dealing with this is as follows:
Grouping of Services
Unless the Contractor can demonstrate to the Authority that best value for money is likely to be achieved for the Contractor if market tested services are tendered separately or in particular groupings, or if any market tested service is divided into separate parts, the grouping of any market tested services shall be left to the discretion of tenderers on the basis that the tender requirements shall specify that:
(a) tenderers may submit tenders for all or any of the market tested services; and
(b) if a tenderer submits a tender for a group or groups of market tested services, then it may be required to provide all or any of the services in such group or groups.10
1.5.6 The next step in the market testing provisions will be to specify how tenderers are selected.11 A suggested way of doing this is set out below:
Selection of Tenderers
(a) The Contractor shall be responsible for compiling the list of prospective tenderers and selecting the tenderers from the list of prospective tenderers on the basis of their:
(i) financial standing; and
(ii) technical and managerial experience and ability (taking into account any relevant references).
(b) The Authority shall have a right to prevent the selection of any person as a prospective tenderer if it reasonably believes that such person does not (or could not reasonably be considered to) comply with any of the criteria referred to in Clause 1.4.4 (a)(iii) above.
(c) The Authority shall, in its absolute discretion, have the right to prevent the selection of any person as a tenderer on the grounds that the prospective tenderer has committed a Prohibited Act.12
(d) The Authority shall have a right to review the list of prospective tenderers. The Contractor shall provide the Authority with an explanation of the reasons behind the non-inclusion on the list of prospective tenderers of any person identified as suitable by the Authority, if so requested by the Authority.
(e) The Contractor shall provide any prospective tenderer which is unsuccessful in being selected with an explanation of the reasons behind its non-selection, if so requested by the person in question.
1.5.7 Once the period for submission of tenders has ended, the Contractor must determine the best tender. The following suitable drafting deals with this issue:
(a) The Contractor shall determine which compliant tender in respect of any market tested service represents the best value for money.
(b) On making this determination, the Contractor shall supply to the Authority a copy of its tender evaluation, together with sufficient supporting information concerning the tender evaluation to enable the Authority to analyse and understand the basis for the Contractor's determination.
(c) If the Authority does not agree with the Contractor's determination, the Authority may, within 15 Business Days of being provided with the tender evaluation, dispute such determination and, if the parties do not resolve such dispute within a further 15 Business Days, the dispute shall be dealt with in accordance with Clause 34 (Dispute Resolution).
1.5.8 On selection, the winning tenderer will take over the provision of the Service and the Unitary Charge should be adjusted on the basis agreed in the Contract. As the Contractor is responsible for the market testing, the Authority should be indemnified against any claims brought against it (for example, from a losing tenderer) as a result of any market testing (for example, for a breach of the agreed market testing procedures).
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3 If, in unusual projects, the Authority is concerned that there may be a lack of bidders, the Authority could consider provisions whereby the incumbent was required to bid (if otherwise no bids might be made). If this is considered a possibility however, this may indicate that these are not actually suitable Services to be market tested. See Section 1.3.2 above.
4 See Chapter 4 of Operational Taskforce Note 1 "Benchmarking and market testing guidance", October 2006.
5 It may also be appropriate for the Contractor to make available to tenderers information relating to the relevant Service provider's shareholding in the Contractor (and/or Operating Sub-Contractor), including the terms of any associated shareholders' agreement.
6 Precise timing will depend on whether any prior benchmarking exercise is conducted. See Section 1.3.4 of Schedule 2.
7 This may include an OJEU notice.
8 These must be objective criteria.
9 This will deal with any exclusion required (such as retirement benefits and occupational pensions). Applicable TUPE regulations must be complied with.
10 The Authority should be aware of the danger of any less attractive services not being bid for and so may require these to be included in bids.
11 The Contract will also have to deal with the extent to which any person is disqualified from selection as a tenderer merely by virtue of its connection with any other person in the Project. Typically, no such connection should disqualify a tenderer provided an independent tender manager is appointed and appropriate information barriers are put in place. See Section 1.4.2 of Schedule 2
12 This may also include breach of security requirements in certain sectors. See Section 23.4 (Termination on Corrupt Gifts and Fraud) for the definition of "Prohibited Act".