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Table of contents
1 INTRODUCTION ______________________________________________ 1
2 PURPOSE OF THE FRAMEWORK ________________________________ 3
2.1
2.2
2.3
2.4
PURPOSE.......................................................................................................... 3
PRINCIPLES ...................................................................................................... 3
W HAT IS INCLUDED ............................................................................................ 3
W HAT IS NOT INCLUDED ..................................................................................... 4
3 LEGAL BASIS _________________________________________________ 5
3.1 PRIMARY AND SECONDARY LEGISLATION............................................................. 5
3.2 REFERENCES .................................................................................................... 5
3.3 STATUTORY GUIDANCE ...................................................................................... 5
3.4 COMMERCIAL POLICY AND NON-STATUTORY GUIDANCE........................................ 6
3.5 APPLICABLE CONTRACTS AND SUPPLIERS ........................................................... 7
3.6 DEFINITION OF A QUALIFYING CONTRACTS ......................................................... 7
3.7 SINGLE SOURCE SUB-CONTRACTS ...................................................................... 9
3.8 DEFINITION OF A QUALIFYING DEFENCE SUPPLIER .............................................. 9
3.9 CONTRACT AMENDMENTS ................................................................................ 10
3.10 EXEMPTION ..................................................................................................... 10
3.11 OPT-IN............................................................................................................ 11
3.12 OUT OF SCOPE CONTRACTS ............................................................................. 11
3.13 LEGAL BASIS OF THE SSRO............................................................................. 11
4 PRICING ____________________________________________________ 12
4.1 PRINCIPLES .................................................................................................... 12
4.2 ALLOWABLE COSTS ......................................................................................... 14
4.3 PROFIT ........................................................................................................... 17
4.4 FIRM, FIXED, TCIF, AND ASCERTAINED COST CONTRACTS ................................ 19
4.5 SINGLE SOURCE SUB-CONTRACTS .................................................................... 20
4.6 PRICING CONTRACT AMENDMENTS ................................................................... 21
4.7 CONTRACT PRICING STATEMENTS ................................................................... 22
4.8 MAINTENANCE OF PRICING RECORDS ............................................................... 23
4.9 COMPLIANCE................................................................................................... 24
4.10 SSRO REFERRALS RELEVANT TO PRICING ........................................................ 24
5 COST RECOVERY THROUGH RATES____________________________ 26
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
PRINCIPLES .................................................................................................... 26
RATES CLAIMS ................................................................................................ 26
RESPONSIBILITY FOR DEMONSTRATING THAT COSTS ARE ALLOWABLE ................ 27
EFFICIENCY TARGETS ...................................................................................... 27
BUSINESS UNIT COST ANALYSIS REPORTS ....................................................... 28
RATES AGREEMENT PRICING STATEMENT ........................................................ 30
ALLOWABILITY ASSESSMENT ............................................................................ 30
COMPLIANCE................................................................................................... 31
SSRO REFERRALS RELEVANT TO COST RECOVERY THROUGH RATES ................. 31
6 CONTRACT MONITORING _____________________________________ 33
6.1 PRINCIPLES .................................................................................................... 33
6.2 MONITORING THE BASELINE ............................................................................. 34
6.3 MONITORING FINAL CONTRACT OUT-TURN AND VARIANCE .................................. 36
6.4 FREQUENT CONTRACT MONITORING ................................................................. 37
6.5 CONTRACT REPORTING PLAN .......................................................................... 38
6.6 PROACTIVE NOTIFICATION ................................................................................ 38
6.7 OPEN BOOK .................................................................................................... 39
6.8 PERFORMANCE EVALUATION REVIEW ............................................................... 39
6.9 POST AWARD REVIEW (EQUALITY OF INFORMATION) ......................................... 40
6.10 POST COSTING ............................................................................................... 40
6.11 PROTECTION AGAINST EXCESSIVE PROFITS AND LOSSES (PEPL) ....................... 40
6.12 COMPLIANCE................................................................................................... 41
6.13 SSRO REFERRALS RELEVANT TO CONTRACT MONITORING ................................ 42
7 SUPPLIER MANAGEMENT _____________________________________ 44
7.1
7.2
7.3
7.4
7.5
7.6
7.7
PRINCIPLES .................................................................................................... 44
STRATEGIC PLANNING OF INDUSTRIAL REQUIREMENTS....................................... 44
RATIONALISATION AND REDUNDANCY ............................................................... 45
MONITORING OVERHEAD RECOVERY ................................................................. 45
MONITORING SMES ........................................................................................ 46
COMPLIANCE................................................................................................... 46
SSRO REFERRALS RELEVANT TO SUPPLIER MONITORING .................................. 47
8 SINGLE SOURCE REGULATIONS OFFICE ________________________ 48
8.1
8.2
8.3
8.4
8.5
8.6
PURPOSE........................................................................................................ 48
FUNCTIONS ..................................................................................................... 48
ORGANISATION AND GOVERNANCE ................................................................... 53
POWERS ......................................................................................................... 53
PUBLICATIONS ................................................................................................ 53
FUNDING......................................................................................................... 54
9 CONFIDENTIALITY ___________________________________________ 55
9.1
9.2
9.3
9.4
9.5
9.6
UNAUTHORISED RELEASE ................................................................................ 55
AUTHORISED RELEASE..................................................................................... 55
STATUTORY BAR ............................................................................................. 55
FOI PROCESSES ............................................................................................. 56
MOD PROCESSES ........................................................................................... 56
SSRO PROCESSES ......................................................................................... 56
APPENDIX A
PROCEDURE AND AMOUNTS FOR CIVIL PENALTIES____ 57
APPENDIX B
PROCEDURE FOR SSRO REFERRALS ________________ 61
APPENDIX C
SUMMARY OF SSRO REFERRALS ___________________ 62
APPENDIX D
ACRONYMS ______________________________________ 68
APPENDIX E
DOCUMENT VERSIONS ____________________________ 70
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1
Introduction
1.1
This document describes the new Ministry of Defence (MOD) single source
procurement framework that replaces the current Yellow Book (the
Government Profit Formula and its Associated Arrangements).
1.2
The framework is expected to come into force on 6 April 2015 and
preparations are continuing. The Defence Reform Act received Royal Assent
on [14 May] on [14] May 2014, at which point it became the Defence Reform
Act 2014. Work will continue throughout spring / summer 2014 to finalise the
Single Source Contract Regulations (SSCRs) (which is secondary legislation
to be made exercising powers in the Defence Reform Act), alongside
continued development of associated statutory guidance and MOD
commercial policy.
1.3
The purpose of this document is to describe to both MOD and industry
practitioners of single source procurement how the new framework will work.
This will be the last issue of this document in its current form – it will be
replaced by more detailed procedures, documentation and training as the
implementation of the new framework continues to mature.
1.4
The framework has two main components:
a) Part 2 of the Defence Reform Act, the SSCRs, and statutory guidance
governing pricing, open book rights, and standard reporting; and
b) an arms-length body known as the Single Source Regulations Office
(SSRO) which manages and monitors the framework and which
replaces the current Review Board for Government Contracts. The
SSRO also performs an expert determination role and performs
analysis.
1.5
The framework does not cover all aspects of single source procurement. For
example it does not limit contract durations, determine how overhead costs
should be recovered, or set out key performance indicators. The framework
also does not cover the decision to use single source procurement; it sets out
requirements once this decision is made. The purpose of the new framework
and what is covered (and not covered) is described in more detail in section 2.
1.6
Unlike the Yellow Book, which is not legally binding (although aspects of it
have become custom and practice), the new framework has a clear legal
basis - this is described in section 3.
1.7
Section 4 describes how single source contracts must be priced, and section
5 covers overhead recovery. Some of this will be familiar to current users of
the Yellow Book, however there are also significant changes, such as to
Equality of Information (EofI) and adjustments to the Baseline Profit Rate.
1.8
The following sections 6 and 7 outline almost entirely new components of the
framework, namely contract monitoring and supplier monitoring. Unlike its
predecessor, the new framework includes significant reporting requirements.
It should be noted that these are minimum requirements, and there is nothing
to stop MOD and suppliers from agreeing more extensive requirements within
contract terms.
1.9
The SSRO is described in section 8. This covers its four primary functions,
namely keeping Part 2 and the SSCRs under review and recommending
changes to them, monitoring the framework’s application, providing an expert
determination role, and performing analysis. The governance of the SSRO is
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also explained, including the composition and recruitment process of its
members and the various committees, as well as the funding.
1.10
The final section 9 describes confidentiality. Part 2 of the Defence Reform Act
includes a provision that makes unauthorised disclosure a criminal offence this section explains that offence.
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2
Purpose of the Framework
2.1
Purpose
2.1.1
The purpose of the single source procurement framework is to ensure a fair
and reasonable price (and only a fair and reasonable price) is paid for goods
and services procured in the absence of competition.
2.2
Principles
2.2.1
The key guiding principles of the new framework are:
a) to address issues that arise from single-source procurement – for
example replicating the missing competitive pressure present in an
efficient market;
b) to focus on areas where standardisation is of value – a framework
provides consistency, but at the expense of being able to define a
bespoke solution. The framework has been designed to benefit from
wide application and stability over time;
c) to be proportionate – higher value contracts carry a greater risk to value
for money (VFM), so there should be greater protections. We also do
not want to discourage the greater involvement of Small and Medium
Sized Enterprises (SMEs) in defence by a framework that is too
burdensome; and
d) to provide VFM – a balanced approach has been taken between asking
for information the MOD would ideally like, and asking for information
that is readily available using current industry systems and processes.
2.3
What is included
2.3.1
The framework covers contract pricing (including pricing of single source
sub-contracts), pricing contract amendments, and cost recovery rates. When
pricing, adherence to key principles and use of a baseline profit rate are
compulsory, with MOD and suppliers open to the risk of a binding price
adjustment by the SSRO once on contract if they are not applied.
2.3.2
The framework includes mandatory transparency requirements. These
include access to records where the MOD 'pulls' information from suppliers,
and standardised reporting where suppliers 'push' information to both the
MOD and the SSRO. There is a civil penalty regime in the event of noncompliance.
2.3.3
In addition to the above pricing and transparency requirements, the
framework imposes certain additional duties on both the MOD and suppliers.
For example suppliers must flow down the framework to single source subcontractors, and the MOD must treat sensitive supplier information with due
care. The consequences for failing to meet these duties vary from financial
penalties to criminal charges.
2.3.4
Finally the framework also includes governance arrangements to ensure
that it is kept up to date, and that application and adherence is
independently monitored.
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2.4
What is not included
2.4.1
The framework does not prescribe:
a) contract duration, including break options and / or extensions;
b) contract type i.e. firm price, fixed price, pain / gain share models such
as Target Cost Incentive Fee (TCIF), or ascertained cost (cost plus)
contracts;
c) payment plans e.g. milestone payments, monthly payments with an
annual reconciliation etc.;
d) how overhead should be recovered, for example whether using indirect
cost recovery rates or alternatively pricing overheads directly within a
contract;
e) how risk should be partitioned between the parties;
f) contractual change mechanisms which determine how the price should
be adjusted for envisaged changes e.g. for quantity or operating hours;
g) performance mechanisms which set out price reductions for nonperformance or additional profit for higher performance (although the
framework places a limit on the maximum positive reward that can be
used and when a positive reward might be appropriate); or
h) intellectual property rights or commercial exploitation levies.
2.4.2
1
All of the above may be set out in commercial guidance1; however the
content of and adherence to this commercial guidance is not within the
scope of the framework.
whether MOD policy or supplier policy.
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3
Legal basis
3.1
Primary and secondary legislation
3.1.1
The Defence Reform Act (“the Act”) received Royal Assent on [14] May
2014. It incorporates three measures, one of which is single source
procurement (the other two relating to how the MOD may operate its
procurement function in future, and reserve forces). Note that subsequent
references to the Act refer only to Part 2 of the Act unless otherwise stated.
3.1.2
Once passed, the Act does not come into immediate effect. It must be
commenced by an order, and different provisions can be commenced at
different times. It is expected that some elements will be commenced in mid
2014, to allow the SSRO to be formally stood up. The framework as a whole
will not apply to contracts until 6 April 2015.
3.1.3
The Act, which is primary legislation, gives the Secretary of State (SofS) the
power to make regulations (secondary legislation). The distinction is that
primary legislation must go through the full Parliamentary process.
Secondary legislation goes through a different process, and so is easier to
make and amend than primary legislation.
3.1.4
In order to understand how the framework will work, the primary and
secondary legislation must be considered together. Collectively they
represent the law that will apply to single source procurement. The
documents relating to the parliamentary process of the Act are available
online at www.parliament.uk2. The secondary legislation will be made in one
Statutory Instrument (SI), being the Single Source Contract Regulations
(SSCRs). The SSCRs will be a “draft affirmative” SI, which means it cannot
be made until a draft has been laid before, and approved by a resolution of,
each House of Parliament. It is expected that the draft SSCRs will be laid in
Parliament at the end of November 2014. Both the Act and the SSCRs will,
in due course, be available online at www.legislation.gov.uk.
3.1.5
The Act includes a requirement for the SofS to review the Act and the
SSCRs three years after the SSCRs first come into force, and every five
years thereafter.
3.1.6
The Act gives the SofS a number of powers. These can be exercised by
other Ministers or, in appropriate, cases by civil servants. Given the
possibility of future changes to the MOD’s procurement function, in some
places the Act says that a power may be exercised by SofS or an
“authorised person”, which could be a future contractor but at present it is
not envisaged that an “authorised person” will be appointed.
3.2
References
3.2.1
Any references to the SSCRs in this document refer to draft Version 3,
issued on 17 March 2014. These are draft regulations which are subject to
ongoing review and consultation – they will change before they are laid in
draft before Parliament in later 2014.
3.3
Statutory guidance
3.3.1
In addition to primary and secondary legislation, the framework also includes
statutory guidance. The powers to make statutory guidance are set out in
2
http://services.parliament.uk/Act/2013-14/defencereform.html
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the Act. There is a legal requirement to have regard to that guidance. In
practice this means that the guidance must be followed, unless there are
good reasons for not doing so in the particular circumstances.
3.3.2
In addition to this statutory guidance, there will be a range of commercial
guidance (whether from the MOD or industry) which will not have a statutory
basis but will support the general operation of the framework – for example,
commercial policy maintained by the MOD under its Acquisition Operating
Framework. Such non-statutory guidance is not covered by this document.
3.3.3
The framework includes the following statutory guidance:
Published by the SSRO:
a) guidance on the six steps for calculating the contract profit rate. We
envisage that this will include how to determine the profit adjustment
for contract risk; how to determine the profit adjustment to ensure a
supplier only gets profit on cost once (POCO); when it is appropriate
to apply a profit uplift as an incentive, e.g. for exceptional
performance;
b) guidance on allowable costs3 that can be included in contract prices;
c) guidance on preparing contract and supplier reports. We envisage
that this will include guidance on the Defined Pricing Structure (DPS),
to describe the standard cost categories that should be used for some
standard reports; template reports for some standard reports;
d) matters that the SofS must take account of when determining the
appropriate level of civil penalty to impose on a supplier for a
contravention under the framework;
Published by the SofS:
e) the principles the SSRO must have regard to in determining the
baseline profit rate and capital servicing rates;
f) the principles the SSRO must have regard to in determining the
SSRO funding adjustment.
3.3.4
The SSRO has an overriding aim to maintain a single source procurement
framework that assures value for money for the UK taxpayer and allows a
fair and reasonable price for suppliers. The SSRO may, if it has good
reasons, deviate from the statutory guidance set out by the SofS in the
calculation of the baseline profit rate, the capital allowances, and / or the
SSRO funding adjustment.
3.4
Commercial policy and non-statutory guidance
3.4.1
Not all elements of single source procurement fall within scope of the
framework (e.g. see 2.4). As long as it is not inconsistent with the framework,
either the MOD or our single source suppliers are free to set and follow
commercial policy or guidance on any other matters.
3.4.2
To ensure that both parties meet their statutory requirements, it will be
beneficial to set out in contractual documents how these requirements will
be met. For example, to set out the dates the different standard reports are
required and exact format they should take. It is anticipated that commercial
policy and non-statutory guidance will be developed along these lines.
3
the equivalent of the current Government Accounting Conventions.
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3.4.3
The scope of the framework is limited in a number of ways, such as not
applying to competitive contracts or to contracts less than £5m in value (this
threshold will be set in the SSCRs). For these contracts it may be that much
of the framework is still desired by the MOD and / or the supplier and
accordingly may be included by agreement in contractual terms. It is
anticipated that commercial policy will be developed to cover this.
3.5
Applicable contracts and suppliers
3.5.1
Most of the statutory requirements relate to defence single source contracts.
The prime contracts which will be subject to these requirements are called
Qualifying Defence Contracts (QDCs).
3.5.2
A sub-contract placed by a supplier can also be a qualifying contract (a
Qualifying Sub-Contract, or QSC), if it is related to the delivery of other
qualifying contracts (whether QDCs or other QSCs) and was placed in the
absence of competition. Again, the factors that will make a contract a QSC
will be set out in the SSCRs. Throughout this document, references to
‘qualifying contracts’ refers collectively to both QDCs and QSCs.
3.5.3
The Act requires some suppliers with qualifying contracts (at the parent
holding company level) to provide supplier-level reports. These are
Qualifying Defence Suppliers (QDSs)4.
3.5.4
The Act and SSCRs include detailed provisions for determining if a contract
is a QDC (see SSCRs Part 2) or QSC (SSCRs Part 3), and for determining if
a supplier is subject to additional statutory transparency requirements (Reg
j52).
3.6
Definition of a Qualifying Contracts
3.6.1
There will be two kinds of qualifying contract. A contract will be a QDC if one
of the parties is the SofS – QDCs are described in this subsection. A
contract may be a QSC if it is a single source sub-contract that forms part of
an unbroken chain of single source procurement that starts with a QDC.
This is described in subsection 3.7.
QDCs (Reg j6)
3.6.2
The Act defines a contract as being a QDC if:
a) it is a contract under which the SofS procures goods, works or services
for defence purposes;
b) the award of the contract is not the result of a competitive process;
c) the value of the contract is above a specified level; and
d) the contract is not of a kind which is exempted.
4
In the Act, these are referred to as the “designated person” and for most suppliers who are part of a
group this will be the “ultimate parent undertaking” as defined in the Act.
