23 February 2018 | Comment | Article by Emily Powell
The Single Source Reporting Office (SSRO) has recently published Recommendations to the Secretary of State following its 2017 review of Part 2 of the Defence Reform Act 2014 (DRA) and the Single Source Contract Regulations 2014 (SSCR).
The DRA and SSCR establish a single source contract regime applicable to defence contracts and sub-contracts satisfying certain conditions. The regime regulates the pricing of the contract and contains various transparency requirements. Prior to the introduction of this regime, single source defence contracts were not subject to any legislative control over pricing or transparency and were often criticised for a lack of transparency and control of costs.
The SSRO recommendations follow on from a consultation paper published in January 2017 and the document contains 14 recommendations for changes to the regulatory framework designed to improve its functioning. Of these 14, eight were initiated by the SSRO and six by stakeholders including the Ministry of Defence (MoD) and defence contractors. These include proposed amendments both to the DRA and the SSCR and will now be considered by the Secretary of State for Defence who will decide which, if any, of the recommendations should be implemented.
The key recommendations initiated by the SSRO include:
- Proposals that the parties to a qualifying defence contract (QDC) or qualifying sub contract (QSC) must have regard to SSRO guidance on the assessment of whether a contract is a QSC, the application of statutory exclusions to the regime, definitions and amendments to the price of QDCs and QSCs. This would complement the current requirement for parties to a QDC or QSC to have regard to guidance on allowable costs, contract profit rates, reporting requirements and penalties.
- Proposals to empower the SSRO to request additional information from contractors party to a QDC and parties to a QSC. It is proposed that these powers would include the ability to issue compliance and penalty notices to parties failing to comply with SSRO requests for information.
- A reduction in the threshold for a sub contract to be considered a QSC from £25M to £10M.
- A requirement for the MoD to investigate and report to the Secretary of State for Defence on the extent to which the existing rules on contract amendments have prevented contracts from becoming QDCs or QSCs. Currently single source amendments to contracts which are not QDCs or QSCs will only result in the contract becoming a QDC r QSC if all parties agree. The SSRO has been deeply critical of this approach.
The consultation responses received by the SSRO demonstrate that some of the SSRO initiated proposals are more contentious than others. However, it can be seen from the proposals described above that, if implemented, the proposals will lead to more contracts being caught by the definition of a QDC or QSC. Given that the regime is still in its infancy and interpretation and application of the legislation is being developed, it can be seen that giving the SSRO these additional rights would also significantly increase its power to shape the implementation and interpretation of the regime. Adoption of the proposals may therefore lead to a significant increase in the powers of the SSRO both in terms of the number of contracts it regulates and the development of the interpretation and implementation of this new area of law. It remains to be seen whether the Secretary of State for Defence will agree that this widening of powers is appropriate and justified.
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