What is Benchmarking clause?

In contracts with a term of three years or more, there is a real risk that market prices fall while the contracted price remains fixed. A benchmarking clause gives you the right to test this periodically and demand correction if the deviation exceeds a defined threshold.

The clause describes who conducts the benchmark (independent third party, jointly, or the buyer alone), what the comparison metric is (market prices, industry averages, specific comparable contracts), what the reference group is (companies of similar size and sector), and what threshold triggers a mandatory adjustment (commonly five to fifteen percent above market price).

After the benchmark is completed, the supplier is typically given a fixed period (thirty to ninety days) to adjust their rates. If they refuse, the buyer may, depending on the clause, terminate the contract early or use the benchmark as grounds for renegotiation.

A well-drafted benchmarking clause also addresses who bears the cost of the benchmark. Who pays the independent party conducting the comparison? In practice, costs are often shared or borne entirely by the party requesting the benchmark.

For IT outsourcing contracts, a benchmarking clause is standard practice in large agreements. In the SME segment this clause is often absent, leaving businesses paying above-market rates for years on services whose market price has dropped significantly.

Without a benchmarking clause in a long-term contract, you lose the ability to enforce market conformity. Technology prices fall rapidly; without a contractual anchor you pay in year three what was market-rate in year one for cloud or managed services that now cost substantially less elsewhere.

A benchmarking clause gives you a formal instrument to challenge the supplier without having to terminate the contract. That is more valuable than a theoretical right to exit, which in practice is rarely realistic due to switching costs.