The Ministry of Defence last week put forward a set of proposals for significant reform of the single source procurement regime.

The proposals, set out in a Command Paper entitled Defence and Security Industrial Strategy: reform of the Single Source Contract Regulations, are a result of the periodic review of the regime that the Secretary of State is required to conduct under the Defence Reform Act 2014. The review is due to conclude by December 2022 in line with the statutory timescales; and is also timed to enable it to contribute to the delivery of the policy outcomes of the Defence and Security Industrial Strategy (DSIS), which was published last year.

The Paper contains 30 separate proposals for changes to the legislation and the associated statutory guidance and policy, which follow on from the SSRO recommendations published last June.  They are divided into three themes: (1) Choice and Flexibility; (2) Speed and Simplicity; and (3) Stimulating Innovation and Exploiting Technology. Key proposals include:

1. Choice and Flexibility

  • Changes to the legislation to allow, in certain specified circumstances, contracts to be priced by reference to an established market price rather than using the bottom-up pricing formula.
  • Amendments to the Cost Risk Adjustment (step 2 of the statutory profit rate calculation), so that rather than just an adjustment to reflect the risk of actual allowable costs differing from estimated allowable costs as is currently the case, this step would allow the adjustment to take account of other financial risks. Note that no change has been proposed to the amount of the incentive adjustment (step 5 of the calculation),  despite the SSRO having previously indicated that it would support this.
  • Changes to allow for a contract to be split into different segments, each of which can have its own approach to pricing, profit rate and calculation of final price. This will include defining how the various segments must be aggregated, and safeguards intended to ensure that this can be done in a proportionate and pragmatic way.
  • Addition of a new regulation stating that, where a contract becomes a QDC by amendment, there is no requirement to apply the pricing formula to work where scope and price were agreed prior to conversion.

2. Speed and Simplicity 

  • Simplifying the existing 6 step profit rate calculation as set out in Regulation 11 of the Single Source Contract Regulations (SSCR). The paper proposes that this is reduced to 4 steps, by removing: 
    1. the POCO adjustment, the purpose of which is to ensure that prime contractors entering into intra-group subcontracts are only able to charge profit on costs once. Going forward, it is proposed that POCO will be dealt with solely through costs; and 
    2. the SSRO Funding Adjustment, via which Industry is currently required to contribute to the funding of the Single Source Regulations Office (SSRO). This will instead be fully funded by MOD.
  • Proposals to increase the SSRO’s role, with the aim of encouraging use of the statutory process to resolve issues and so making negotiations quicker and more effective. The proposed changes include allowing the SSRO to issue guidance on all aspects of the regime, not just those currently set out in the legislation, and will also give the SSRO the ability to give opinions about the operation of the regulatory framework without the need for a joint referral.
  • Changes in reporting requirements, which aim to ensure that these requirements relate only to information that MOD needs and will use, reducing unnecessary burden on suppliers. This includes limiting the use of the Defined Pricing Structure (DPS), with interim contract reports following the Contractor’s own work breakdown structure instead.

3. Stimulating Innovation and Exploiting Technology

There are three proposals in this area, which relate to adapting the legislation and guidance to cater for different contracting approaches to encourage innovation - e.g. allowing co-funding of research and ensuring that R&D costs can be recovered through overheads.

Implementation of Proposals

Implementation of these wide-ranging proposals will require amendments to primary and secondary legislation, as well as the associated statutory guidance and policy. Whilst no specific timescales are given for this, the intention is for the substantive amendments, which will involve changes to the SSCR, to be introduced in two tranches: (1) to implement “key flexibilities” such as alternative pricing methods, and (2) to implement the remaining changes. The changes to the primary legislation to enable this will depend on available parliamentary time.

The paper invites industry stakeholders to respond to the proposals in the Command Paper, and emphasises that industry will continue to be involved as the draft amendments are developed. However, given the significant stakeholder engagement on this topic over the last two years,  and taking into account the relatively short timescales for conclusion of the review, any meaningful movement away from these principles seems unlikely at this stage. So, whilst it remains to be seen exactly how the various proposals will be addressed, the Paper provides those involved in single source contracting with a reliable preview of the direction of travel for the regulatory regime over the coming years.