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Procured by the SofS (Reg j3)
3.6.3
This includes contracts signed on behalf of the SofS, such as by MOD trade
bodies. The SSCRs will define ‘defence purposes’ as any contract to which
the Secretary of State for Defence is party – the framework therefore also
applies to contracts made by the MOD on behalf of Other Government
Departments (OGDs), such as fuel.
Single source (Regs j8 and j9)
3.6.4
The definition of a competitive process will be set out in the SSCRs and will
define a ‘competitive process’ – so any contract procured in a way that does
not meet that definition may be subject to the new framework. The SSCRs
will also set out how the status of framework contracts, and contracts let
under them, will be determined.
3.6.5
The following contracts are likely to be procured on a single source basis:
a) contracts subject to the Public Contract Regulations 2006 (PCRs),
which have been procured using the “negotiated without notice” process;
b) contracts subject to the Defence and Security Public Contract
Regulations 2011 (DSPCRs), which have been procured using the
“negotiated without notice” process;
c) contracts exempted from the PCRs and DSPCRs, e.g. under Article 346
of the Treaty on the Functioning of the European Union (or the ‘warlike
stores’ exemption), where there has not been a limited competition;
d) contracts which differ in a material way from the tender submitted under
a competitive procurement process, for example an extended solebidder phase in which the requirements were substantially amended.
Value thresholds (Reg j4)
3.6.6
The SSCRs will set out the financial thresholds that determine if the
framework will apply. They will also set out how to determine the value of a
contract.
3.6.7
Initially the thresholds will be that contracts less than £5m are not QDCs,
and sub-contracts less than £25m are not QSCs. Qualifying contracts equal
to or above £50m are subject to greater reporting requirements, and may
also trigger separate supplier reporting obligations (see section 7).
3.6.8
The provisions about how to calculate the value of a contract for the
purposes of the SSCRs will broadly reflect those in the DSPCRs. The
SSCRs will include that adjustment should be made for foreign currency
amounts and elements subject to a variation of price clause. It will also
consider contracts based on rolling monthly charges, and contracts which
have be split into smaller units even though they are for the same
deliverable.
Excluded contracts (Regs j7 and j12)
3.6.9
The SSCRs will specify the types of contract that will be excluded from the
framework. They will initially include the following:
a) contracts for the purposes of intelligence activities;
b) contracts for the acquisition, management or maintenance of land and /
or buildings; and
c) contracts made within the framework of a cooperative international
defence programme, based on research and development, and for all
phases of the product life cycle.
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3.7
Single source sub-contracts
3.7.1
A contract is a QSC if it is:
a) a contract made by a supplier (or a member of the supplier group) a
significant proportion of which is for the purposes of delivering another
qualifying contract or group of qualifying contracts;
b) the award of the contract is not the result of a competitive process; and
c) the value of the contract is above a specified level.
See Reg j11.
3.7.2
As with a QDC, the SSCRs will define the value thresholds. The threshold
for a sub-contract to be a QSC will be initially set at £25m in value.
3.7.3
The SSCRs will also specify how to determine whether a supplier has used
a competitive process, and as with QDCs will also provide for framework
contracts and contracts made under them – see Regs j13 and j14.
3.7.4
A supplier who is entering into a sub-contract must assess whether or not
the sub-contract is a QSC (see Regs j19 and j20). If the assessment is that
the sub-contract is a QSC, the supplier must inform both the prospective
sub-contractor and the MOD that this is the case. The supplier must keep a
record of their assessment process, which the MOD is entitled to examine.
See Appendix A for further information regarding QSCs.
3.7.5
If the MOD feels that a supplier has failed to perform an assessment, or
made an incorrect negative assessment, or that they made the assessment
correctly but failed to notify either the MOD or the prospective sub-contractor
of a positive assessment, then the MOD may issue a compliance notice or a
penalty notice which may lead to a civil penalty (see Appendix A). The
supplier may appeal this penalty via the SSRO (see Appendix B).
3.7.6
A sub-contractor who feels that a prospective contract should not be a QSC,
even through a positive assessment has been made, may refer the matter to
the SSRO which can determine whether the contract would (if entered into)
be a QSC (see Reg j21).
3.7.7
A sub-contractor who believes that a sub-contract is no longer a QSC (for
example if a QDC to which it relates has finished but the sub-contract is still
on-going), may refer the sub-contract to the SSRO which can determine that
it is no longer a QSC (see Reg j15).
3.8
Definition of a Qualifying Defence Supplier
3.8.1
A supplier is a Qualifying Defence Supplier (QDS) if they have at least one
current qualifying contract above £50m (see Reg j52).
3.8.2
Where a supplier involved in a qualifying contract is part of a group of
companies, then the QDS will be the ultimate parent undertaking of the
group. See Error! Reference source not found. for further information on
determining QDSs.
3.8.3
The supplier-level reporting requirements that apply to QDSs only apply to
the extent that they are relevant to supplier costs and performance on or
related to qualifying contracts – i.e. a QDS is not required to report on
matters that do not relate to qualifying contracts.
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3.9
Contract amendments
Contract changes procured as new contracts
3.9.1
MoD’s requirement may change during the course of a contract. In some
circumstances, procurement law may permit MOD to amend an existing
contract in order to satisfy its changed requirement (for instance, where the
original contract was the subject of competition and the revised requirement
had been envisaged in the original competition and could be said to be
within the scope of that competition; or where there is a justification for using
the “negotiated without notice” procedure under the PCRs or DSPCRs in
respect of the changed requirement). In other circumstances, procurement
law may require the changed requirement to be the subject of a new
contract which should be opened up to competition.
3.9.2
In the former case – where MoD is able to amend an existing contract in
order to satisfy its changed requirement – three types of amendment are
considered for the purpose of this document:
a) a contract amendment to a QDC or QSC;
b) a contract amendment to a competitive contract placed after the
relevant date (which is the date that the first SSCRs come into force);
c) a contract amendment to a contract placed prior to the relevant date
(whether competitive or not).
3.9.3
In the latter case – where MoD enters into a new contract to address its
changed requirement – whether or not the contract amounts to a QDC will
be governed by the factors set out in section 3.6 above.
Contract amendments to an existing qualifying contract
3.9.4
A contract amendment to a qualifying contract does not change whether or
not the contract is a QDC or QSC. If an amendment raises or lowers a
contract’s value above / below the £50m threshold, this will not change the
statutory requirements; these are set relative to the initial value at contract
let.
Contract amendments to competitive contracts placed after the relevant date
3.9.5
These will only become QDCs if the MOD and the supplier agree that the
contract should become a QDC (see opt-in in section 3.11 below).
Contract amendments to contracts placed prior to the relevant date (whether
competitive or not)
3.9.6
These will only become QDCs if the MOD and the supplier agree that the
contract should become a QDC (see opt-in in section 3.11 below).
3.10
Exemption
3.10.1
The SofS has the power to exempt a given contract from being a qualifying
contract.5 This power is anticipated to be used only in rare circumstances.
This exemption applies to both QDCs and QSCs.
3.10.2
This power will be exercised on SofS’s behalf by a civil servant of sufficient
seniority. MOD is preparing guidance for the process of deciding when the
exemption power should be exercised, and that will include characteristics
that suggest a contract should be made exempt. For example, where there
5
See sections 14(7) and 28(6) of the Act.
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is strong evidence that prices have been set in line with competitive market
forces.
3.11
Opt-in
3.11.1
For single source contracts entered into prior to the SSCRs coming into
force, or for competitive contracts, a supplier and the MOD may agree that,
upon amending the contract, the contract is to become a QDC (subject to
the other criteria for a QDC also being met, such as contract value, being for
defence purposes etc). See Reg j6.
3.11.2
A trigger for this agreement may be set out in terms included in a contract.
For example the MOD and a supplier may agree, in a competitive contract,
that if certain conditions are met then the contract will become a QDC.
3.11.3
It is anticipated that there will be MOD commercial policy to include such a
term in some competitive contracts.
3.12
Out of scope contracts
3.12.1
If a contract is not a QDC, and yet elements of the framework are desired,
then this can be agreed by the parties. There will be standard MOD
conditions (DEFCONs) covering aspects of the new framework that can be
included, subject to the negotiation.
3.12.2
It is anticipated that some of these new standard conditions may be
incorporated into new MOD commercial policy, for example for contracts
below £5m.
3.13
Legal basis of the SSRO
3.13.1
This is described in section 8.
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4
4.1
Pricing
Principles
Pricing formula
4.1.1
The framework is designed to support the agreement of a price for a single
source contract that is fair and reasonable to both parties.
4.1.2
The price is to be set using the following formula (hereafter the 'pricing
formula'):
Price  Contract Profit Rate  Allowable Costs   Allowable Costs
4.1.3
If it may not be appropriate for a contract price to be determined using the
pricing formula, for example where the whole price could be set directly
using market rates that are accepted as representing value for money, then
the contract may be exempted from the entire framework (see 3.10).
4.1.4
The framework allows for the price above to be:
a) calculated after costs are incurred and thus based on actual costs, such
as for a cost plus contract (see Reg j26);
b) used to determine a target price, based on target allowable costs, which
may then be used to compare to actual allowable costs, such as in TCIF
contracts (the target fee at the target cost must be set in line with 4.1.2)
(see Reg j27); or
c) used to determine a firm or fixed price (see Regs j24 and j25) which
may then be subject to a final price adjustment in line with the
Protection against Excessive Profits and Losses (PEPL) mechanism
contained in Reg j31 (see 6.11).
Profit principles
4.1.5
The baseline profit rate will be determined annually by the SofS based on a
recommendation from the SSRO. It will be published annually in the London
Gazette no later than the 15th of March of the preceding financial year.
4.1.6
The SofS may issue statutory guidance to which the SSRO must pay due
regard when making its recommendation. The SSRO will also be guided by
its statutory aim, which is to “ensure that good value for money is obtained…
[and contractors] …are paid a fair and reasonable price”.
4.1.7
There are other secondary adjustments to the profit rate in order to arrive at
a contract specific profit rate. These adjustments are set out in section 4.3
below.
Allowable cost principles
4.1.8
The Act sets out the three principles (see Section 20) that determine
whether a cost is allowable. To be included in a single source price build-up,
a cost must be:
a) appropriate – the type of cost is appropriate to be recovered through
single source contracts;
b) attributable – the cost relates to the MOD single source contract; and
c) reasonable – the quantum of the cost is fair.
4.1.9
The SSRO must publish statutory guidance on how to determine which
costs are allowable, and it is expected that this will include further guidance
(including examples) on what is “appropriate, attributable and reasonable”.
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This guidance is expected to be known as the Single Source Cost
Standards (SSCSs). It will be possible to deviate from the SSCSs if there
are good reasons to do so.
4.1.10
The SSCSs are expected to outline the categories of costs that are totally or
partially excluded, and also some items that for clarity are explicitly included.
The initial set of SSCSs is expected to be based closely on the Government
Accounting Conventions (GACs) in force at the relevant date.
4.1.11
The purpose of the attributable principle is to ensure that only costs incurred
for the benefit of the MOD under qualifying contracts are assessed as
allowable costs. Otherwise costs incurred on, for example, non-MOD
contracts, could be considered both appropriate and reasonable yet bear no
relation to a qualifying contract.
4.1.12
In MOD’s view, a cost is attributable if it is:
a) either:
i. incurred specifically for the contract; or
ii. benefits both the contract and other work, and may be
distributed to both in reasonable proportion to the benefits
received; or
iii. is necessary to the overall operation of the business, although a
direct relationship to any particular contract item cannot be
shown; and
b) allocated to MOD contracts on a basis consistent with the contractor’s
cost accounting practices.
4.1.13
The SSCSs also set out principles that determine whether a cost is
reasonable.
4.1.14
In MOD’s view, a cost is reasonable if it will be determined by assessment of
the quantum of the costs, and will generally be a question of judgement
based upon supporting evidence. The determination of what amount of
contractor costs are reasonable will be by agreement between the MOD and
contractor.
4.1.15
A cost may be reasonable if it does not exceed that which would be incurred
by a prudent person in the conduct of competitive business.
4.1.16
There is no presumption of a cost being reasonable purely by virtue of its
incurrence by a contractor.
4.1.17
The SSCSs may set out further guidance on factors that should be
considered in assessing whether contractor costs are reasonable. Examples
of such factors may include:
a) reference to the outcome of benchmarking comparisons or ‘should cost’
analysis;
b) significant deviations from the contractor’s established practices;
c) general recognition that the cost is ordinarily and necessarily for the
conduct of the contractor’s business or the contract performance; and
d) excludes costs that may have been avoided or reduced by the exercise
of reasonable standards of skill, care and efficiency.
4.1.18
Examples of this additional guidance are described below under allowable
costs and profit (subsections 4.2 and 4.3).
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Responsibilities
4.1.19
The supplier has primary responsibility for generating the price estimate. As
such the supplier has a responsibility to ensure that the assumptions and
forecasts used to determine the price are fit for purpose and in line with the
pricing formula. The MOD has a secondary responsibility to ask for and
check the validity and accuracy of any assumptions and forecasts that have
been shared with the supplier.
4.1.20
The MOD is responsible for providing the supplier with any information that
is materially relevant to setting the price, such as forecast demand. The
supplier has a secondary responsibility to ask for and to check the validity
and accuracy of any assumptions and forecasts the MOD has shared with
them.
4.1.21
These responsibilities will be set out in commercial guidance and, where
relevant, will be reflected in the reporting requirements set out in the SSCRs,
for example in the Contract Pricing Statement (see 4.7) and the Rates
Agreement Pricing Statement (see 5.6).
4.1.22
Suppliers will have a responsibility to keep records relevant to the
agreement of the price.
Compliance
4.1.23
The consequences of not basing the price upon the pricing principles
outlined here is the risk of a binding financial adjustment to the price, as
determined by the SSRO, following a referral by either party (see 4.10).
4.1.24
This means that if the parties have agreed a price inconsistent with these
principles, then notwithstanding this agreement, the parties still run a
financial risk from a future referral to the SSRO.
4.2
Allowable costs
Direct
4.2.1
Direct costs attributable to a qualifying contract will, of course, be
appropriate and should be included in the allowable costs. In agreeing the
price of a qualifying contract, both parties should agree that the direct costs
are appropriate, attributable and reasonable.
4.2.2
If a price is agreed based on direct costs that are not appropriate,
attributable, or reasonable, then both parties expose themselves to the risk
of a possible future financial determination by the SSRO once they are on
contract (see 4.10).
4.2.3
Over time the application of the framework will allow the MOD to build up a
database of defence benchmarks and parametrics. This will give the MOD
the ability to challenge supplier assessments of direct costs based on
historic evidence.
Indirect
4.2.4
The same pricing principles will apply to indirect costs as to all other
allowable costs.
4.2.5
There are two approaches to recovering overheads used by the MOD: direct
recovery or absorption recovery. The framework allows for either to be used.
4.2.6
In direct recovery all or some overhead costs are priced as a separately
identifiable set of line items in a contract. An example of this might be a
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capability contract where the MOD agrees to pay for the maintenance of a
capability as a fixed cost. In this case the overhead costs, provided they are
appropriate, attributable, and reasonable, are simply included in the price
build-up exactly as direct costs would be.
4.2.7
The most common approach currently used by the MOD for the recovery of
overhead costs is to use “cost recovery rates” (hereafter ‘rates’), based on
an absorption recovery methodology. These rates are currently agreed
between the supplier and the MOD Cost Assurance and Analysis Service
group (CAAS), and are signed off by a MOD Commercial Officer.
4.2.8
How rates are to be agreed under the framework is described in detail in
section 5. This subsection describes how rates should be used in pricing.
4.2.9
Firm and fixed price contracts should be based on the latest agreed
estimated and forecast rates. For TCIF (and other pain / gain share
contracts), the target cost should also be based upon the latest agreed and
forecast rates. For cost plus contracts, for price adjustments to TCIF and
similar contracts, and for determining the price for cost plus contracts, actual
rates should be used.
4.2.10
Where estimated or forecast rates have been agreed, these should be used
when pricing firm, fixed, and TCIF (and variants) qualifying contracts rather
than, for example, using the latest actual rate and applying an inflation
adjustment.
4.2.11
Where an estimated or forecast rate (i.e. pertaining to future financial years)
cannot be agreed, then either party may refer the matter to the SSRO, which
will give an opinion as to the rate to be used in pricing firm or fixed price
contracts, or in the setting of target costs (such as in TCIF). More than one
estimated or forecast rate can be agreed in a year, for example if new
information comes to light that is material to rates setting.
4.2.12
Where an actual rate (i.e. pertaining to the last financial year) has not been
agreed, then either party may refer the matter to the SSRO, who will make a
determination as to the actual rate to be used in pricing cost plus contracts
or in determining pain / gain share provisions (such as in TCIF) or for the
final price adjustment under PEPL.
4.2.13
If a rate is used in pricing that deviates from the rate agreed by the supplier
and CAAS, or from the advisory or binding rate set by the SSRO if no
agreement was reached, then both parties expose themselves to the risk of
a possible future financial determination by the SSRO once they are on
contract (see 4.10). This risk also applies if no rate was agreed and neither
party referred it to the SSRO.
4.2.14
The risk of a future referral once on contract is what gives “teeth” to SSRO
opinions on rates. The intention is that the risk of a referral will drive
constructive behaviours in the agreement of rates, and that an actual referral
will be rare.
Forecast sub-contract prices
4.2.15
The pricing principles mean that a supplier has a duty to get reasonable and
accurate quotes for any sub-contracted work (and to have done any relevant
make / buy cost benefit analyses).
4.2.16
Ensuring that sub-contractor quotes represent the best and most reasonable
estimate of the outcome of a future tender / negotiation process (that will be
completed only after the main contract is) can be difficult. The framework
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does not include any specific provision for dealing with this difficulty other
than the general responsibility of adhering to the pricing principles.
4.2.17
There is nothing in the framework to stop both sides agreeing to a target
cost approach to sub-contractor quotes. This is the current approach taken
in France: once the sub-contract is signed any difference between the actual
price and the quote is shared 50/50. The appropriateness of such an
approach depends on a number of factors, such as the pricing incentives on
the various parties, the maturity of the information available to subcontractors in making their quotes, and the stability of the sub-contractor
requirements.
Risk contingency
4.2.18
Single value cost estimates rarely reflect the risk and uncertainty inherent in
a project. It is common practice to base cost estimates on the 'most likely'
outcome, and then to add on a risk contingency that represents the
difference between the average outcome and the most likely. In most realworld examples, the average cost is higher than the most likely.
