Benchmarking Clause

Because contracts can cover a substantial period of time, and because technology is evolving so rapidly, there is a natural concern that an agreement, although it originally provides for a high level of service at a favorable price, will become outdated, or over time will not result in the level of service anticipated.

One method by which contracting companies address this issue is to include a benchmarking clause in the agreement. Benchmarking clauses provide that specified terms in the contract will be periodically reviewed against benchmark levels in the applicable marketplace. The review may result in modifications to prices, services, service levels, and other terms in the contract.

It should come as no surprise that vendors often are not fond of benchmarking clauses, and a number of issues can arise during negotiation and implementation of the provision. The first question will be when and how often the benchmarking review occurs. Another natural issue is the question of who will perform the analysis. A common resolution is to agree upon and hire a third-party provider for this purpose. Of course, that leads to the question of who will pay the third party’s fees.

Other issues include the determination of which services and prices will be benchmarked, and the standard to which the provider will be held. Notwithstanding the difficulties, benchmarking clauses can be an effective way in which contracting partners can deal with long-term contracts and rapidly evolving technology.