# Benchmarking clause

Source: https://contracko.com/glossary/benchmarking-clause

# Benchmarking clause

A clause allowing prices or service levels to be compared to the market and adjusted accordingly.

## Definition

A benchmarking clause lets the client periodically compare the supplier's prices and performance against the wider market, typically through an independent benchmarker, and adjust the contract where it has fallen out of line. This protects against gradual erosion of value in long-term outsourcing deals. The clause rests on contractual freedom and has no specific statutory anchor.

## Example

> Every two years an independent firm benchmarks the managed-services fees against comparable contracts, and prices above the market median are reduced.

## Why this is a business risk

Without a benchmarking clause, long-term outsourcing clients can find themselves locked into above-market rates for years because switching costs are too high. Suppliers face the opposite risk: an aggressively drafted clause may force price reductions every cycle without accounting for investments, inflation or improved service scope made since the original contract.

## How to manage it

- Specify the benchmarking frequency, the selection criteria for the independent benchmarker and who bears the cost to avoid disputes before the first exercise.
- Define the comparison methodology: which market data sources, which peer contracts and what adjustments are made for scope or quality differences.
- Agree a remedy mechanism -- price adjustment, negotiation window, termination right -- and what happens if the parties cannot agree after the benchmarking result.
- Set a calendar reminder for the benchmarking trigger date so the right is exercised before the contractual window closes.
- Include a floor on how much prices can fall per cycle to protect suppliers from disproportionate adjustments driven by temporary market dips.

### How Contracko helps

Contracko tracks benchmarking trigger dates extracted from long-term contracts and sends reminders when a review window is opening. Storing the clause and its parameters in a searchable repository means the benchmarking methodology is accessible when the review cycle starts, without hunting through archived PDFs.

## Relevant for

[IT Services](https://contracko.com/industries/it-services)[Managed Service Providers](https://contracko.com/industries/managed-service-providers)[Consulting](https://contracko.com/industries/consulting)

## Related clauses

- [Benchmarking Clause](https://contracko.com/clause-library/benchmarking)
- [Service Level Agreement (SLA)](https://contracko.com/clause-library/service-level-agreement)
- [Price Indexation Clause](https://contracko.com/clause-library/price-indexation)

## Related terms

- [Market conformity](https://contracko.com/glossary/market-conformity)
- [Service level agreement (SLA)](https://contracko.com/glossary/sla)
- [Price revision](https://contracko.com/glossary/price-revision)
- [Service credits](https://contracko.com/glossary/service-credits)

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## Frequently asked questions

Common questions about this term.

- **Q:** Can the supplier refuse the benchmarking result?
  **A:** The clause usually requires acceptance of the result within a set window or triggers a remediation or termination mechanism. A supplier who simply refuses may be in breach; however, most clauses allow a period to propose remediation before a termination right arises.

- **Q:** How does a benchmarking clause differ from a price-indexation clause?
  **A:** A price-indexation clause adjusts prices by a formula (such as CPI) automatically; benchmarking compares prices to actual market rates and requires a separate exercise. Indexation is simpler but does not correct for market shifts that diverge from the index.

- **Q:** Who typically pays for the benchmarking exercise?
  **A:** Cost allocation varies. Common arrangements are: shared equally; borne by the client (who exercises the right); or borne by the supplier if the benchmarking reveals that prices are materially above market. The contract should specify this to avoid disputes.

- **Q:** What data is used for the market comparison?
  **A:** Typically anonymised contract data held by the benchmarking firm, supplemented by published surveys and the benchmarker's own database. The clause should specify what constitutes a comparable contract -- similar size, scope, region and service type -- to prevent cherry-picking.

- **Q:** Can a benchmarking clause lead to price increases as well as reductions?
  **A:** In principle yes, if the contract allows two-way adjustment. In practice most clauses drafted by clients are one-way (downward only). Suppliers negotiating the clause should push for reciprocal adjustment if market rates rise above the current contract price.

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