4.2.19
For example the construction of a building may have a most likely cost of
£1m. However if many things go better than expected (the ground is ideal),
this may drop to £850k, and if many things go worse than anticipated (the
ground is contaminated), this may be as high as £1.3m. The average
outcome here may be £1.05m, so it would be appropriate to include £50k on
top of the £1m most likely outcome as risk contingency. The reason why the
average cost tends to be greater than the most likely cost is that unexpected
events are more likely to increase costs, and by a greater amount, than they
are to reduce them.
4.2.20
Including a risk contingency while also allowing a higher profit for higher risk
(see 4.3.10) does not represent double counting (if done properly). Consider
two projects both with a most likely outcome of £1m, one as outlined above
and another where the variation is more constrained to between £950k and
£1.2m. In both cases the average outcome may be £1.05m, but in the first
case the outcome could vary between £850k and £1.3m, whereas in the
second the possible variation is less. The riskiness of the first project is
greater than the second, so it should attract a higher profit rate.
4.2.21
If the single point cost estimates are based on the average rather than the
most likely, then the risk contingency will be less (and may be zero). The
more risk is 'built in' to the single point cost estimates, the less should be
included in the contingency. If a great deal of risk has been built into the
single source estimates, the risk contingency might even be negative.
4.2.22
The risk contingency should be determined net of any mitigation (e.g.
insurance policies, management processes).
4.2.23
The risk contingency should be based on the costs the supplier pays. If the
outturn costs are greater, but these are passed back entirely onto the MOD,
then there is no cost risk to the supplier.
4.2.24
The risk contingency should take into account any pain / gain sharing
mechanisms - for example if the MOD agrees to take on 70% of any cost
over-run, then the variation of cost the supplier is exposed to is lessened, so
the average cost the supplier pays will be closer to the most likely.
4.2.25
The risk contingency should also take into account events that might lead to
costs being lower than anticipated, such as material and wage inflation
being lower than anticipated.
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4.2.26
The determination of the risk contingency will form part of the pricing records
that must be kept, and the pricing principles apply to them as they do to all
elements of the price (including the ability to refer to the SSRO at a later
stage if they are not in accordance with them).
4.2.27
Over time the application of the framework will allow the MOD to build up a
database of actual risk events typical within defence procurement, and the
financial consequences. This will give the MOD some ability to challenge
supplier assessments of risk contingency based on historic evidence.
4.3
Profit
Contract profit rate
4.3.1
The starting point of the contract profit rate (CPR) to apply in the pricing
formula is the baseline profit rate (BPR). The BPR is common across all
single source contracts. It is the largest component of profit, and the other
elements are second-order adjustments to the BPR.
4.3.2
The contract profit rate is set by the following formula (hereafter the "profit
formula") (see Reg j28):
CPR  BPR  Risk adj - POCO adj - SSRO funding adj  incentive adj  capital adj
4.3.3
The adjustments should be applied in the order shown above (i.e. start with
the BPR, then adjust for risk, etc). They are described in more detail below.
4.3.4
The SSCRs will allow the rates for the risk, POCO and capital adjustments
to be determined for a group of qualifying contracts rather than having each
individual contract separately considered (see Reg j28). This would make
sense where there are a large number of smaller qualifying contracts with a
single supplier and for similar work.
Baseline profit rate
4.3.5
Every financial year the SofS will publish the BPR to be used in the pricing
formula in the London Gazette. It will be published no later than the 15th of
March of the previous financial year.
4.3.6
No later than the 31st of January of the previous financial year, the SSRO
must recommend to the SofS a BPR that it considers will give suppliers a
fair and reasonable price.
4.3.7
In making its recommendation, the SSRO will be guided by its statutory aim,
which is to “ensure that good value for money is obtained…[and
contractors]…are paid a fair and reasonable price ”. However it must also
have regard to statutory guidance that the SofS can issue.
4.3.8
It is envisaged that the first BPR (i.e. that for the year 2015/16) will be
prepared using the same process as is currently in place. Indeed the Review
Board is not expected to be dissolved until later in 2015, so subject to the
permission and oversight of the new chair of the SSRO, it is likely that it will
also be the same people running the BPR setting process for the first year of
the new framework.
4.3.9
If the SofS publishes a BPR that differs from that suggested by the SSRO,
he must publish his reasons for doing so. It is anticipated that the SofS will
follow the advice of the SSRO and any such deviations will be exceptional.
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Risk adjustment
4.3.10
The BPR should first be adjusted for an agreed amount, falling within ±25%
of the BPR, to reflect the risk that a supplier's actual costs differ from the
estimated costs used in the determination of the allowable costs in the
pricing formula.
4.3.11
How this adjustment should be determined will be based on statutory
guidance issued by the SSRO – it is expected the SSRO will consult on the
first guidance for this adjustment.
Profit on cost once
4.3.12
Once adjusted for risk, the profit rate will if necessary be adjusted to ensure
that profit only arises once in relation to a particular element of the allowable
costs. This is in accordance with the profit on cost once (POCO) principle
(see Reg j29).
4.3.13
How this adjustment should be determined will be based on statutory
guidance issued by the SSRO.
4.3.14
An MOD / industry working group has already agreed an approach to
calculate the POCO adjustment, which will be submitted to the SSRO for
their consideration.
SSRO funding adjustment
4.3.15
The SSRO funding adjustment will be set each year in the same way as the
BPR - the SSRO will recommend it to the SofS, who will then publish it in
the London Gazette (publishing his reasons if he chooses not to follow the
SSRO’s advice).
4.3.16
In making its recommendation to the SofS, the SSRO must have regard to
guidance issued by the SofS. The method expected to be included by SofS
in such guidance is:
a) take the average actual running costs of the SSRO over the last three
years;
b) deduct the average of any SSRO costs over the last three years
incurred in relation to specific tasks and analyses requested by the SofS;
c) divide this by the average of the last three years’ total value of qualifying
contracts, to get to a percentage;
d) divide this by two, to represent a 50/50 split of these costs between the
MOD and suppliers with qualifying contracts.
4.3.17
The costs of the SSRO to be included in the above calculation are not
expected to exceed £4m per annum, so the industry share will be circa £2m.
Divided by a typical volume of single source procurement (circa £6bn per
annum), this will give rise to an adjustment (a reduction in the BPR) in the
order of 0.05%.
4.3.18
The budget of the SSRO will be set each year by the MOD, and the SSRO
will have to publish its annual accounts. The SSRO will also be subject to
numerous checks and balances such as by Her Majesty's Treasury (HMT)
and the Cabinet Office led initiative of tri-annual reviews of all arms-length
bodies.
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Incentive adjustment
4.3.19
The incentive adjustment is an adjustment at SofS's discretion to allow a
supplier additional profit as a reward for particular performance. This cannot
exceed an amount to be set in the SSCRs, initially 2% (see Reg j28(7)).
4.3.20
Most contractual performance measures result in profit reductions for poor
performance, however it may sometimes be good commercial practice to
allow for a positive incentive. This adjustment allows for this, and the 2%
must include all incentive payments specified in a contract (with the
exception of share-line payments). The adjustment is expected to be used
sparingly.
4.3.21
The SSRO may issue statutory guidance on when and how to use this
incentive adjustment that MOD commercial officers must have regard to.
Capital servicing adjustment
4.3.22
The final adjustment to be made is the capital servicing adjustment. This
adjustment allows suppliers to recover their reasonable costs of capital
(whether working or fixed capital) related to qualifying contracts.
4.3.23
The current approach is to determine a capital servicing allowance at the
supplier's business unit level, based on the levels of allowable fixed and
working capital at that business unit and the fixed and working capital rates
published by the Review Board. Once a reasonable return on capital is
established, this is expressed as a proportion of the allowable production
costs of that business unit, and a profit adjustment is determined.
4.3.24
The framework will retain this approach as one possible way to determine
how allowable capital costs can be priced. As with the BPR and the SSRO
funding adjustment, the SSRO will recommend capital rates to the SofS
(having regard to guidance issued by SofS), and the SofS will publish these
rates no later than the 15th of March of the previous financial year.
4.3.25
The framework will also be able to accommodate capital costs being
recovered in other ways, for example by direct inclusion within allowable
costs (as in a PFI style contract). The ability to accommodate alternative
approaches is not driven out of a desire to change the current system, but to
allow for this should this become appropriate.
Amending the adjustments
4.3.26
The Regulations will grant the SofS the power to amend the above five
adjustments through Regulations. This will allow the SSRO, in their regular
review of the framework, to suggest amendments that SofS can incorporate
through secondary legislation.
4.4
Firm, Fixed, TCIF, and Ascertained Cost contracts
4.4.1
The pricing formula and profit formula will apply to all qualifying contracts
regardless of their commercial model. The only way to avoid the use of the
pricing formula for contracts which satisfy the QDC requirements is for the
SofS to use his exemption power (section 14(7).
4.4.2
What this means for the different contract types is summarised below:
a) Firm. The total firm price must be set with reference to the pricing
formula. The allowable costs must be appropriate, attributable, and
reasonable. There will be statutory guidance, issued by the SSRO, that
gives guidance on how to determine what costs are allowable costs.
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There is a duty on the supplier to use pricing assumptions that are fit for
purpose, and a duty on the MOD to ask for and check (where they have
been provided) these prior to pricing. The MOD should provide
assumptions to the supplier that are materially relevant to pricing, and
the supplier should ask for and check (where they have been provided)
these prior to pricing. Where the price uses rates to recover indirect
costs, these should be the estimated and forecast rates agreed by
CAAS. PEPL (see 6.11) applies to all contracts over £50m, and is at the
SofS's discretion for contracts between £5 and £50m.
b) Fixed. As above, however the costs and profit should be expressed in
real terms (at a particular price date), and one or more indices used to
determine the nominal price in accordance with the variation of price
agreement.
c) TCIF (or any other pain / gain share model such as MPTC). The
target price must be set based on applying the profit formula to the
target costs. The target costs must be the allowable costs, and must
conform to all the pricing principles, as must the actual costs.
d) Ascertained cost. The actual price must be based on the actual
allowable costs plus the CPR calculated in accordance with the profit
formula.
4.5
Single source sub-contracts
4.5.1
Single source sub-contracts may also be qualifying contracts (see 3.7). If a
single source sub-contract is a qualifying sub-contract (QSC), it must be
priced in accordance with the pricing principles.
4.5.2
If the pricing principles are not followed, then either the sub-contractor or the
MOD may refer the matter to the SSRO, which can make a financial
determination to return the situation to what it would have been if the
contract had been priced correctly (see 4.10). Any resulting financial
adjustment will be between the MOD and the sub-contractor directly (see R
j17(1)(a)).
4.5.3
The framework recognises that single source sub-contractors will have
sensitive commercial data that they may not wish to share with the prime
contractor, which may be a possible competitor (although this situation
should not be abused - for example direct costs, sub-contractor costs, and
risk contingency should all be shared).
4.5.4
Where a sub-contractor has good reason not to share pricing assumptions
with the supplier with whom they are contracting (to deliver an aspect of a
qualifying contract), then the sub-contractor (and the MOD) will still have a
duty to follow the pricing principles, and the other requirements of the
framework that do not relate to pricing (such as standard reporting, which
will go directly to the MOD and SSRO).
4.5.5
If a sub-contractor does not share a pricing assumption prior to pricing, with
either the MOD or the supplier with whom they are contracting or both, then
they expose themselves to a higher risk of a future SSRO referral once on
contract. The standard reports will also demonstrate their financial
performance on the sub-contract, and the MOD will thus be able to target
audits and referrals to the SSRO appropriately.
4.5.6
The SSCRs (at Part 3) will set out how the framework will be applied to
QSCs. In addition to the SSCRs, further commercial guidance will be
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provided to set out how the framework applies, and what rights and
responsibilities are created between sub-contractors and the MOD.
4.5.7
The diagram below sets out how the sections in the Act will be applied
through the SSCRs. In summary, pricing will remain between the contractor
letting the sub-contract and the sub-contractor whilst open book, reporting
and compliance will be directly between the MOD and the sub-contractor.
This avoids the disclosure of commercially sensitive information between
contractors.
Clause application to sub-contracts and sub-contractors after clause 30 is applied
Clauses:
15 . . . . . . . .
16 . . . . . . . .
17, 19 . . . . .
18(1)+(2) . .
28(1) to (5)
29(1) to (4)
P
S
QSC
Legislative Framework
pricing
TCIF pricing
profit rate
profit rate: supplement
qualifying sub-contracts
sub-contract assessment
QSC
Defence Reform Act 2014
Part 2 – Single Source Contracts
SI: SSCRs
S
Clauses:
14 . . . . QDCs
Stat Guidance : SofS
Stat Guidance : SSRO
QDC
M
Where:
M is MOD
P is Prime Contractor
S is Sub-contractor
and
QSC is Qualifying Sub-Contract
Clauses:
18 (3)+(4) .
20 . . . . . . .
21(1)-(4) . .
22 . . . . . . .
23 . . . . . . .
24 . . . . . . .
25 . . . . . . .
26 . . . . . . .
27 . . . . . . .
28(6) . . . . .
29(5)+(6) . .
31 . . . . . . .
32 . . . . . . .
33 . . . . . . .
34 . . . . . . .
price referral
allowable costs
PEPL
recovery of unpaid amts
records
contract reports
supplier reports
duty to report events
report restrictions
SofS sub-con exception
assessment rights
compliance notice
penalty notice
penalty amount
enforcement
Clauses:
13 . . . . . . .
35 . . . . . . .
36 . . . . . . .
37 . . . . . . .
38 . . . . . . .
39 . . . . . . .
40 . . . . . . .
41 . . . . . . .
42 . . . . . . .
43 . . . . . . .
SSRO
opinions
analysis
SofS services
disclosure
review
repeal
time limits
general
interpretation
4.6
Pricing contract amendments
4.6.1
See section 3.9 for the general context of contract amendments.
4.6.2
When a contract that is currently not a QDC becomes a QDC for the first
time upon an amendment (as noted previously, this may only be with the
agreement of both parties to the contract) then the whole contract must be
re-priced in accordance with the SSCRs.
4.6.3
With an existing qualifying contract, there are two approaches available to
price an amendment (see Reg j23).
4.6.4
Where the amendment can be priced separately, it must be priced as a
change to the total price, with the allowable costs included in the pricing
formula being the change to the allowable costs as a result of the
amendment (i.e. this is the incremental cost of the contract amendment).
This change can be either positive or negative.
4.6.5
Where it is not possible to price the amendment as a change, then the
alternative is to re-price the entire contract.
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4.6.6
Any re-pricing needs to be based on the BPR, SSCRs and statutory
guidance in force at the time of the amendment.
4.7
Contract Pricing Statements
4.7.1
If either party makes a referral to the SSRO on the basis that the pricing
principles were not applied, then the SSRO will need the audit trail for the
pricing assumptions.
4.7.2
This audit trail is made up of three elements. Firstly the contract. Secondly
the pricing model that was used to determine the price. Thirdly the list of all
the pricing assumptions that were used in the pricing model to generate the
price.
4.7.3
All three of these are needed (the pricing model includes formulae that
specify how the assumptions lead to the price - these formulae are part of
the basis of pricing). The SSCRs will specify that the supplier’s pricing
model must be provided as part of the Contract Pricing Statement (CPS)
(see Reg j43(2)).
4.7.4
The list of pricing assumptions used will be one of the reports specified in
the SSCRs, and is known as the CPS. The SSCRs will provide details as to
what the CPS must contain (this report is being piloted with potential
contractors in spring / summer 2014), for example for each pricing
assumption the CPS must include the justification or audit trail behind this
assumption and the source of the assumption.
4.7.5
For example, if one of the assumptions in the pricing model is the number of
productive engineering hours needed to build a particular component, this
will typically be the output of a more detailed engineering model. In this case
justification will be the name and version of the lower level model used, and
the supplier will be expected to keep this lower level model as one of the
records relevant to pricing. The more material the assumption is to the price,
the more detail and justification may reasonably be expected.
4.7.6
The CPS is similar to the current Equality of Information Pricing Statement
(or EIPS), with two important differences. The content of the CPS will be
more tightly defined (by the SSCRs) than the EIPS. Also, if a joint CPS
cannot be agreed prior to the signing of the contract, the supplier will be
required to provide a CPS to the MOD within one month of contract signing.
If this is not done the MOD may issue a compliance notice which may lead
to a civil penalty. Given the importance of the CPS to ensuring adherence
with the pricing principles, this will be one of the largest civil penalties. See
Appendix A for more details on the civil penalty process and amounts.
4.7.7
MOD commercial policy will be to agree appropriate elements of the CPS
prior to agreeing a price, as is currently the case with the EIPS. The
framework recognises, however, that there can often be significant pressure
to sign a contract by a given date, with numerous changes to the price in the
lead-up to signature. If appropriate elements of the CPS have been agreed
prior to contract signing, then provision of the CPS within the one month will
be trivial. If not there will still be a requirement for the supplier to provide this.
4.7.8
If no CPS is provided, and a civil penalty is applied, this does not stop either
party later referring a contract to the SSRO on the basis of pricing principles.
The SSRO is likely to take a dim view of what may appear to be a deliberate
attempt to avoid maintaining an audit trail.
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4.7.9
The framework does not put a direct legal requirement on the MOD or
supplier to provide equality of information prior to pricing. This will be set out
in commercial policy. It will, of course, be highly unusual for the MOD (or a
combination of the contractor and MOD if it is a qualifying sub-contract) to
agree to a single source price without being confident in the pricing
assumptions underpinning the price. Sharing pricing information prior to
agreeing a price is also an effective way to mitigate the risk of a negative
future determination by the SSRO once on contract.
4.7.10
The CPS and the pricing model submitted must be consistent with the price
of the contract, or they will not represent an acceptable submission. The
MOD will also provide the contract to the SSRO.
4.7.11
The purpose of the CPS is not to make the supplier or MOD liable should
these assumptions turn out not to be correct (it is inevitable that actual costs
will deviate from forecast costs). The purpose of the CPS is to be part of the
audit trail of the pricing assumptions, which together with the referral right,
means all parties are incentivised to apply the pricing principles.
4.7.12
If a supplier uses data the MOD provided for pricing purposes, and once on
contract, if the supplier thinks that the MOD had better information but did
not provide it, or that the MOD misrepresented the caveats, then the MOD is
at risk from the supplier referring the matter to the SSRO. If the SSRO
consider that either the MOD had better information but did not provide it, or
that the MOD misrepresented the relevant caveats, then it can make a
financial determination (see Appendix B).
