UK: Single Source Contract Regulations - Recent Developments

Last Updated: 15 August 2019
Article by Maria Pereira, Eleanor Kerslake and Louis Head

Summary

The UK defence sector continues to be subject to price regulation and scrutiny in respect of single source defence contracts. As outlined in our previous article titled ' Single Source Contract Regulations - change on the horizon', the Single Source Regulations Office (SSRO) recommended several potentially significant amendments to the Single Source Contract Regulations 2014 (Regulations) in January 2018.

Following further engagement with stakeholders, the Secretary of State for Defence (Secretary of State) has not yet accepted all the recommendations made by the SSRO, but has agreed to make several amendments to the Regulations which largely relate to:

  • exemptions/exclusions from the scope of the Regulations;
  • amendments to the contract price of an existing qualifying defence contract (QDC);
  • calculation of the relevant contract value by the contracting authority;
  • reporting obligations under the Regulations; and
  • adjustments to the contract price of an existing qualifying sub-contract (QSC).

Those amendments which have not already come into force will do so on 1 September 2019.

A less challenging approach - for now

The amended Regulations are perhaps most notable for what they do not include. The SSRO's recommendations were quite wide-reaching - proposing, in essence, an increase in the number of contracts falling within the scope of the Regulations and a broadening of the powers of the SSRO. Key industry players had concerns that the SSRO's recommendations went too far, and while the Secretary of State has taken these concerns into account to date, further amendments to the Regulations may still be made in the future in order to give effect to the intent behind the recommendations of the SSRO.

 

Overview

The Defence Reform Act 2014 and the Regulations established a regulatory framework in respect of single source defence contracts (i.e. contracts which are not competed) in the UK, which are not covered by the Defence and Security Public Contracts Regulations 2011. The UK defence sector continues to be subject to price regulation and scrutiny in respect of single source defence contracts under this regulatory framework.

As outlined in our previous article titled ' Single Source Contract Regulations - change on the horizon', the SSRO published its recommendations in January 2018 (issued in June 2017) which consisted of potentially significant and challenging amendments to the Regulations including, for example, substantially reducing the financial value threshold for QSCs, amending the application of the Regulations to contract amendments, and extending the powers of the SSRO.

Although many of these recommendations have not yet been implemented by the Secretary of State, several recent amendments have been made to the Regulations or, otherwise, will be made on 1 September 2019, and further guidance has recently been published by the SSRO, as outlined in further detail below. The Secretary of State has taken the concerns of industry into account to date but further amendments to the Regulations may still be made in the future in order to give effect to the intent behind the recommendations of the SSRO.

Amendments to the Regulations

The Single Source Contract (Amendment) Regulations 2018 and the Single Source Contract (Amendment) (No. 2) Regulations 2018 have come into force and make several amendments to the Regulations (2018 Amendment Regulations).

The 2018 Amendment Regulations address various drafting deficiencies and inconsistencies. However, in addition, they also made the following amendments:

Exemptions/Exclusions

  • The criteria of the exemption for contracts made within the framework of an international co-operative defence programme have been narrowed;
  • The exclusion of contracts made wholly for the purposes of intelligence activities has been replaced with an exclusion of contracts which would require the disclosure of information which the Secretary of State considers would create a risk to national security;
  • An exclusion has been introduced which excludes new contracts which replace previous contracts (which were not QDCs) where such new contracts are in all material respects identical to, and ensure the continuation of the contractual obligations contained in, the previous contracts;

Pricing Amendments

  • The pre-existing method for re-pricing a QDC has been replaced with a new Schedule which sets out how the price of a QDC must be re-determined depending on the nature and the number of the amendments being made to the contract, and depending on the pricing method used (e.g. whether the cost-plus method is used). Modifications were also made to ensure that this Schedule will also apply in relation to the re-pricing of QSCs; and
  • A reference must now also be made to the SSRO for determination no later than 6 months after a contract is amended to become a QDC, or if any amendments are made to a contract in specified circumstances.

Further Amendments on the Horizon

The Single Source Contract (Amendment) Regulations 2019 (2019 Amendment Regulations) come into force on 1 September 2019 and will make several amendments to the Regulations.

In addition to addressing a number of inconsistencies and improving the clarity of the Regulations, the 2019 Amendment Regulations will make the following amendments:

Calculating Contract Value

  • The time limits identifying which contracts constitute a series of contracts entered into for the purpose of fulfilling the relevant requirement will be removed. Contracts that are entered into for the purpose of fulfilling the relevant requirement will be considered as a series of contracts that must be valued in aggregate, regardless of when such contracts are entered into (unless an exemption under the Regulations applies);

Reporting

  • New reporting obligations will be introduced to ensure greater transparency of the supply chain which will apply if the primary contractor enters into a sub-contract with a value of at least GBP15,000,000; and will require that a primary contractor submits the following where it has assessed that a sub-contract would not be a QSC:
    • the outcome of the negative assessment;
    • confirmation of whether the award of the contract is not the result of a competitive process; and
    • confirmation of whether that contract enables the performance of contracts other than a QDC or QSC;
  • Where the value of the proposed contract is at least GBP15,000,000, a record of the reasons relied upon to justify a negative assessment will need to be kept as part of the existing record-keeping requirement in the Regulations;
  • The relevant records for a QSC will need to be kept for two years after the contract completion date or the date on which a contract ceases to be a QSC; and

Pricing Adjustments

  • Where an adjustment to the contract price of a QSC is required under the Regulations, the contract price will not be adjusted by that amount. Instead a payment for that amount will need to be made by the Secretary of State to the sub-contractor or by the sub-contractor to the Secretary of State, as appropriate.

Publication of SSRO Guidance

The SSRO has continued to publish guidance which should be considered alongside the regulatory framework including guidance on:

  • the baseline profit rate and its adjustment which details how the contract profit rate for any QDC must be calculated, including with reference to the updated 2019/20 baseline profit rate which is 7.63 percent; and
  • allowable costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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