Last month, the Single Source Regulations Office (SSRO) published its Recommendations to the Secretary of State for its periodic review of Part 2 of the Defence Reform Act 2014 (the "Act") and the Single Source Contract Regulations 2014 (the "Regulations").
The Act requires the Secretary of State to review the regulatory framework for single source procurement at least every five years, and although MOD initially indicated its intention for this review to be completed in December 2020, it was later pushed back to December this year due to the COVID-19 pandemic.
The SSRO report, which is intended to inform the Secretary of State’s review, makes twelve recommendations for legislative change drawing on findings from a consultation with industry early last year. The proposed changes focus on aligning with the Defence and Security Industrial Strategy objectives of simplicity, speed and incentivisation, and are divided into three categories: (1) pricing, (2) transparency, and (3) the SSRO's supporting role.
In terms of pricing, the key recommendation which will be of interest to contracting authorities and industry relates to a change to how the contract profit rate is calculated. The SSRO acknowledges that although the evidence points towards profits across the portfolio of QDCs being fair at an aggregate level, this does not mean that profit is fair at individual contract level. Its preferred approach to addressing this issue is to amend the regime to allow a range of baseline profit rates, with the appropriate baseline profit rate being determined by reference to the type of activity being undertaken. The contract profit rate would then be determined for each defined component of a single contract, by applying the six-step process beginning with the appropriate baseline profit rate for that component.
Another key area of interest for industry in particular is the operation of the incentive adjustment. Although the report did not make any formal recommendations on this, the SSRO suggests that it would support an increase to the existing 2% limit, but that any change would need to be accompanied by better guidance and greater transparency, and further input from MOD and industry would be needed to get this right.
The SSRO makes a number of other pricing recommendations, including amendments to improve the operation of the POCO adjustment process, changes to the way that contracts which are brought into the regime on amendment are priced, and changes to allow the estimated costs in target priced contracts to be adjusted in accordance with specified rates/indices.
In terms of transparency, the report acknowledges that many improvements can be achieved through changes to SSRO issued guidance and the operation of DefCARS rather than the legislation. However, the SSRO does propose some legislative changes, including imposing a time limit on undertaking and notifying QSC assessments and a requirement to report not just a negative QSC assessment but the reasons for that negative assessment.
Another particularly significant change proposed by the SSRO is an extension of its powers in order to support implementation of the regime more effectively. If enacted, this change would allow the SSRO to:
- give opinions about the operation of the regulatory framework on request, without the need for the request to be made jointly by the interested parties as is currently required;
- make determinations regarding a wider range of subjects than is currently permitted under the legislation; and
- issue guidance on any aspect of the regulatory framework, which contracting parties must have regard to, rather than just the specific areas currently permitted by the legislation.
It of course remains to be seen what approach the Secretary of State will take to these recommendations. If we look back at the first periodic review of the legislation conducted in 2017, whilst some of the amendments proposed by the SSRO made their way into the legislation, some of the most significant and far reaching proposals did not, and so it is difficult to predict with any certainty which, if any, of these latest recommendations will be taken into account. We will have to wait for completion of the review, due in September this year, for a definitive view of how the legislation will change going forward.