4.7.13
If the MOD disagrees with a CPS in terms of the justification or source of the
data, for example if the CPS states that an assumption was provided by the
MOD and the MOD does not recognise this, then commercial policy will set
out that the MOD will have one month to notify the supplier (and SSRO) of
this. If no agreement can be reached, then either party may refer the CPS to
the SSRO, which will give an opinion as to its view of the correct CPS
(which it is likely to use should either MOD or the supplier refer a contract to
them on the basis that pricing principles were not followed).
4.8
Maintenance of pricing records
4.8.1
The framework includes a requirement for suppliers to maintain records (see
Reg j37) which are sufficiently up to date and accurate to enable the SofS to
use them to:
a) audit the standard reports (including the CPS);
b) verify that a cost being incurred is an allowable cost;
c) verify the reason for variances between estimated and actual allowable
costs;
d) monitor the supplier's performance of its contractual obligations; and
e) determine if a sub-contract is a QSC.
4.8.2
The requirement to maintain records related to the CPS means pricing
records must be maintained. The time period for which records must be
kept will be set out in the SSCRs (six years after the end of the financial
period to which the records relate, or until two years after the contract
completion if that is earlier) (Reg j38).
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4.9
Compliance
4.9.1
Compliance in the framework relevant to pricing covers, inter alia, the
following situations.
a) If the supplier does not provide the MOD with a CPS (which will include
the associated pricing model) within one month of contract signing, the
MOD may issue a compliance notice which may lead to a civil penalty
(see Appendix A).
b) If the supplier fails to keep relevant records, then the MOD may issue a
compliance notice or a penalty notice which may lead to a civil penalty
(see Appendix A).
4.10
SSRO referrals relevant to pricing
4.10.1
The procedures to be followed in making a referral to the SSRO are
described in Appendix B.
A referral to the SSRO for an opinion on profit adjustments (see Reg j32)
4.10.2
In the event that the parties cannot agree on the profit adjustment for risk or
for POCO that is in accordance with the pricing principles, they may refer
the matter to the SSRO for an opinion (Reg j32).
4.10.3
To give time for an SSRO referral, should one be needed, it will be
commercial policy to try to agree the profit rate adjustment for risk and
POCO sufficiently prior to the likely contract sign date.
4.10.4
The opinion of the SSRO is advisory, and there is no direct legal
consequence for the supplier and MOD agreeing a price that differs from the
SSRO's opinion. However in the event of a referral to the SSRO for a
determination on adherence to pricing principles once on contract (see
below), the SSRO is likely to have regard to its previous opinion.
A referral to the SSRO for a determination on adherence to pricing principles
4.10.5
Once on contract, and for up to two years after the contract end, either party
may ask the SSRO for a determination on whether or not the qualifying
contract was priced in accordance with the pricing principles. The SSRO will
be expected to make a determination on the matter within three months.
4.10.6
There are two referrals that may be made to the SSRO, either of which may
result in a binding financial determination. The SSRO may determine that
the MOD must pay the supplier money or vice versa.
4.10.7
The two referrals are in relation to the contract profit rate adjustments (see
Reg j33) and to the allowable costs (see Reg j35).
4.10.8
In making any determination, the SSRO must have regard (see Reg j75) to
the:
a) the SSCRs and the statutory guidance that were in place at the time the
contract was entered into (or priced via amendment);
b) the extent to which each party to the contract has fulfilled its
responsibilities under Part 2 and the SSCRs;
c) the extent to which relevant statutory guidance has been followed (and
any justification for not following it);
d) representations by the parties (and the SofS, where he is not a party)
on the matter;
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4.10.9
Where appropriate, the SSRO may bring in external experts to assist them
in forming a view.
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5
Cost recovery through rates
5.1
Principles
5.1.1
This section relates to costs that are recovered through rates ("indirect
costs"). Overheads included directly in the price are treated as direct costs
(see 4.2.1).
5.1.2
To include indirect costs in the pricing formula (see 4.1.2), they must be
allowable costs. Indirect costs must conform to the pricing principles outlined
in 4.1 in exactly the same way as all other elements that make up the price
of a qualifying contract.
5.1.3
In summary, indirect costs must be appropriate, attributable, and reasonable.
The SSRO must publish statutory guidance on how to determine which
costs are allowable, and this will include further guidance on what is meant
by “appropriate, attributable and reasonable”. This guidance is expected to
be known as the Single Source Cost Standards (SSCSs). It will be possible
to deviate from the SSCSs if there are good reasons to do so. The initial set
of SSCSs is expected to be based closely on the GACs in force at the
commencement date.
5.1.4
The rest of this section concentrates on the rates regime for large single
source suppliers. The exceptions to this are the Actual and Estimated
“Business Unit Cost Analysis Reports”, described below in 5.5, which are
relevant whether indirect costs are recovered through rates or through other
means.
5.1.5
A simplified process for SMEs will apply, and will be set out in MOD
commercial policy, however this is not part of the framework. In the unusual
situation where an SME has a single source contract with the MOD above
the threshold that makes it a QDC (£5m), if appropriate the SofS may
exempt it from the framework.
5.2
Rates claims
5.2.1
The SSCRs will set out obligations that apply to some suppliers with
qualifying contracts (see section 3.8 above and Reg j52). Where a supplier
is a part of a group, these obligations fall on the ultimate parent undertaking
of that group.
5.2.2
One of these obligations is the requirement to submit rates claims (for actual
and estimated rates – see Regs j54 and j56) to the MOD for relevant
business units within three months of the end of the supplier's financial year.
This time period can be extended by agreement with the MOD. If the
supplier fails to provide a rates claim by this date, the MOD may issue a
compliance notice which may lead to a civil penalty (see Appendix A).
5.2.3
The regulations will set out the definition of a Qualifying Business Unit
(QBU). It is intended that this will reflect the CP:CE units currently used in
the rates programme.
5.2.4
The rates claims must include the information relevant to agreeing a rate in
accordance with the pricing principles.
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5.2.5
The principle of attributability is particularly relevant to indirect costs. In
MOD’s view, a cost may be considered attributable if it is:
a) either:
i. incurred specifically for the contract; or
ii. benefits both the contract and other work, and may be distributed
to both in reasonable proportion to the benefits received; or
iii. is necessary to the overall operation of the business, although a
direct relationship to any particular contract item cannot be shown;
and
b) allocated to MOD contracts on a basis consistent with the contractor’s
cost accounting practices as applied to MOD single source and other,
non-MOD contracts.
5.2.6
When considering (a) above, the MOD will have regard to the outputs of
discussions with suppliers on their long-term overhead plans to determine
whether or not a given cost should be passed back to the MOD (see 7.2).
5.2.7
The Questionnaire on the Method of the Allocation of Costs process is
designed to document a supplier’s cost estimating and recording systems
and will ensure (b) above. This will continue as part of the framework.
5.2.8
If the MOD and the supplier are unable to agree either actual or estimated /
forecast rates, either side may refer the matter to the SSRO (see Appendix
B). If the referral relates to actual rates, the determination is via a referral on
the allowable costs under a contract, or on the PEPL adjustment – either will
be a binding determination for the particular contract for which the referral is
made, and it is expected that both parties will accept the SSRO’s
determination in relation to other contracts that also use that rate.
5.2.9
If the referral relates to estimated / forecast rates, then the SSRO will give
an opinion (see Reg j34). The two parties to a qualifying contract do not
have to use the SSRO's opinion in agreeing the price of that qualifying
contract, however if they do not then they expose themselves to the risk of a
financial determination from the SSRO once on contract (unless there is a
good reason for not using this rate, such as material change in forecast
costs / throughput).
5.3
Responsibility for demonstrating that costs are allowable
5.3.1
The supplier has primary responsibility for ensuring that the costs included
in rates claims are allowable costs. The MOD has a secondary responsibility
to ask for, and check, the assumptions and forecasts that have been shared.
5.3.2
Suppliers must also be able to demonstrate that their claims are in
accordance with the pricing principles: that they are appropriate, attributable,
and reasonable. If they cannot, then the MOD is likely to exclude them in
calculating the rates. If the parties cannot agree, then the matter may be
referred to the SSRO.
5.4
Efficiency targets
5.4.1
Under the new framework, over time the MOD will build up a library of
indirect cost benchmarks. Using these benchmarks will become part of the
rates agreement process. One of the roles of the SSRO will be to prepare a
report on defence benchmarks that will include benchmarks for indirect
costs. The SSRO will base this on its analysis of supplier costs reports (see
Error! Reference source not found.) and other relevant industry
benchmarks.
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5.4.2
On the basis of these benchmarks, the MOD will be able to identify indirect
costs that are at odds with comparable business units or historic outturns. If,
after discussions with the supplier, the MOD feels that a supplier is not being
cost efficient, then the MOD may agree efficiency targets with the supplier.
For example including within estimated and forecast rates an efficiency
challenge to encourage the supplier to reduce its indirect costs.
5.4.3
If these efficiency targets cannot be agreed with the supplier, and yet the
MOD feel there is strong case for these targets to be included, they may of
course refer the matter to the SSRO in the usual way for an opinion. If the
SSRO’s opinion is not used when pricing a qualifying contract that use these
rates, then once on contract either party may refer the matter to the SSRO
for a financial determination.
5.4.4
If the supplier plans to implement a specific and material initiative (see
section 5.7 below), such as a new IT system, on which future savings are
anticipated, then the MOD may agree such target savings with the supplier.
These savings will be incorporated into future and estimated rates as with
efficiency targets.
5.5
Business Unit Cost Analysis Reports
5.5.1
The framework recognises that for different suppliers, and different business
units within the same supplier, it may be appropriate to allocate different
types of cost as direct or indirect. The most appropriate way of allocating
indirect costs can also vary by supplier and business unit.
5.5.2
In order to help the MOD be confident that costs are reasonable, to identify
areas where indirect costs are higher than expected, and to set appropriate
efficiency targets, the SSCRs will require a supplier to provide actual and
estimated Business Unit Cost Analysis Reports (BUCAR-A and BUCAR-E,
see Regs j55 and j586) that split indirect costs out in a standard way.
5.5.3
The BUCAR-A or BUCAR-E will be required in draft alongside a supplier’s
Rates Claim (RC-A for actuals or RC-E for estimates). The trigger for the
final BUCAR-A and BUCAR-E is an agreed Rates Claim, or failing that the
SSRO’s opinion following a referral. The supplier will have one month from
this date to submit their final BUCAR-A / E or the MOD may issue a
compliance notice which may lead to a civil penalty (see Appendix A).
5.5.4
The BUCAR-A / E does not duplicate the corresponding Rates Claim - it is
interested in the amount of cost incurred or forecast rather than deriving a
rate. It also assumes that the attribution method (described in the QMAC) is
working properly as far as determining the proportion of business unit costs
allocated to qualifying contracts, and instead reports on the total costs
incurred by the business unit. This will allow for easier comparison over time
and benchmarking.
5.5.5
The MOD recognises that direct comparison will not always be appropriate
between suppliers or business units. The nature of the work being procured
will influence the reasonableness of costs, as will the method by which
business units have chosen to allocate costs to direct and indirect.
Nonetheless it is anticipated that there will be enough consistency to make
comparisons useful.
6
note that these are still called the actual and estimated costs analysis reports in draft V3 of the
SSCRs.
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5.5.6
The table below describes the contents of the BUCAR-A – see the latest
supplier report template and Reg j55 (note that V3 of the regulations do
reflect the latest report template).
Section
1. Supplier
information
2. Cost Analysis
- Prior Estimate
3. Cost Analysis
- Actuals
4. Cost Analysis
- Variance
7. Supporting
Data Headcount
8. Supporting
Data - Activity
Costs
9. Supporting
Data – Revenue
Analysis
10. Supporting
Data – Other
Cost Drivers
11. Rates –
Agreed
Recovery Bases
12. Rates –
Agreed Rates
5.5.7
Data
 basic information about the BU and legal entity
 the previously estimated costs analysis for the year being
reported upon
 the actual costs analysis for the year being reported on
 explanation for variances between (2) and (3)
 analysis of headcount (prior estimate, actual and variance)
for the year being reported on
 detail of activity costs – those groupings of costs by specific
activities (e.g. bids and proposals)
 summary of revenue by contract source - e.g. by qualifying
contract, MOD competitive, etc
 summary of land and buildings and other drivers that will be
used to normalise data for benchmarking
 summary of cost recovery bases per the agreed rates
 summary of the agreed rates
The table below describes the contents of the BUCAR-E – see the latest
supplier report template and Reg j58 (note that V3 of the regulations do
reflect the latest report template).
Section
1. Supplier
information
3. Cost Analysis
- Actuals
5. Cost Analysis
- Estimate
6. Cost Analysis
- Changes
7. Supporting
Data Headcount
8. Supporting
Data - Activity
Costs
9. Supporting
Data – Revenue
Analysis
10. Supporting
Data – Other
Cost Drivers
Data
 basic information about the BU and legal entity
 the actual costs analysis for the previous year
 the estimated costs analysis for the current year being
reported on
 explanation for changes from (3) to (5)
 analysis of headcount (prior estimate, actual and variance)
for the year being reported on
 detail of activity costs – those groupings of costs by specific
activities (e.g. bids and proposals)
 summary of revenue by contract source - e.g. by qualifying
contract, MOD competitive, etc
 summary of land and buildings and other drivers that will be
used to normalise data for benchmarking
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Section
11. Rates –
Agreed
Recovery Bases
12. Rates –
Agreed Rates
13. Future
Initiatives
Data
 summary of cost recovery bases per the agreed rates
 summary of the agreed rates
 summary of key initiatives that are expected to impact costs
recoverable through rates in future periods
5.5.8
In the event the supplier fails to provide a RC-A, BUCAR-A, RC-E or a
BUCAR-E, the MOD may issue a compliance notice which may lead to a
civil penalty (Appendix A).
5.6
Rates Agreement Pricing Statement
5.6.1
The SSCRs will also stipulate that, following an estimated rates agreement,
a supplier must submit a Rates Agreement Pricing Statement (RAPS – see
Reg j57). The RAPS is the equivalent document to the Contract Pricing
Statement, but for rates. It represents the audit trail that will be used in a
possible referral to the SSRO in the event that the rate was incorrectly used
in the pricing of a qualifying contract, or in the settlement of a price
adjustment for PEPL or any pain / gain share mechanism such as TCIF. See
section 4.7 to understand the purpose of the CPS as the purpose of the
RAPS is the same.
5.6.2
The CPS will refer to the RAPS of any of the rates used in the pricing of the
qualifying contract. As with all pricing records, the supplier must maintain
their records relevant to determining an agreed actual or estimated /
forecast rate. If a supplier fails to maintain these records then the MOD may
issue a compliance notice or penalty notice which may lead to a civil penalty
(see Appendix A).
5.6.3
The procedure to be followed for a RAPS is the same as for a CPS. The
RAPS must be provided one month after the rates agreement. The MOD
then has a further one month to note any disagreement with the RAPS.
5.6.4
As with the CPS, commercial / CAAS policy will be to agree appropriate
elements of the RAPS prior to agreeing the rate. If this is done the provision
of the RAPS within one month of agreeing the rate will be trivial.
5.7
Allowability assessment
5.7.1
The SSCRs will stipulate that the BUCAR-E (see 5.5.7 - 13 Future Initiatives)
must include a section in which a supplier describes any specific and
material initiatives that underpin the business unit cost estimates / forecasts.
For example a new IT system, apprentice scheme, or material capital works.
Against these specific and material initiatives the supplier must indicate the
likely cost, and how much of this they anticipate recovering from the MOD.
They should also indicate any target benefit that they are prepared to embed
into future rates.
5.7.2
It will be MOD commercial policy that these will have to be examined by
senior commercial and / or financial officers within the MOD to assess
whether these are likely to be considered allowable costs. If not, this will be
reflected in the process of agreeing the rates agreement by those
undertaking the task on behalf of the MOD.
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5.7.3
The impact of positive assessment is not that the future forecast costs are
agreed - it is the role of the annual actual and estimated / forecast rates
process to agree allowable costs.
5.7.4
The impact of a negative assessment is not that a supplier cannot engage in
the initiative as they had planned. They can - however the MOD will resist
attempts for the supplier to pass these costs on in MOD single source (not
just qualifying) contracts.
5.7.5
If the supplier does not agree with the MOD's assessment on whether the
costs of the initiative are in line with the pricing principles (i.e. appropriate,
attributable, and reasonable), then they may refer the matter to the SSRO
for an opinion (see 5.2.9).
5.8
Compliance
5.8.1
Compliance in the framework relevant to the agreement of rates covers the
following situations.
a) If the MOD and supplier cannot agree an actual or estimated / forecast
rate, then they may refer the matter to the SSRO, which will give its
opinion or determination as to what the rate should be, in accordance
with the pricing principles (see Appendix B). This is a determination for
actual rates, and an opinion for estimated / forecast rates.
b) If a qualifying defence supplier fails to provide the MOD with their rates
claims within three months of the end of their financial year (or a longer
period if agreed by the MOD), then the MOD may issue a compliance
notice which may lead to a civil penalty (see Appendix A).
c) If a qualifying defence supplier fails to provide the MOD with a BUCARA or a BUCAR-E within one month of the agreement of an actual or
estimated / forecast rate (or the receipt of an opinion of the SSRO), then
the MOD may issue a compliance notice which may lead to a civil
penalty (see Appendix A).
d) If a qualifying defence supplier fails to provide the MOD with a RAPS
within one month of the agreement of an estimated / forecast rate (or
the receipt of an opinion of the SSRO), then the MOD may issue a
compliance notice which may lead to a civil penalty (see Appendix A).
e) If the supplier fails to keep relevant records, then the MOD may issue a
compliance notice or a penalty notice which may lead to a civil penalty
(see Appendix A).
5.9
SSRO referrals relevant to cost recovery through rates
5.9.1
The procedures to be followed in making a referral to the SSRO are
described in Appendix B.
A referral to the SSRO for an opinion or determination on rates agreements
5.9.2
In the event that the parties cannot agree on an actual or estimated /
forecast rates agreement, they may refer the matter to the SSRO. The
SSRO will be expected to express an opinion (for estimated rates) or
determination (for actual rates) on the matter within three months.
5.9.3
To give time for an SSRO referral, should one be needed, and still have the
rates available for pricing in a timely manner, it will be MOD commercial
policy to have a target of agreeing rates within three months of receipt of the
rates claim.
