Why do contractors claim that CPI is not a relevant price comparison?

CPI is a benchmarking tool used to measure, set targets and monitor progress and efficiency.

The CPI index prices are current prices being achieved and delivered irrespective of quantity, location or frequency. The CPI is being constantly updated and reflects the changes in market prices.

The benchmark is established by variance in percentage between the prices being benchmarked when compared against the CPI at any moment in time. The purpose of benchmarking is to be able to measure efficiency at any time and to be able to take action if prices do not follow market trends.

A large proportion of contractors’ profits are derived from negotiations with their suppliers and the levels of pricing charged by their suppliers to the contractors’ clients.

CPI does not factor in contractors’ profit retention from suppliers. That is a matter for the client and the contractor. The real issue is the degree of variance to CPI acceptable to both parties. Clients and the contractor should set agreed levels of variance dependent upon the total service package being provided by the contractor and regularly monitor pricing against the CPI to ensure the levels agreed are being delivered.

Because the CPI prices are based upon actual prices available irrespective of quantity, location or frequency it is normal for contractors’ suppliers’ prices to be in the region of – 1.5% to as much as – 15% below the CPI. The levels will depend upon the contractors’ volumes nationally, and the individual site purchasing logistics. Any percentages above CPI could indicate inefficient purchasing, a small one off contract, or added profit contribution from procurement, which is perfectly acceptable if agreed up front.

Tip

Negotiate with contractors their levels of profit from purchases and agree the percentage to CPI and write the tolerance agreed into the contract.