15. The focus here is to design and agree a payment and performance mechanism which produces the appropriate incentives on the contractor to deliver the requirement, which contains a practical performance monitoring process, which levies appropriate deductions for poor performance and which escalates to the right to terminate when performance is consistently unacceptable.
16. An outline mechanism should be constructed by the project team (with the assistance of its advisers) and included in the documentation released to bidders at the ITN/ITPD stage. This will ensure that all bidders' proposals are formulated from the same basis which aids the bid evaluation process. The calibration of the mechanism is key in determining the appropriate balance between incentivisation and value for money. Disproportionately harsh deductions for minor service failures are likely to be poor value for money as the risk of service performance failures will be priced in the bids. It is also likely that hair triggers which lead to contractual default will be unacceptable to lenders and will not be "bankable". It is important therefore, throughout the procurement phase, to have a clear understanding of the relationship between the payment and incentive mechanism and the price.
17. Post contract award and prior to service commencement it is advisable to plan for a series of "dry runs" of the mechanism to ensure that both parties agree that it is workable, produces accurate and meaningful performance data and generates management information against which payments and deductions can be made.
Relevant MOD policy/guidance:
• HM Treasury: Standardisation of PFI contracts (SoPC) Version 4
• [MOD PFU Guidance Note - Payment & Incentive Mechanisms for PFI Projects]7
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7 In draft.