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5.9.4
If the rate is an estimated / forecast rate, the SSRO will give an opinion (see
Reg j34), and there is no direct legal consequence if the supplier and MOD
agree a price using a rate that differs from the SSRO's opinion. However in
the event of a referral to the SSRO for determination on adherence to
pricing principles once on contract (see 4.10.5), the SSRO is likely to have
regard to its previous opinion.
5.9.5
If the rate is an actual rate, the determination of the SSRO is binding (see
Reg j35). The legal consequence of this depends upon the use to which the
actual rate is put. Whether it is a PEPL adjustment, a pain / gain share
adjustment (e.g. TCIF), or to set the price of an ascertained cost contract, in
the event the SSRO opinion was not used, the disadvantaged party could
make a referral resulting in a financial determination.
5.9.6
In making a determination of a rate in line with the pricing principles, the
SSRO must have regard (see Regs j75 and j35) to the:
e) Part 2 of the Act, SSCRs, and statutory guidance that were in place at
the time the contract was entered into (or priced via amendment);
f) the extent to which each party to the contract has fulfilled its
responsibilities under Part 2 and the SSCRs;
g) the extent to which relevant statutory guidance has been followed (and
any justification for not following it);
h) representations by the parties on the matter;
i) information available to each party at the time the price was determined;
j) defence and standard industry benchmarks it considers to be
appropriate;
k) whether the parties disclosed their pricing assumptions in a timely
manner;
l) efforts made by the parties to establish whether the rate was in
accordance with the pricing principles;
m) agreements between the parties with regard to spreading historic
indirect costs across multiple time periods;
n) agreements between the parties with regard to expected costs and
savings from efficiency initiatives; and
o) agreements between the parties with regard to industrial capabilities the
MOD agrees to sustain.
5.9.7
To ensure no conflict of interest in this case (where the SSRO both writes
the guidance, and determines if it has been followed), the SSRO must set
up a committee that must include at least one external suitably qualified
person.
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6
Contract monitoring
6.1
Principles
6.1.1
The framework is designed to give the MOD (and SSRO) visibility of supplier
costs and cost drivers once on contract. There are three ways in which the
framework supports greater visibility:
a) standard reports provided by the supplier to both the MOD and the
SSRO;
b) a requirement for suppliers to proactively notify the MOD of any material
change, or any risk of a material change, to either performance, cost, or
schedule; and
c) audit and open book rights that allow the MOD access to the records,
systems, sites, and people relevant to the performance of qualifying
contracts.
6.1.2
Suppliers may include the costs of meeting these requirements within the
price of qualifying contracts, provided these costs are attributable and
reasonable.
6.1.3
To help ensure the framework provides value for money, larger projects
carry greater standard reporting requirements. The reporting requirements
and thresholds will be set out in the SSCRs (see Part 7 of the SSCRs).
6.1.4
The purpose of project visibility is to:
a) improve the MOD's understanding of the typical costs incurred on
defence single source contracts so they might become a more
intelligent customer;
b) allow the MOD to generate good quality management information to
better focus senior management time where it is needed;
c) allow the MOD to identify areas where costs incurred are higher than
expected or at odds with comparable projects, and where there may be
opportunities to reduce costs;
d) allow the MOD to identify possible failing projects in a timely manner, to
monitor risks and cost growth, and to assess the likelihood of
consequential price rises;
e) allow the MOD to monitor sub-contracting procedures and performance;
and
f) improve the accuracy of cost estimating techniques by monitoring
variance between estimates and outturn and understanding the causes
of this.
6.1.5
The standard reporting focuses on monitoring cost and schedule rather than
on monitoring performance against contract obligations. The appropriate
reporting on performance will vary substantially by contract, so it is currently
not included. This may or may not change in subsequent reviews of the
framework.
6.1.6
The standard reporting requirements will be set out in the SSCRs. This will
allow them to be updated on a periodic basis by the SofS on the basis of
recommendations from the SSRO. The SSCRs will not describe every field
that will need to be completed, but will describe the content that the reports
must cover. The actual forms to be completed will be published by the
SSRO.
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6.1.7
The reporting requirements set out below represent minimum requirements
that will apply to qualifying contracts. It will usually be appropriate to agree
additional bespoke reporting, such as performance reporting or monthly
reporting. There is nothing in the framework to stop the parties agreeing to
additional reporting via contract conditions.
6.2
Monitoring the baseline
6.2.1
Within one month of contract signing, the supplier must provide the MOD
and SSRO with a Contract Notification Report (CNR – see Reg j46). This
report establishes the contract management baseline and also supports the
development of benchmark and parametric information. As the first point of
reporting following contract let, this confirms receipt of the contract pricing
documents (the CPS, pricing model, and risk register) along with summary
contract information such as the inclusion of standard MOD contractual
terms and conditions. The reporting baseline is captured, covering price,
schedule, metrics, payments, deliverables and initial sub-contractors.
6.2.2
The framework recognises that suppliers will have different approaches to
estimating the price of a qualifying contract, and that this will rightly vary with
the nature of the goods or services being provided, the corporate structure
of the supplier and the historic data the supplier can access. However, one
of the aims of the framework is to allow the MOD to challenge supplier cost
estimates on the basis of historic information. To allow comparison across
comparable projects, the costs in the CNR (and some other reports, see
later), will be split in a standard way. This standard set of cost categories is
known as the Defined Pricing Structure (DPS).
6.2.3
The DPS will be in statutory guidance published by the SSRO. The DPS will
vary according to the nature of what is being procured, for example whether
it is a contract for equipment design and manufacture, or an in-service
availability contract. The DPS is expected to initially follow the current US
work breakdown structure MIL-STD-881c.
6.2.4
The DPS is likely to include a hierarchy of cost categories. For example the
costs of a system may be broken out by sub-system, and a sub-system may
be broken down still further. It is anticipated that the total number of cost
categories, for even the largest contracts, will typically be between 20-50.
The DPS relevant to a particular contract will be set out in the Contract
Reporting Plan (see 6.5).
6.2.5
The table below describes the contents of the CNR – see the latest contract
report template and Reg j46 (note that V3 of the regulations do reflect the
latest report template).
Section
1. Report
Submission
Admin
2. Contract
Report Plan
3 & 4. Supplier
Basic Reference
Data
5. Key
Deliverables
6. Metrics
Data
 basic submission details such as date and contact details
 summary of key contract and reporting dates
 basic supplier data (company details) and contract data
(period, pricing method etc)
 a list of the key items to be provided under the contract
 a list of the metrics in accordance with the DPS, and their
forecast / expected values
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Section
Data
7. Price
Breakdown
 the contract price broken down in accordance with the DPS
and by fiscal year, together with a summary of cost recovery
base volumes
12. Payments
Analysis
 a summary of payments expected above a minimum
threshold value, together with an annual summary of all
payments by currency
13. Contract
Delivery
Milestones
 a summary of contract delivery milestones with contracted
target dates and actual or forecast completion dates
14. Subcontracts
 a description of the sub-contractor supply chain used for the
contact and a general description of the sub-contractor
procurement strategy
 summary details of key sub-contracts let or expected to be
let
6.2.6
The largest contracts may stretch over many years, and monitoring such
contracts only at the start and end would not achieve the purposes outlined
at the start of this section. For qualifying contracts greater than £50m in
value, the supplier must also submit an Interim Contract Report (ICR).
6.2.7
There is a degree of flexibility in the periodicity of ICRs. The default position
will be that an ICR is required annually. For production contracts that are in
stages or batches, it may be more useful to link the ICRs to the completion
of milestones or batches. For low risk contracts, where costs are well
understood by all, and the difference between outturn and estimated costs
or schedule is likely to be small, then ICRs may be appropriate every two or
three years, or halfway through the contract. Equally it may be that an ICR is
required for a contract less than £50m in value, although probably less
frequently than once a year. The SSCRs will set out the conditions and
thresholds where it is appropriate to deviate from the annual periodicity (see
Reg j48).
6.2.8
The ICR must allow comparison with the CNR and CCR. In order to allow for
this, costs must be split by the DPS, and any actual indirect costs must be
allocated in accordance with the same approach as was used in pricing and
in line with the pricing principles. If there is a difference between the rates
used in MOD pricing, and those used in a supplier’s standard accounting
systems, the basis of rates used in the ICR needs to be on the same basis
as those used in MOD pricing.
6.2.9
The table below describes the contents of the ICR – see the latest contract
report template and Reg j48 (note that V3 of the regulations do reflect the
latest report template).
Section
1. Report
Submission
Admin
2. Contract
Report Plan
3 & 4. Supplier
Basic Reference
Data
5. Key
Deliverables
Data
 basic submission details such as date and contact details
 summary of key contract and reporting dates
 basic supplier data (company details) and contract data
(period, pricing method etc)
 a list of the key items to be provided under the contract
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Section
6. Metrics
Data
 a list of the metrics in accordance with the DPS, and their
forecast / expected values
7. Price
Breakdown
 the contract price broken down in accordance with the DPS
and by fiscal year, together with a summary of cost recovery
base volumes
8. Actuals and
Forecast
 the contract actual and forecast price broken down in
accordance with the DPS and by fiscal year, together with a
summary of cost recovery base volumes
10. Variance
Analysis
 analysis of the reasons for variance between (7) and (8),
together with assessment of any forecast final payments
(e.g. TCIF adjustments)
12. Payments
Analysis
 a summary of payments expected above a minimum
threshold value, together with an annual summary of all
payments by currency
6.2.10
In the event the supplier fails to provide a CNR or an ICR, the MOD may
issue a compliance notice which may lead to a civil penalty (see Appendix
A).
6.3
Monitoring final contract out-turn and variance
6.3.1
Within six months of contract completion a supplier must provide the MOD
with a Contract Completion Report (CCR – see Reg j49). As the CNR and
ICR describe the expected outcomes, the CCR confirms the results on
completion. The report will capture the final costs, and the outcomes on
schedule, risk and metrics. This will support understanding of variances, and
the development of benchmark and parametric information. As with the CNR
and the ICR, the CCR will use the standard set of cost categories defined in
the DPS.
6.3.2
The CCR will include much of the same information as included in the CNR
and ICR (see table under 6.2.5), with estimates or plans replaced by actual
amounts and times. The table below shows the additional elements to the
ICR that the CCR will cover – see the latest contract report template and
Reg j49 (note that V3 of the regulations do reflect the latest report template).
Section
11. Risk /
Opportunity
13. Contract
Delivery
Milestones
14. Subcontracts
Data
 analysis of risk and opportunity outturns
 a summary of contract delivery milestones with contracted
target dates and actual completion dates
 a description of the sub-contractor supply chain used for the
contact and a general description of the sub-contractor
procurement strategy
 summary details of key sub-contracts let
6.3.3
As with the ICR, the CCR must allow comparison with the CNR and thus
actual costs must be prepared on the same basis as those used in MOD
pricing. If the CCR shows outturn cost variances that are material, then the
MOD is likely to use their right to initiate Post Costing procedures (see 6.10).
6.3.4
The MOD may also request a Contract Cost Certificate (CCC – see Reg j50).
As under the current framework, a CCC will support the agreement of
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ascertained costs where necessary for contract payments, or to support
Post Costing activities or the agreement of final price adjustments including
PEPL.
6.3.5
A CCC may be requested by the MOD at any time in support of these
activities, and this will usually be in the normal course of the commercial
management of the contract where ascertained costs are involved. The
CCC may therefore apply to any qualifying contract. There will be no
minimum or default requirement for a CCC as it should only be required
when there is a commercial need for the operation of the contract or in
support of price adjustments or post costing activity.
6.3.6
The content and format of a CCC is still being considered, and will be
included in a future version of this document.
6.3.7
In the event the supplier fails to provide a CCR or a CCC, the MOD may
issue a compliance notice which may lead to a civil penalty (see Appendix
A).
6.4
Frequent contract monitoring
6.4.1
For qualifying contracts over £50m in value, within one month of the end of
each calendar quarter, the supplier must submit a Quarterly Contract Report
(QCR). The purpose of the QCR is to provide a regular, timely, update on
project performance.
6.4.2
Because the emphasis is on timely reporting, rather than being able to
compare and reconcile with the price or to cost estimates, the cost
categories on the QCR are not set with reference to the DPS. The QCR
should be split using the same cost categories the supplier uses in their own
regular (i.e. monthly or quarterly) contract management processes. The
QCR also includes other elements that it is important for the MOD to keep a
timely track on, such as any likely price adjustments (such as for PEPL, for
pain / gain share provisions, or any other price mechanism) and the subcontracts the supplier intends to sign in the next three months.
6.4.3
The table below describes the contents of the QCR – see the latest contract
report template and Reg j47 (note that V3 of the regulations do reflect the
latest report template).
Section
1. Report
Submission
Admin
2. Contract
Report Plan
3 & 4. Supplier
Basic Reference
Data
Data
 basic submission details such as date and contact details
 summary of key contract and reporting dates
 basic supplier data (company details) and contract data
(period, pricing method etc)
7. Price
Breakdown
 the contract price broken down in accordance with the
supplier breakdown and by fiscal year, together with a
summary of cost recovery base volumes
8. Actuals and
Forecast
 the contract actual and forecast price broken down in
accordance with the supplier breakdown and by fiscal year,
together with a summary of cost recovery base volumes
9. Quarterly
Analysis
 supplementary analysis of actual / forecast by quarter for
previous, current and next year – specific to the QCR
10. Variance
 analysis of the reasons for variance between (7) and (8),
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Section
Analysis
11. Risk /
Opportunity
13. Contract
Delivery
Milestones
14. Subcontracts
Data
together with assessment of any forecast final payments
(e.g. TCIF adjustments)
 analysis of risk and opportunity outturns
 a summary of contract delivery milestones with contracted
target dates and actual or forecast completion dates
 a description of the sub-contractor supply chain used for the
contact and a general description of the sub-contractor
procurement strategy
 summary details of key sub-contracts let or expected to be
let
6.4.4
In the event the supplier fails to provide a QCR, the MOD may issue a
compliance notice which may lead to a civil penalty (see Appendix A).
6.5
Contract Reporting Plan
6.5.1
Within one month of contract signing, the supplier must provide a Contract
Reporting Plan (CRP) to the MOD and the SSRO. The CRP will set out the
due dates, format, and DPS to be used in meeting the reporting
requirements for that qualifying contract.
6.5.2
The CRP should be agreed prior to contract signing, and ideally will be a
schedule within the contract. However, in the event that this is not done,
there will still be a requirement for the supplier to provide a CRP after
contract signing.
6.5.3
In the event that the MOD and the supplier disagree over whether the CRP
is in accordance with the SSCRs, for example which reports are required,
their dates and frequency, or over the DPS, then either party may refer the
matter to the SSRO for a determination. The SSRO's determination should
be used as the basis of any civil penalties the MOD applies in relation to the
contract reporting requirements. If the MOD applies a civil penalty
inconsistent with this determination, the supplier will be able to refer the
matter to the SSRO, which is likely to overturn the penalty. If the supplier
does not conform to the SSRO determination, and the MOD applies a civil
penalty, the SSRO is likely to uphold the penalty.
6.6
Proactive notification
6.6.1
The Act (at section 26) sets out the requirement for a contractor to notify the
MOD on becoming aware of:
a) the occurrence (or likely occurrence) of an event, or circumstances that
are likely to have a material impact in relation to a qualifying contract; or
b) information that is likely to be materially relevant to a qualifying contract.
6.6.2
If a contractor fails to notify the MOD of any of these, then the MOD may
issue a penalty notice. Unlike other penalty notices, the amount of such a
penalty will be determined as if the contravention were a breach of contract.
The supplier may, as with all penalty notices, refer the matter to the SSRO
for a determination.
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6.7
Open book
6.7.1
The Act includes a requirement (at section 23) for contractors to maintain
records which are sufficiently up to date and accurate to enable the SofS to
use them to:
a) audit the standard reports (including the CPS);
b) verify that a cost being incurred is an allowable cost;
c) verify the reason for variances between estimated and actual allowable
costs;
d) monitor the supplier's performance of its contractual obligations; and
e) determine if a sub-contract is / should have been a QSC.
6.7.2
The SSCRs will set out that the SofS is entitled to:
a) examine any records for the above purposes;
b) require the supplier to provide hard or soft copies of the above records;
and
c) require the supplier to provide explanation or further information related
to the records (or any other information the supplier has provided to the
MOD in relation to the qualifying contract).
6.7.3
The SSCRs will specify that the MOD must give the supplier 20 working
days’ notice for the examination of records (see Reg j39).
6.7.4
If the supplier is prohibited from disclosing the information under an
obligation of confidence, and the MOD consider that this obligation may
have been entered into otherwise than for genuine commercial reasons,
then the SofS may refer the matter to the SSRO. If the SSRO agrees, then
the information must be disclosed nonetheless. This procedure also applies
to any of the information contained in the standard reports.
6.7.5
If the supplier does not comply with a request to examine records, or provide
copies or further information or explanation, then the MOD may issue a
compliance notice which may lead to a civil penalty (see Appendix A). As
with all civil penalties in the framework, the supplier may appeal to the
SSRO if it feels the penalty was unreasonably applied.
6.7.6
If the supplier feels that the MOD is being unreasonable in its requests to
see records, request copies, or seek further information or explanation then
the supplier may refer the matter to the SSRO for a review (see Reg j40).
6.8
Performance Evaluation Review
6.8.1
A Performance Evaluation Review (PER) is the name given to a specific
application of the general open book rights above. No additional legal
requirement is needed to allow the MOD to undertake a PER over and
above the open book rights. However it is anticipated that the requirement to
conduct a PER will be outlined in MOD commercial policy, and it is part of
the framework, so it is described here.
6.8.2
The principle element envisaged by MOD in conducting a PER is a periodic
review by CAAS of supplier business units or qualifying contracts, including
possible review of any policy, business function, activity, or system that
impacts upon cost, efficiency, or value for money, access to which will be
sought by agreement with the contractor.
6.8.3
The MOD expects a PER to provide evidence of the efficiency with which
business units perform single source contracts. By benchmarking the
evidence obtained, pressures commensurate with those that drive efficiency
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in a competitive environment can be simulated, as this would highlight to
suppliers potential areas for performance improvement.
6.8.4
The MOD intends to undertake PERs of its major suppliers on a cyclical
basis, typically - but not necessarily limited to – every four years. The MOD
would be open to accepting the results of suppliers’ own internal / external
systems audit reports in place of additional MOD audit, when that is
appropriate. It is anticipated that the PER reports would feed into any
existing MOD Key Supplier Management regime.
6.9
Post Award Review (Equality of Information)
6.9.1
A Post Award Review (PAR) is the name given to a specific application of
the general open book rights above. No additional legal requirement is
needed to allow the MOD to undertake a PAR over and above the open
book rights. However it is anticipated that the requirement to conduct a PAR
will be outlined in MOD commercial policy and it is part of the framework, so
it is described here.
6.9.2
The purpose of a PAR is to review whether or not a supplier followed the
pricing principles in determining the price of a qualifying contract. The review
may occur fairly close to the time of pricing, say within two years, or may be
more relevant later. This is a largely pragmatic consideration – records will
be easier to retrieve and those involved determining the price are more likely
still to be in post the closer the PAR is conducted to contract-let.
6.10
Post Costing
6.10.1
Post Costing is the name given to a specific application of the general open
book rights above. No additional legal requirement is needed to allow the
MOD to undertake Post Costing over and above the open book rights.
However it is anticipated that the requirement to conduct Post Costing will
be outlined in MOD commercial policy and it is part of the framework, so it is
described here.
6.10.2
Post Costing is an audit conducted by the MOD to ensure that the costs
included in the CCR, and subsequently reported in a CCC at MOD’s request,
are appropriate, attributable and reasonable actual allowable costs, and to
understand the reasons for any variances between outturn and estimated
costs.
6.10.3
A possible outcome of a Post Costing exercise is a referral to the SSRO as
to whether the price of a qualifying contract was in accordance with pricing
principles, or for a determination on the final price adjustment in accordance
with PEPL or any pain / gain share provisions.
6.11
Protection against excessive profits and losses (PEPL)
6.11.1
The SSCRs will specify that certain contract types (initially all fixed and firm
contracts), may be subject to a final pricing adjustment for protection against
excessive profits and losses (PEPL). The adjustment for PEPL is based on
comparing the actual profit rate (as a percentage of actual costs) with the
Contract Profit Rate (CPR) used in the pricing formula7.
6.11.2
If the actual profit rate exceeds the CPR by more than 5%, then 25% of this
additional profit must be paid back to the MOD.
7
If there were contract amendments, then this is the weighted average profit rate used in pricing the
different amendment.
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6.11.3
If the actual profit rate exceeds the CPR by more than 10%, then 50% of this
additional profit must be paid back to the MOD (i.e. an additional 25% more
than the amount specified above).
6.11.4
If the actual profit rate exceeds the CPR by more than 15%, then 75% of this
additional profit must be paid back to the MOD (i.e. an additional 25% more
than the amount specified above).
6.11.5
If the actual profit rate is negative (i.e. a loss), then the MOD shares 25% of
this loss and will pay the supplier accordingly.
6.11.6
If the actual profit rate is less than -5% (i.e. a loss of greater than 5%), then
the MOD shares 50% of this loss beyond -5% (i.e. an additional 25% more
than the amount specified above) and will pay the supplier accordingly.
6.11.7
If the supplier and the MOD disagree on whether a PEPL adjustment is
required, or if they disagree over the amount to be paid under PEPL, then
either party may refer the matter to the SSRO for a determination.
6.12
Compliance
6.12.1
Compliance in the framework relevant to contract monitoring covers the
following situations. See Appendix A for details on the procedure and
amounts.
a) If a supplier fails to provide a CNR within one month of contract signing,
the MOD may issue a compliance notice which may lead to a civil
penalty.
b) If a supplier fails to provide a CRP within one month of contract signing,
the MOD may issue a compliance notice which may lead to a civil
penalty.
c) If a supplier fails to provide a CPS within one month of contract signing,
the MOD may issue a compliance notice which may lead to a civil
penalty.
d) If a supplier fails to provide a QCR within 1 month after the calendar
quarter end, the MOD may issue a compliance notice which may lead to
a civil penalty.
e) If a supplier fails to provide an ICR within 2 months of the dates
specified in the CRP (or annually if not specified for contracts over
£50m), the MOD may issue a compliance notice which may lead to a
civil penalty.
f) If a supplier fails to provide a CCR within six months of contract
completion, the MOD may issue a compliance notice which may lead to
a civil penalty.
g) If a supplier fails to provide a CCC within six months of being requested
the MOD may issue a compliance notice which may lead to a civil
penalty.
h) If a supplier fails to notify the MOD of a material change or
circumstances, or the risk of a material change, to performance, cost, or
schedule on a qualifying contract, or materially relevant information,
then the MOD may issue a compliance notice which may lead to a civil
penalty.
i) If a supplier fails to comply with a request to examine records, or
provide copies or further information or explanation, for the purposes
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outlined in section 6.7 then the MOD may issue a compliance notice
which may lead to a civil penalty.
6.12.2
Failure under a) to g) above is defined as either non-provision, incomplete or
unsigned. There is an additional category of failure if a supplier provides a
report (as detailed in a) to g) above) that is misleading, for which the MOD
may apply a penalty. The supplier will have the right to refer any such
penalty to the SSRO if it feels the penalty was unreasonably applied or
calculated.
6.12.3
There may also be an increased penalty where there is persistent reporting
failure. The penalty for any reporting contravention that occurs whilst the
supplier is considered to be in ‘persistent failure’ (see Appendix A for further
details) will be calculated as usual but will then be increased by 20% to
reflect the persistent nature of the contravention.
6.13
SSRO referrals relevant to contract monitoring
6.13.1
The procedures to be followed in making a referral to the SSRO are
described in Appendix B.
A referral to the SSRO for a determination on the Contract Reporting Plan (see Reg
j45)
6.13.2
In the event that a CRP is not provided, or the MOD does not consider the
reporting schedule to be accurate, or the DPS or associated metrics to be
adequate, then the MOD may refer the matter to the SSRO for a
determination.
6.13.3
The SSRO must provide a determination on the matters referred, and this
will form the basis of future contract reporting and compliance.
A referral to the SSRO for a review of the use of open book rights (see Reg j40)
6.13.4
In the event that a supplier involved in a qualifying contract feels that the
MOD is making unreasonable use of their open book rights, they may refer
the matter to the SSRO. The SSRO will be expected to undertake a review
on the matter.
6.13.5
If the SSRO agrees that the MOD has been making unreasonable use of
their open book rights, it can make a declaration to that effect.
A referral to the SSRO for a determination on the appropriate final price adjustment
under PEPL (see Reg j36)
6.13.6
In the event that the parties cannot agree whether a PEPL adjustment is
required, or the amount due between the parties, they may refer the matter
to the SSRO. The SSRO will be expected to make a determination on the
matter within three months.
A referral to the SSRO for a determination on the appropriate price adjustment
according to agreed pain / gain share provisions (e.g. TCIF contracts).
6.13.7
In the event that the parties cannot agree whether a price adjustment (other
than the final price adjustment (PEPL)) is required, or the amount due
between the parties, they may refer the allowable costs that cannot be
agreed to the SSRO. This is done via the same referral as for any other
determination on allowable costs (see Reg j35). The SSRO will be expected
to make a determination on the matter within three months.
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A referral to the SSRO for a determination on whether an obligation of confidence
that a supplier is subject to was entered into for genuine commercial reasons.
6.13.8
In the event that the supplier, in generating a standard report or in response
to a request for information under open book rights, is prohibited to do so by
an obligation of confidence, then the supplier must notify the MOD of which
obligation(s) they consider cannot be met, and why.
6.13.9
The MOD may refer this matter to the SSRO if it considers that the
obligation of confidence may not have been entered into for genuine
commercial reasons. If the SSRO considers that the obligation of confidence
exists, and was entered into for genuine commercial reasons, then the
supplier does not have to provide the information. Otherwise, the
requirement remains. See Regs j62 and j63.
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7
Supplier management
7.1
Principles
7.1.1
Single source procurement is often used when only a single provider has the
industrial capability to produce or maintain military equipment that the MOD
requires. The maintenance of this industrial capability can therefore be a
matter of national security.
7.1.2
The costs of maintaining this industrial capability are substantial, and are
often recovered through indirect costs that are spread over a number of
different contracts. This makes it difficult for the MOD to monitor the costs of
industrial capability, and whether the MOD is getting value for money,
through contract management alone.
7.1.3
Another difficulty of monitoring key defence industrial capability is that some
of these capabilities are provided by small specialist providers with whom
the MOD has no direct commercial relationship.
7.1.4
The single source framework is designed to give the MOD some visibility of
the industrial capability supported by single source procurement through
standard reporting. These reports are designed to provide visibility of:
a) the industrial capability being sustained by single source procurement,
and the plans suppliers have for the related infrastructure;
b) the costs of this industrial capability, the capacity available, and current
and likely throughput;
c) the overall effectiveness of the indirect cost recovery methodology
being used to recover these costs across numerous qualifying contracts;
and
d) the small to medium sized enterprises (SMEs) used by single source
suppliers, and how these are being sustained.
7.1.5
The standard supplier reporting requirements will be covered in the SSCRs.
This will allow them to be updated on a periodic basis by the SofS on the
basis of recommendations from the SSRO. The SSCRs will prescribe the
content that the reports must cover, in fairly general terms, but not what
forms must be used. As part of their statutory guidance on reporting, we
expect that the SSRO will publish forms which suppliers can use. This
approach is intended to provide a balance between not being overly
prescriptive as to how the information is given or presented, while making it
clear to suppliers how they can satisfy the requirements.
7.1.6
These reporting requirements relate to suppliers rather than to individual
contracts. A contract may be with one entity within a larger corporate group,
and the industrial capability may be spread over a number of subordinate
corporate entities. The requirement is thus placed onto a Qualifying Defence
Supplier (QDS), see 3.8.
7.2
Strategic planning of industrial requirements
7.2.1
Each QDS must provide a Strategic Planning Report (SPR) to the MOD
within six months of the supplier’s financial year end. The SPR provides a
medium to long term view of the supplier’s capabilities, and overheads
relevant to current or future MOD requirements.
7.2.2
The report is primarily intended to provide senior (and appropriate) MOD
staff with the information necessary to engage with suppliers in a meaningful
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dialogue about the long term requirements for single source capability and
capacity.
7.2.3
The content and format of an SPR is still being considered, and will be
included in a future version of this document. Note that this will be a single
report per QDS, not per business unit.
7.2.4
The SPR will go to senior officials within the MOD. It will be used in
capability planning to understand the industrial impact of planning options. It
will also be used in discussions with senior supplier managers so both
parties can understand if there is a fundamental over- or under-capacity
issue, and respond to this appropriately.
7.2.5
The response to over- or under-capacity may be to consider what might be
done to smooth the demand profile (e.g. by delaying or bringing forward
programmes). Another response to over-capacity may be for the MOD to let
the supplier know that the capability being sustained by qualifying contracts
needs to reduce (e.g. by rationalisation and redundancy, or by the supplier
seeking other customers, or by the supplier strategically deciding to maintain
the over-capacity without passing the cost back to the MOD).
7.2.6
Any strategic decisions made by the MOD as a result of discussions with the
supplier relating to industrial capability and infrastructure maintained and
paid for by the MOD, will be passed on to those people agreeing rates (see
5.2).
7.2.7
In the event the supplier fails to provide a SPR, the MOD may issue a
compliance notice which may lead to a civil penalty (see Appendix A).
7.3
Rationalisation and redundancy
7.3.1
Since 1950, UK defence spending as a proportion of GDP has fallen from
circa 10% to 2-3% on a long-term downward trajectory; the UK defence
industrial sector has been in long-term decline since then. Rationalisation
and redundancy costs are likely to represent a larger proportion of total
costs in the UK defence sector than in many other industrial sectors.
7.3.2
The framework recognises that rationalisation and redundancy costs will be
part of the normal costs of business, even in growing sectors. As such the
initial SSCSs will be based on the current GACs, and normal rationalisation
and redundancy costs will continue to be appropriate costs. However the
MOD considers it is appropriate to consider the treatment of large
rationalisation and redundancy programmes separately rather than to simply
add these costs to the rates.
7.3.3
The MOD accepts that there will still be a need to make specific commercial
deals on exceptionally large indirect costs. Given the bespoke and unusual
nature of these deals, and that they will often be contracts paying directly for
costs typically considered to be indirect, with reporting requirements specific
to the nature of the deal, it is anticipated that these contracts may be
exempted by the SofS from the framework.
7.4
Monitoring overhead recovery
7.4.1
The framework allows overhead costs to be recovered in different ways.
Given this, and the large proportion that overhead costs typically represent,
the framework includes a report that allows the MOD (and supplier) to
determine whether or not overhead is being over, or under, recovered. This
provides both parties with the ability to determine if there is systematic overor under-recovery of overhead costs.
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7.4.2
Each QDS must provide a Rates Comparison Report (RCR) to the MOD
within six months of the supplier’s financial year end. The RCR compares
the costs recovered through rates within the prices of qualifying contracts
with the costs incurred and properly attributed to those qualifying contracts.
An RCR will be required for each QBU, using the same definition as used in
rates claims (see 5.2.3).
7.4.3
The table below describes the contents of the RCR – see the latest RCR
report template and Reg j59 (note that V3 of the regulations do not reflect
the latest report template).
Section
1. Report
Submission
Admin
2. BU Basic
Reference Data
3. Contracts
Data
 basic submission details such as date and contact details
 basic business unit data, including corresponding legal
entities
 a list of the qualifying contracts relevant to the BU during the
year
4. Agreed Actual
Rates
 a list of the agreed actual rates for the BU
5. Comparison
 for each contract and rate, the corresponding recovery base
volumes (actual and priced) and priced rates
6. Summary
Report
 summary of recovery comparison by contract pricing method
7.4.4
If the RCR identifies that there has been systematic over- or under-recovery,
rather than the normal year on year fluctuations to be expected, then it is
anticipated that the MOD and supplier will look to establish the cause of this.
If as a result of this either party then feels that the other party may not have
followed the pricing principles in agreeing overheads recovered either
through rates or directly, then it may refer the matter to the SSRO
accordingly (see 5.9 and 4.10 respectively), and this will be a consideration
in the agreement of future rates.
7.4.5
In the event the supplier fails to provide an RCR, the MOD may issue a
compliance notice which may lead to a civil penalty (see Appendix A).
7.5
Monitoring SMEs
7.5.1
Each QDS must provide an SME Report (SMER) to the MOD within six
months of the supplier’s financial year end. The Government is continuing to
develop its understanding of the use of SMEs across all its key suppliers,
and this work is being led by the Cabinet Office. The MOD will engage
directly with its suppliers to understand its key suppliers’ approach to SMEs.
7.5.2
The content and format of an SMER is still being considered, and will be
included in a future version of this document. Note that this will be a single
report per QDS, not per QBU.
7.5.3
In the event the supplier fails to provide a SMER, the MOD may issue a
compliance notice which may lead to a civil penalty (see Appendix A).
7.6
Compliance
7.6.1
Compliance in the framework relevant to supplier management covers the
following situations. See Appendix A for details on the procedure and
amounts.
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a) If a supplier fails to provide an SPR within six months of supplier’s
financial year end, the MOD may issue a compliance notice which may
lead to a civil penalty.
b) If a supplier fails to provide an RCR within six months of a supplier's
financial year end, the MOD may issue a compliance notice which may
lead to a civil penalty.
c) If a supplier fails to provide an SMER report within six months of the
supplier’s financial year end, the MOD may issue a compliance notice
which may lead to a civil penalty.
7.7
SSRO referrals relevant to supplier reporting
7.7.1
The only SSRO referral specifically related to supplier reporting is a
reference to investigate obligation of confidentiality (see reg j62(b)).
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8
Single Source Regulations Office
8.1
Purpose
8.1.1
The SSRO will be (subject to formal classification) an arms-length nondepartmental public body. Its role is to be an independent expert on MOD
single source procurement and the custodian of the single source
procurement framework. As the custodian, it must have an excellent
understanding of how the framework is applied and its issues. Because it is
an independent expert, it can also fulfil a mediation role to speed up the
process of single source procurement where disagreements occur that
might otherwise prove intractable.
8.1.2
In order to ensure its independence, and because the SSRO needs certain
powers to fulfil its role, setting it up required legislation. The SSRO is
established by section 13 of the Act. It will be a body corporate, and not part
of the Crown. Its members and employees will not be civil servants.
8.1.3
Like all arms-length bodies, the SSRO must be associated with a
Department. Given its role, this is the MOD. This does not interfere with its
independence, however, which is assured through its terms of reference and
the governance provisions contained in the Act. Indeed one of the tests
dictating a new body’s status as an arms-length body is the need for it to
"act independently". The SSRO will have a framework document setting out
in detail its relationship with the MOD and its terms of reference, which will
be publicly available.
8.1.4
In carrying out its functions, the SSRO must aim:
“to ensure that good value for money is obtained in government expenditure
on qualifying defence contracts, and [contractors] are paid a fair and
reasonable price…” (section 13(2)(a) of the Act).
8.2
Functions
8.2.1
The SSRO will perform the following functions:
a) keeping Part 2 of the Act and the SSCRs under review;
b) recommending to SofS what Baseline Profit Rate and adjustments he
should set each year;
c) publishing statutory guidance on allowable costs;
d) publishing statutory guidance on the DPS;
e) publishing statutory guidance as to reporting, including templates that
can be used to meet the requirements of the SSCRs;
f) recording contracts and monitoring compliance with the reporting
requirements;
g) giving (non-binding) opinions and (binding) determinations;
h) the appeal body for civil penalties;
i) publishing statutory guidance on penalty amounts for use by the MOD
in issuing Penalty Notices; and
j) analysis.
Keeping the legislation under review
8.2.2
Legislation requires that the SofS must review Part 2 of the Act and the
SSCRs within three years of the date of the first SSCRs come into force,
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and every five years thereafter. The Act requires the SSRO to keep Part 2
and the SSCRs under review, and the SofS to have regard to any
recommendations made by the SSRO (the SSRO’s recommendations will
be publicly available).
8.2.3
The procedure that the SSRO is likely to follow in its review is outlined below.
a) Formulate the proposal and consult with the primary users (this should
be undertaken in the first instance at the end of year two with a full
calendar year to implement any resulting changes). Primary users will
be determined on the basis of the current portfolio of single source
contracts that it is monitoring and is at the discretion of the SSRO. This
is expected to include MOD, DE&S and current top single source
contractors (parties may choose to be represented by a specific group
of specialists).
b) Publish the draft recommendations in a publicly available document to
form the basis of a public consultation. The consultation should be a
minimum of two months to ensure an appropriate level of engagement
and enable any interested party to contribute (in line with the
Government’s ‘Code of Practice on Consultation’).
c) Publish recommendations to SofS (this must happen at least six months
in advance of SofS's duty to review the legislation – section 39(3)(b)).
Reviewing the Baseline Profit Rate and adjustments
8.2.4
The SSRO will recommend a Baseline Profit Rate, an adjustment for SSRO
funding, and market capital servicing rates to the SofS. These
recommendations will be made public, and will be provided to the SofS
annually, no later than on the 31st January of each year. The SofS will then
publish the new rates to use in the pricing formula for the following financial
year no later than on the 15th of March of the preceding financial year in the
London Gazette. If the SofS publishes profit rates that differ from the
SSRO's recommendations, he must also publish his reasons.
8.2.5
In making its recommendations as to the profit rates and adjustments above,
the SSRO must have due regard to any statutory guidance issued by the
SofS on these matters. The initial guidance on the SSRO funding
adjustment is set out at 4.3.15.
Publishing statutory guidance on allowable costs
8.2.6
The SSRO must publish statutory guidance on the appropriate cost
categories to include within the allowable costs. It is anticipated that the
SSRO will update this in line with the five yearly review cycle, however
minor reviews may happen annually after consultation with the primary
users.
8.2.7
This guidance may also provide details on the definitions of reasonable and
attributable as applied to allowable costs included in the pricing formula.
8.2.8
It is anticipated that the SSRO will publish this statutory guidance on its
website.
Publishing statutory guidance on the Defined Pricing Structure
8.2.9
A number of the reports require that suppliers must allocate their costs into
standard cost categories. These will be set out in the Contract Reporting
Plan. In agreeing these, the MOD and supplier must have regard to the
statutory guidance published by the SSRO.
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8.2.10
It is anticipated that the SSRO will update their guidance in line with the five
yearly review cycle, but the SSRO will be able to amend its guidance when it
considers amendments appropriate.
8.2.11
It is anticipated that the SSRO will publish this statutory guidance on its
website.
Publishing reporting templates that meet the requirements of the Regulations and
other statutory guidance
8.2.12
The SSRO will publish report templates for the standard reports required by
the SSCRs. It is anticipated that the SSRO will update these in line with the
five yearly review cycle, but the SSRO will be able to amend its guidance
when it considers amendments appropriate. It is anticipated that the SSRO
will publish this statutory guidance on its website.
Recording and monitoring contracts and suppliers subject to the regulations
8.2.13
The SSRO will monitor the application of the framework. The SSRO will be
informed of new qualifying contracts and QDSs by the MOD and through the
receipt of reports, such as the Contract Notification Report. The SSRO will
also get procurement data from the MOD on the single source contracts that
have been signed, and will therefore have sight of which single source
contracts have been exempted.
8.2.14
The SSRO will receive all the standard reports under the framework. The
SSRO will know if any standard reports have been provided late, or if they
have not been provided at all. The SSRO will be informed by the MOD of
any compliance notices and penalty notices that have been issued. It will
also know of any penalties notices that suppliers have appealed (as the
appeal body is the SSRO). The SSRO will also be aware of any matters that
have been referred to them for an opinion or determination, such as over
rates agreements.
8.2.15
All the above information will give the SSRO a good view of the application
and adherence to the single source procurement framework by the MOD
and suppliers. This will support its ability to keep the legislation under review.
8.2.16
The framework document will also set out the requirement for the SSRO to
publish an Annual Adherence Report. This will summarise the adherence to
the framework by both the MOD and suppliers. It will serve a 'name and
shame' function. There may be two versions of this report, one for the MOD
and one for public release where some information is made anonymous.
Expressing opinions and making determinations
8.2.17
The SSRO may give an opinion on any matter which both parties agree to
put to it. The SSRO must provide an opinion, or make a determination, on
any matter specified in the Act or the SSCRs. Determinations may include
financial determinations between the MOD and a supplier involved in a
qualifying contract – note that this may include financial determinations
between the MOD and a sub-contractor.
8.2.18
The SSCRs will provide that the SSRO must make a determination on:
a) adherence to pricing principles (see 4.10.5 and Regs j33 and j35);
b) actual rates agreements (see 5.9.2 and Reg j35);
c) the appropriate final price adjustment under PEPL (see 6.13.6 and Reg
j36);
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d) the appropriate price adjustment according to agreed pain / gain share
provisions (e.g. TCIF contracts) (see 6.13.7 and Reg j35);
e) on whether a potential sub-contract is a QSC (see 3.7.6 and Reg j21);
f) on whether a current QSC is no longer a QSC (see 3.7.7 and Reg j15);
g) on contract reporting requirements should a CRP not be provided or be
considered inadequate by SofS (see 6.5 and Reg j45); and
h) on whether an obligation of confidence entered into by a supplier that
would stop them providing information under open book or in the
standard reports was entered into for genuine commercial reasons (see
6.7.5 and Reg j63).
8.2.19
In addition to these determinations provided for by the SSCRs, under the
Act the SSRO must also make determinations in relation to Penalty Notices
(see Appendix A and Section 32(6)-(8)).
8.2.20
The SSCRs will provide that the SSRO must give an opinion on:
a) applicability to contracts, for value, competitive process and ‘significant
proportion’ (see 3.6 and 3.7, and Reg j5).
b) profit adjustments for risk, POCO and for capital servicing allowances
(see 4.10.2 and Reg j32);
c) estimated / forecast rates agreements and estimated allowable costs
(see 5.9.2 and Reg j34); and
d) unreasonable use of open book rights by the MOD (see 6.13.4 and Reg
j40).
8.2.21
The SSRO may give an opinion on other matters if it is asked to by both
parties, but this is at its discretion, and not a requirement (section 35(3).
8.2.22
The decisions of the SSRO when acting as an expert will be subject to
judicial review under general principles.
8.2.23
In giving these opinions and determinations, the functions of the SSRO must
be exercised by a committee made up of three people, at least one of which
must be an external suitably qualified individual to bring an external view to
the determination (see Schedule 4 para 10 of the Act).
8.2.24
The Act specifies that where an existing contract requires the Review Board
for Government Contracts to make a determination or give an opinion in
relation to any matter, after the relevant date the determination or opinion is
to be made or given by the SSRO instead (section 35(6) and (7)).
8.2.25
The SSRO’s framework document will set out time periods within which the
SSRO will be expected to come to its opinion or determination. Given that
the complexity of the issue on which an opinion or determination may be
asked, the potential size of any financial determination, the SSRO may take
longer than this. The SSRO's performance against the time periods will be
published by the SSRO annually.
8.2.26
The SSRO will also publish annually a summary of the opinions and
determinations it has made, and why. This will enable the MOD and single
source suppliers to understand how the SSRO is likely to interpret the
legislation. Parties involved in referrals may be identified in terms of their
general compliance with the framework, but will not be identified in relation
to individual opinions or determinations.
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Appeal body for civil penalties
8.2.27
The Act gives the SofS the right to issue a compliance or penalty notice
(which leads to a civil penalty) to a supplier involved in qualifying contract if
they:
a) fail to assess correctly whether a sub-contract was a QSC and notify the
parties prior to signing the sub-contract (see 3.7)
b) fail to keep relevant records (see 4.8 and 5.6);
c) refuse to provide relevant records to the MOD (see 6.7);
d) refuse to explain relevant records to the MOD (see 6.7);
e) fail to provide proactive notification (see 6.6);
f) provide misleading contract reports (see 6.12);
g) fail to provide completed and signed standard reports by the specified
due date. This includes the:
i. Contract Pricing Statement (see 4.7);
ii. Rates Claims (see 5.2);
iii. Actual and Estimated Business Unit Cost Analysis Reports (see
5.5);
iv. Rates Agreement Pricing Statement (see 5.6);
v. Contract Notification Report (see 6.2.1);
vi. Interim Contract Report (see 6.2.6);
vii. Contract Completion Report (see 6.3);
viii. Contract Cost Certificate (see 6.3.4);
ix. Quarterly Contract Report (see 6.4);
x. Contract Reporting Plan (see 6.5);
xi. Strategic Planning Report (see 7.2);
xii. Rates Comparison Report (see 7.4); and
xiii. SME Report (see 7.5).
8.2.28
The procedure for the application of a civil penalty is outlined in Appendix A.
The supplier may appeal any penalty notice the MOD has given them to the
SSRO. The SSRO may overturn, uphold, increase, or decrease the civil
penalty. The SSRO's determination is final.
Publishing statutory guidance on the determination of penalty amounts to use by the
MOD in issuing Penalty Notices
8.2.29
The maximum penalties that the MOD can impose using Penalty Notices will
be set out in the SSCRs (see Appendix A). The SSRO will publish statutory
guidance on the factors that the MOD must have regard to in determining
the penalty amounts up to the maximum specified in the Penalty
Regulations.
8.2.30
It is anticipated that the SSRO will update their guidance in line with the five
yearly review cycle, however minor reviews may happen from time to time
after consultation with the primary users. It is anticipated that the SSRO will
publish this statutory guidance on its website.
Analysis
8.2.31
The framework document will set out the analysis that the SSRO will
perform. At the moment it is expected to include the following.
a) Supplier portfolio analysis. The SSRO will analyse supplier reports on
overhead spend, rates, capacity etc and provide useful comparative
management information to the MOD. For example highlighting where
one supplier is spending consistently more on IT than its competitors,
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looking at how overhead is allocated across a supplier’s portfolio of
contracts, and looking at possible future rationalisation and redundancy
costs and capacity issues. This may include benchmarking against
other sectors and / or international comparators. An annual report is
envisaged.
b) Defence benchmarks and parametrics. The SSRO will build a database
of the estimating and out-turn benchmarks and parametrics, and use
this to suggest those which should be used for independent cost
estimating tools and to support price and rate negotiations. An annual
report is envisaged.
8.2.32
In addition, the SofS may ask the SSRO to perform additional analysis on
the basis of the information it has received or generated performing the
above analysis. The costs of this additional analysis will not be included in
the calculation of the SSRO funding adjustment (see 4.3.15).
8.3
Organisation and governance
8.3.1
The SSRO is to consist of a chair, a chief executive, a chief operating officer
(who is also the financial director), and at least two non executive members.
These will be appointed by the SofS through an appointment process that is
overseen by the Office of the Commission of Public Appointments. Industry
has appointed one industry representative to sit on the interview panel to
help ensure the independence of the SSRO.
8.3.2
The term of a member of the SSRO is between 3 and 6 years, and although
they may be reappointed, their total tenure cannot exceed 10 years unless
the SofS feels that there are special circumstances that justify doing so.
8.3.3
The SofS may remove or suspend a member of the SSRO on the grounds
of incapacity, misconduct, or the failure to carry out his or her duties.
8.3.4
The SSRO is not to be regarded as a servant or agent of the Crown. It does
not enjoy any status, immunity or privilege of the Crown.
8.3.5
The SSRO will employ a small number of staff. The total size of the SSRO
(members and employees) is not anticipated to exceed 40 people, and the
total annual costs are not anticipated to exceed £4m / year.
8.4
Powers
8.4.1
The SSRO may:
a) do what is required to fulfil its functions as outlined above;
b) appoint staff, pay them, and provide a pension for them;
c) appoint committees and determine the procedures to be followed; and
d) pay external experts, for example those appointed to committees.
8.4.2
The SSRO may not borrow money, except temporarily and up to a limit set
by the SofS.
8.5
Publications
8.5.1
The SSRO must publish:
a) recommendations to the SofS of changes to the legislation (periodically,
and not less frequently than three years after commencement and five
yearly thereafter);
b) statutory guidance on appropriate cost categories;
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c)
d)
e)
f)
statutory guidance on DPS;
report templates;
an adherence report (annually);
a summary of its opinions and determinations where these have been
requested (annually);
g) a report on its activities, including a statement of accounts (annually);
and
h) other guidance related to its affairs (e.g. a code of practice for members
and staff, an equality code).
8.5.2
It is anticipated that these reports will be published on the SSRO's website
and some will be placed in the libraries of the Houses of Parliament.
8.6
Funding
8.6.1
The funding of the SSRO will come directly out of the MOD's budget. At the
moment this is assumed to be 'grant in aid'.
8.6.2
The MOD will receive a contribution from industry through lower prices on
qualifying contracts, as the contract profit rate includes an adjustment for
SSRO funding. This adjustment is calculated by the SSRO to recover 50%
of its costs from suppliers with qualifying contracts (see 4.3.15).
8.6.3
Note that for a transitional period after the SSCRs come into force the
number of qualifying contracts will be low, and it would not be appropriate to
require these early qualifying contracts to disproportionately fund the SSRO
through the funding adjustment. Therefore the SSRO will be fully funded by
the MOD until 31 March 2017 (see Reg j28).
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9
Confidentiality
9.1
Unauthorised release
9.1.1
The Act provides that unauthorised release of specific information received
under the legislation is a criminal offence. Which information is covered will
be specified in the SSCRs (see Regs j76, j77 and j78) and includes:
a) specified elements of contract reports;
b) specified elements of supplier reports (still to be determined);
c) suppliers advising the MOD of a significant risk or change to PCT;
d) other information given to the SSRO (e.g. to support an application to
the SSRO for an opinion or determination); and / or
e) analysis work based on the above.
9.1.2
The tariff associated with the offence will be:
a) on summary conviction - imprisonment up to a maximum of 6 months
(12 months in Scotland) or a fine up to the statutory maximum (currently
£5,000) or both; or
b) on indictment - imprisonment up to a maximum of two years, or a fine or
both.
9.1.3
The existence of this offence will encourage the MOD and the SSRO to
introduce robust processes to ensure that the offence does not occur.
9.2
Authorised release
9.2.1
The offence will not apply to an authorised release. Release will be
authorised if it is released:
a) in response to a request under the Freedom of Information Act (subject
to the order making power, see below);
b) to facilitate the carrying out of Ministerial functions (e.g. sharing across
the Crown);
c) between the MOD and the GOCO and vice versa;
d) between the MOD and the SSRO and vice versa;
e) by the SSRO in carrying out its functions under the Act;
f) to the staff of the SSRO (or its expert advisors);
g) such that the identity of the provider cannot be inferred;
h) if the supplier gives consent, or if it is provided to the original supplier;
i) in relation to EU requirements, or legal proceedings; or
j) more than 30 years after the information was obtained (or earlier if the
business ceases to be carried on).
9.3
Statutory bar
9.3.1
The Act gives the SofS a power (exercisable by making an order) to
introduce a full statutory bar to the release of the specified information. This
will have the effect of exempting its disclosure under the Freedom of
Information Act (see section 44(1)(a) of that Act), although the other
exceptions listed above will continue to apply.
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9.4
FOI processes
9.4.1
There are no changes expected to the current MOD processes for dealing
with FOI requests.
9.4.2
The SSRO will be a public authority subject to FOI (see Schedule 4 of the
Act, para 21). It will develop its own FOI policy and process, expected to be
similar to normal Government processes.
9.5
MOD processes
9.5.1
There will be no changes to the existing Government Security Classification
System for the new framework. Detailed working processes are being
developed for how reports and information will be held, managed and
distributed.
9.6
SSRO processes
9.6.1
The SSRO will develop its own systems and processes for handling
information under the framework. It is expected that the SSRO will adopt the
Government Security Classification System to ensure consistent treatment
of information. The SSRO will be expected to develop standards equivalent
to List X, and will be accredited by Defence Security & Assurance Services
in accordance with HMG Information Assurance Standards.
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Appendix A Procedure and amounts for civil penalties
Procedure
A.1
The Act gives the SofS the right to issue a compliance notice or a penalty
notice (which leads to a civil penalty) to a supplier if they:
a) fail to keep relevant records (see 4.8 and 5.6);
b) refuse to provide relevant records to the MOD (see 6.7);
c) refuse to explain relevant records to the MOD (see 6.7);
d) fail to assess correctly whether a sub-contract was a QSC and notify the
parties prior to signing the sub-contract (see 3.7);
e) fail to provide proactive notification (see 6.6);
f) provide misleading contract reports (see 6.12);
g) fail to provide completed and signed standard reports by the relevant
due date. This includes the:
i. Contract Pricing Statement (see 4.7);
ii. Rates Agreement Pricing Statement (see 5.6);
iii. Rates Claims (see 5.2);
iv. Actual and Estimated Business Unit Cost Analysis Reports (see
5.5);
v. Contract Notification Report (see 6.2.1);
vi. Interim Contract Report (see 6.2.6);
vii. Contract Completion Report (see 6.3);
viii. Contract Cost Certificate (see 6.3.4);
ix. Quarterly Contract Report (see 6.4);
x. Contract Reporting Plan (see 6.5);
xi. Strategic Planning Report (see 7.2);
xii. Rates Comparison Report (see 7.4); and
xiii. SME Report (see 7.5).
A.2
For failures under (a) to (c) above, the MOD will have a maximum period of
the earlier of six months after the period for which the records are required to
be kept or two years from the end of the contract within which to issue a
Compliance Notice.
A.3
For failures under (d) to (f) above, the MOD will have a maximum period of
two years from the end of the contract within which to issue a Compliance
Notice.
A.4
For failures under (g) above, the MOD will have a maximum period of six
months from the date of failure within which it may decide to issue a
Compliance Notice.
A.5
See Reg j65 for these time periods.
A.6
The Compliance Notice must:
a) give the particulars of the alleged contravention;
b) state what steps must be taken within what period; and
c) state that if these steps are not taken, the SofS may issue a Penalty
Notice.
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A.7
If the SofS considers that the supplier has failed to take the steps outlined in
the Compliance Notice, and the supplier does not have a reasonable excuse
for the failure, then the SofS may issue a Penalty Notice.
A.8
SofS may also issue a Penalty Notice directly without having previously
issued a Compliance Notice, when he does not think that there are steps that
can be taken to remedy the contravention.
A.9
A Penalty Notice must:
a) specify the failure to which the notice relates;
b) state the amount of the penalty;
c) state the date by which the amount must be paid;
d) specify how the penalty must be paid;
e) given details of interest that may be payable; and
f) explain how the supplier might appeal to the SSRO.
A.10
If a supplier has appealed to the SSRO, then the penalty is not payable until
the SSRO has given its determination. Once the SSRO has given its
determination, this is final.
A.11
Penalty Notices for access to records, explanation of records, or reporting
failures may specify that the amount specified can be reduced if the failure is
rectified within designated time periods.
A.12
If the amount owed is not paid by the date specified (and the matter is not one
in which a determination by the SSRO is outstanding), then the SofS may
recover the amount as a debt (including any interest that starts to accrue from
the due date of the penalty amount - the interest rate is that specified in
section 17 of the Judgments Act 1838).
Time periods
A.13
The time period between the issuing of a Compliance Notice and a Penalty
Notice will be set out in the SSCRs. The initial figure will be up to 3 months
from the date of steps specified in the Compliance Notice. When a Penalty
Notice is issued without a preceding Compliance Notice, the period in which a
Penalty Notice may be issued will be the same as for a Compliance Notice
(see A.2 above).
A.14
The time period between the issuing of a Penalty Notice and when the penalty
is due will initially be 6 months. This may be varied in future should this be
recommended by the SSRO under its review of the legislation.
A.15
For failures under (a), (b), or (c) of A.1 above (provision of relevant records,
explanation, or reports), the amount will be reduced if the supplier complies
within the time period specified in the table below.
No. days after Penalty
Notice
Within 1 month
Within 3 months
% of full penalty payable
25%
50%
Amounts
A.16
The SSCRs will set out the maximum penalty amount that can be specified in
a Penalty Notice (see Regs j67 to j70).
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A.17
In setting the amount in the Penalty Notice (up to the maximum above), the
MOD must have regard to statutory guidance on the matter published by the
SSRO.
A.18
The initial amounts in relation to failures under (a)-(c) of A.1 above (records)
are as follows:
A.19
A.20
A.21
A.22
Value of QDC
Maximum penalty
Less than £50m
£20,000
≥£50m and <£200m
£100,000
≥£200m and <£500m
£250,000
≥£500m and <£1bn
£375,000
≥£1bn
£500,000
The initial amounts in relation to failures under (d) of A.1 above (assessment
of sub-contracts) are as follows:
Value of sub-contract
Maximum penalty
Less than £50m
£50,000
≥£50m and <£200m
£250,000
≥£200m and <£500m
£500,000
≥£500m and <£1bn
£750,000
≥£1bn
£1,000,000
The initial amounts in relation to failures under (g) (i) and (ii) of A.1 above
(pricing statements forming the basis for EofI) are as follows:
Value of QDC
Maximum penalty
Less than £50m
£50,000
≥£50m and <£200m
£250,000
≥£200m and <£500m
£500,000
≥£500m and <£1bn
£750,000
≥£1bn
£1,000,000
The initial amounts in relation to failures under (g) (iii)-(xiii) of A.1 above (other
contract and supplier reports) are as follows:
Value of QDC
Maximum penalty
Less than £50m
£20,000
≥£50m and <£200m
£100,000
≥£200m and <£500m
£250,000
≥£500m and <£1bn
£375,000
≥£1bn
£500,000
The values for the qualifying contracts in the tables above are determined in
the same way as for the value threshold to determine if a contract is a
qualifying contract (see 3.6.8).
Persistent Failure (see Reg j69)
A.23
There will be an increased penalty where there is persistent reporting failure
under (g) of A.1 above. This is defined as where in a rolling 12 month period a
corporate group has 5 or more reporting contraventions.
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A.24
For the purposes of persistent failure, failures counted in the rolling 12 month
period shall be those for which a penalty notice has been issued in that period
less any successful appeals determined by the SSRO in the same period.
A.25
The penalty for any reporting contravention that occurs whilst the supplier is in
breach of this limit will be calculated as usual (i.e. with reference to the
maximum penalty value for that contravention and with regard to any statutory
guidance issued by the SSRO) but will then be increased by 20% to reflect
the persistent nature of the contravention.
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Appendix B
Procedure for SSRO referrals
B.1
The SSRO may receive a request for an opinion on any matter from both the
MOD and a supplier involved in the qualifying contract. The SSCRs will set
out on what matters the SSRO must provide an opinion or determination (see
8.2.17). If the SSRO has been asked to express an opinion on a matter
outside those set out in the SSCRs, then it may still do so if it asked to do so
by both parties (see section 35(3)).
B.2
Referral to the SSRO should only be made following a period of local
negotiation between the supplier and relevant parties. No specific time limit
will be set for the duration of such negotiation. However if the SSRO
considers that insufficient time and effort have been made by one or both
parties to reach an agreement, it may make a ruling on the cost of the referral
(see below).
B.3
If following an unsuccessful period of local negotiation either party wishes to
make a referral to the SSRO, the Designated Officer from the referring party
must inform the Designated Officer from the other party by means of a written
notice to negotiate. These Designated Officers should be agreed by the
parties to the qualifying contract.
B.4
The notice to negotiate will:
a) set out details of the matter on which the SSRO's opinion or
determination might be requested; and
b) state that if an agreed position is not reached within one month of the
date of the notice, a referral will be made to the SSRO.
B.5
If the deadlines set out in the notice to negotiate are not met, a referral may
be made to the SSRO. The referral will:
a) set out the matter on which the SSRO's opinion or determination is
sought;
b) include a copy of the notice to negotiate; and
c) be copied to the other party.
B.6
The SSRO will acknowledge the referral in writing to both parties within 10
working days of receipt. The acknowledgement will include:
a) a summary of the matter on which its opinion or determination is sought;
b) a request for initial evidence to be submitted by either party within one
month from the date of the acknowledgement (the SSRO may
subsequently ask for additional evidence); and
c) an estimate of timescales. If the initial evidence provided is adequate,
the SSRO will aim to make relevant determinations within three months
of receipt of the referral.
B.7
The default position is that each party will bear its own costs of referral.
However the SSRO has the power to make costs orders, and is likely to do so
if it determines that either party is making unnecessary use of its right of
referral (either in terms of type, materiality or frequency).
B.8
The SSRO will issue its decision in writing. If monies are payable from one
party to another it will set out the deadline for such payments to be made and
how.
B.9
A determination by the SSRO is final. There is no appeal mechanism
(although decisions of the SSRO are subject to judicial review).
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Appendix C
Summary of SSRO Referrals
C.1
Opinions and Determinations – Opinions are not binding upon the parties to the referral, but provide the opportunity to seek
clarification from the SSRO on interpretation, or prior to a contract being entered into. Determinations are binding upon the
parties to the referral.
C.2
It should be noted that some referrals resulting in an opinion are mirrored by a referral resulting in a determination. These reflect
the fact that a binding referral cannot be made prior to a contract being entered into. In these cases, the pre-contract opinion
provides a clear indication of the SSRO’s view prior to the parties entering into the contract, and it would be expected that the
parties will take this into consideration in agreeing the contract since the SSRO is unlikely to give a different view based on the
same facts should a determination be requested after the contract is entered into. These ‘referral pairs’ are grouped together in
the table below.
C.3
Note that parties with the right to make a referral are highlighted in blue italics to indicate those referrals that may be made by
Industry.
#
Subject
Act
Section
Nature
and
Reg
Potential outcome
Restrictions
Can be referred by:
SSRO
target
response
time
35(1)
via Reg
j5
appropriate value of the
contract, assessment of
competitive process, or
opinion on significant
proportion
prior to qualifying
defence contract
or qualifying subcontract being
entered into
Secretary of State OR
primary contractor OR
prospective primary
contractor OR
sub-contractor OR
prospective subcontractor
3 months
Applicability
1
Appropriateness of value
of contract, competitive
process or significant
proportion.
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Opinion
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#
Subject
Act
Section
Nature
and
Reg
Restrictions
Can be referred by:
SSRO
target
response
time
prior to qualifying
defence contract
or qualifying subcontract being
entered into
Secretary of State OR
primary contractor OR
prospective primary
contractor OR
sub-contractor OR
prospective subcontractor
3 months
price adjustment
any time after
price is first
agreed under
section 15
Secretary of State OR
primary contractor OR
sub-contractor (via
29(1))
3 months
Determination
price adjustment
any time after
price is first
agreed under
section 15
Secretary of State OR
primary contractor OR
sub-contractor (via
29(1))
3 months
Opinion
appropriate value of
estimated rates in the
context of allowable costs
may be followed by (6)
below after the contract is
entered into
Secretary of State OR
prospective primary
contractor OR
prospective subcontractor
3 months
Determination
price adjustment, or as
relevant to other price
adjustments (TCIF or
PEPL)
prior to a
qualifying defence
contract or
qualifying subcontract being
entered into
only where rate is
applicable to a
qualifying defence
contract or
qualifying subcontract
Secretary of State OR
primary contractor OR
sub-contractor
3 months
Potential outcome
Pricing of contracts
2
Appropriateness of
Contract Profit Rate
adjustments for:
risk (step 2); OR
POCO (step 3); OR
CSAs (step 6).
35(1)
via Reg
j32
3
Appropriateness of
Contract Profit Rate
adjustments for:
risk (step 2); OR
POCO (step 3); OR
CSAs (step 6).
18(3)
via Reg
j33
4
Allowability of costs.
20(5)
and (6),
via Reg
j35
5
Appropriateness of
estimated rates used in
pricing a prospective
qualifying defence contract
or prospective qualifying
sub-contract.
35(1)
via Reg
j34
6
Appropriateness of actual
rates relating to a
qualifying defence contract
or qualifying sub-contract.
20(5)
and (6),
via Reg
j35
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appropriate value of the
referred adjustment
Opinion
Determination
may be followed by (3)
below after the contract is
entered into
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#
Subject
Act
Section
Nature
and
Reg
7
Agreement of final TCIF
adjustments.
16(2)(b)
via Reg
j35
Determination
price adjustment
none
8
PEPL adjustment.
21(3)(b)
via Reg
j36
Determination
price adjustment
fixed / firm priced
contracts only
Opinion
declaration of
unreasonable exercise of
powers
Potential outcome
Restrictions
Can be referred by:
Secretary of State OR
primary contractor OR
sub-contractor (via
29(1))
Secretary of State OR
primary contractor OR
sub-contractor (via
29(1))
SSRO
target
response
time
3 months
3 months
Transparency
9
Unreasonable use of open
book powers.
23(6)
and (7)
via Reg
j40
10
Obligations of
confidentiality are for
genuine commercial
reasons.
27(3)
via Reg
j63
Determination
11
Content of a Contract
Reporting Plan.
35(1)
via Reg
j45
Determination
open book and reporting
requirements continue to
apply despite a relevant
restriction
instances of reports, their
due dates, the pricing
structure and
corresponding output
measures to be used
none
designated person
(under section 24) OR
primary contractor OR
sub-contractor (via
29(1))
3 months
none
Secretary of State
3 months
CRP not received
by due date, or
CRP not agreed
Secretary of State
3 months
positive
assessment first
made by a letting
contractor
prospective subcontractor
3 months
Sub-contracts
12
Assessment that a subcontract will be a qualifying
sub-contract.
29(5)
via Reg
j21
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Determination
whether a sub-contract will
be considered a qualifying
sub-contract
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#
Subject
Act
Section
Nature
and
Reg
13
Cessation of the status of a
qualifying sub-contract.
30(4)(b)
via Reg
j15
Determination
Potential outcome
Restrictions
Can be referred by:
SSRO
target
response
time
continuation a subcontract’s status as a
qualifying sub-contract
sub-contract not
wholly related to
other qualifying
contracts
sub-contractor
3 months
within 6 months of
the date of the
penalty notice (or
such period as
stated in the
regulations)
a person subject to a
penalty notice, which
may therefore include:
designated person
(under section 24) OR
primary contractor OR
prospective primary
contractor OR
sub-contractor OR
prospective subcontractor
3 months
must be related to
a qualifying
contract, whether
prospective or
actual, and
whether prime or
sub-contract
Secretary of State
AND
primary contractor OR
prospective primary
contractor
OR
Secretary of State
AND
sub-contractor OR
prospective subcontractor
3 months
Compliance
14
Whether a contravention
has occurred;
Whether the steps
specified in a compliance
notice have been taken;
Whether there is a
reasonable excuse for a
contravention or failure to
take compliance notice
steps;
The amount of a penalty.
32(8)
Determination
cancellation of penalty
notice;
variation of penalty
amount;
state penalty due date
SSRO: other functions
15
Any matter related to a
(prospective) qualifying
defence contract or
qualifying sub-contract,
where the contractor and
Secretary of state jointly
wish to seek an opinion.
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35(3)
Opinion
statement of opinion
September 2013
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#
Subject
16
Legacy referrals after the
Review Board has been
wound up.
Act
Section
Nature
and
Reg
35(7)
Determination
or Opinion
Potential outcome
Restrictions
Can be referred by:
SSRO
target
response
time
dependent upon nature of
referral
a valid referral
under the legacy
Review Board
criteria
as per legacy criteria
3 months
C.4
Section 35(1) allows the SSCRs to specify further matters that may be referred to the SSRO. This power will not be used to
create referrals that are already covered by those provided for directly in the Act. It is therefore proposed that only four referrals
should be specified under this power. These are:
a) Opinion on the appropriateness of Contract Profit Rate adjustments for risk (step 2), POCO (step 3), or CSAs (step 6);
b) Opinion on the appropriateness of estimated rates used in pricing a prospective qualifying defence contract or
prospective qualifying sub-contract;
c) Opinion on the appropriateness of contract value, competitive process and significant proportion in relation to assessing
the applicability of the framework to a contract; and
d) Determination on the content of a Contract Reporting Plan.
C.5
Some of the referrals provided for under the Act are general referrals that may cover a number of processes throughout the
contract life-cycle. The same referral power may therefore be used in several different instances. Below are some examples of
this to highlight that, whilst not covered under a specific and dedicated referral, these issues are still covered by the referral
process.
a) An equality of information (EofI) breach - EofI is not specifically identified in the Act; rather it is covered through specific
reports under sections 24 and 25 (the Contract Pricing Statement and Rates Agreement Pricing Statement) together with
transparency powers. If any party considers there has been an EofI breach in pricing the contract, this can be referred via
referrals 3, 4 or 6.
b) Post Costing – if the outcome of a post costing activity cannot be agreed between the MOD and a contractor, then this
can be referred via referral 4.
c) Determining the contract profit rate - incentive adjustment (step 5) – this element is at MOD’s discretion and unlike other
elements determining the contract profit rate is not subject to agreement. No referral is provided for this step, whilst it is
for steps 2, 3 and 6 under referrals 2 and 3.
d) Determining a qualifying business unit – this is relevant to the provision of reports under section 25 that are required for
each qualifying business unit (for example, reports on cost recovery rates that are determined at business unit level). A
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qualifying business unit will be specified in the SSCRs, and it is expected that the MOD and contractor will agree, in
accordance with that definition, which business units will be subject to reporting requirements as a qualifying business
unit. In the unlikely event that there is disagreement, this would be reflected in the completeness of reports provided
under section 25. This would be covered by a referral under 14 above.
C.6
Sub-contactors are noted in the table of referrals to highlight which referrals they will have access to. Referrals to which subcontractors have access will be dealt with in the same way as for prime contractors.
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Appendix D
Acronym
BUCAR-A
BUCAR-E
BPR
CAAS
CCC
CCR
CNR
CP:CE
CPR
CPS
CRP
DE&S
DPS
DSPCRs
EIPS
EofI
FOI
GACs
GDP
GOCO
GPF
HMT
ICR
MOD
MPTC
OGD
PAR
PCRs
PCT
PEPL
PER
PFI
POCO
QBU
QCR
QDC
QDS
QMAC
QSC
RC-A
RC-E
RCR
SI
SMER
SME
Acronyms
Definition
Business Unit Cost Analysis Report-Actual
(a supplier report)
Business Unit Cost Analysis Report-Estimated (a supplier report)
Baseline Profit Rate
Cost Assurance and Analysis Service group
Contract Cost Certificate
(a contract report)
Contract Completion Report
(a contract report)
Contract Notification Report
(a contract report)
Cost of Production : Capital Employed
(ratio used for CPR)
Contract Profit Rate
Contract Pricing Statement
(a contract report)
Contract Reporting Plan
(a contract report)
Defence Equipment and Support
Defined Pricing Structure
Defence and Security Public Contract Regulations 2011
Equality of Information Pricing Statement
Equality of Information
Freedom Of Information
Government Accounting Conventions
Gross Domestic Product
Government Owned Contractor Operated
Government Profit Formula
Her Majesty's Treasury
Interim Contract Report
(a contract report)
Ministry Of Defence
Maximum Price Target Cost
Other Government Department
Post Award Review
Public Contract Regulations 2006
Performance, Cost and Time
Protection against Excessive Profits and Losses
Performance Evaluation Review
Private Finance Initiative
Profit On Cost Once
Qualifying Business Unit
Quarterly Contract Report
(a contract report)
Qualifying Defence Contract
Qualifying Defence Supplier
Questionnaire on the Method of the Allocation of Costs
Qualifying Sub-Contract
Rates Claim – Actual
(a supplier report)
Rates Claim – Estimated
(a supplier report)
Rates Comparison Report
(a supplier report)
Statutory Instrument
SME Report
(a supplier report)
Small and Medium Sized Enterprise
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Acronym
SofS
SPR
SSCRs
SSCSs
SSPF
SSRO
TCIF
VFM
Definition
Secretary of State
Strategic Planning Report
Single Source Contract Regulations
Single Source Cost Standards
Single Source Procurement Framework
Single Source Regulations Office
Target Cost Incentive Fee
Value For Money
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(a supplier report)
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Appendix E
Document Versions
Version
V1.0
Date
May 2013
V1.1
Sep 2013
V2.0
Sep 2013
Formal release.
 Includes maximum penalty values in Appendix A.
Apr 2014
Formal release.
 Revisions to reflect amendments to the Act during
Parliamentary process.
 Revisions to reflect current draft SSCRs, being Version 3
issued on 17 March 2014.
 Separation of terminology to distinguish between use of QDC
and QSC.
V3.0
E.1
Key Changes
Initial release.
Interim release, pending formal update.
 Addition of appendices for summary of referrals, acronyms
and document versions.
 Updates to reflect Defence Reform Act introduced 3 July 2013.
 Contract Amendment Report removed.
 Rates reports renamed Costs reports (ARR becomes ACR
and ERR becomes ECR), with changes to report sections.
 Descriptions of CNR, ICR, QCR and CCR sections revised.
 Addition of the Contract Cost Certificate (CCC).
 Overhead Comparison Report renamed Rates Comparison
Report (RCR).
 Descriptions of LTOR, RCR and SMER sections revised.
 Clarification between SSRO opinions and determinations.
Note that between V2.0 and V3.0:
a) Actual Cost Report (ACR) has been renamed the Business Unit Cost
Analysis Report – Actual (BUCAR-A)
b) Estimated Cost Report (ECR) has been renamed the Business Unit
Cost Analysis Report – Estimated (BUCAR-E)
c) Long Term Overhead Report (LTOR) has been renamed the Strategic
Planning Report (SPR)
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