Defence Reform Act 2014

DEFENCE REFORM ACT 2014 & SINGLE SOURCE CONTRACT REGULATIONS 2014(AS AMENDED BY THE SINGLE SOURCE CONTRACT (AMENDMENT) REGULATIONS 2018).

The UK MoD as a public body is required under EU legislation to compete any UK MoD procurement requirements in an open process whereby the requirement is publicly advertised and competed. Certain exemptions apply to the requirement to compete the UK MoD requirement including for national security reasons or where competition is not possible because of IPR restrictions. Where the UK MoD relies upon one of these exemptions the procurement becomes a single source contract procurement to which the Defence Reform Act and its associated regulations and guidance will apply subject to certain qualifying criteria for the main contract (a qualifying defence contract or QDC) and any associated subcontracts (qualifying sub-contract or QSC).

The 2014 Defence Reform Act (DRA) is the primary legislation applicable to single source procurement.  The Act enables the making of secondary legislation namely the Single Source Contract Regulations (SSCRs) that came into force on the 18th December 2014 (as recently amended by the Single Source Contract (Amendment) Regulations 2018 and 2019.

The Defence Reform Act 2014 and the associated Single Source Contract Regulations 2014 (collectively with the SSRO statutory guidance will apply to all qualifying contracts with effect from 31st March 2015. Existing contracts (unless the Contractor and the MoD agree otherwise) will continue to be governed by the pre-DRA DEFCON pricing conditions and the the Government Accounting Conventions (GACs) and Government Profit Formula (GPF) set out in the "Yellow Book"

The Defence Reform Act established the role of the Single Source Regulations Office (SSRO). The SSRO will among other duties issue Statutory Guidance with respect to aspects of the DRA & SSCR. The SSRO effectively replaces the functions undertaken by the Review Board for Government Contracts.   The SSRO has its own webpages within www.gov.uk

PLEASE SEE OUR RESOURCES PAGE: SSRO GUIDANCE

Non Qualifying Contracts

Where a single source contract is not a qualifying contract and hence not subject to the DRA & SSCR the UK MoD have issued revised pricing DEFCONS in the 810 series that the UK MoD will seek to apply to these single source contracts. These 810 series DEFCON conditions are a commercial arrangement with the UK MoD (and hence remain negotiable) and are sure to evolve over the near term. As the DRA/SSCR legal framework does not apply to these contracts and hence the SSRO  has no jurisdiction, pricing disputes will be addressed through the disputes resolution provisions of the contract.

The UK MoD require these conditions for non qualifying contracts  to cover both high value contracts that have been exempted from the DRA/SSCR and lower value contracts that fall under the qualifying financial values of the DRA/SSCR. 

As the MoD has no direct contractual arrangement with the sub-contractors of the main contractor, the UK MoD places obligations on the main contractor to flow down pricing obligations through the supply chain for the UK MoD's benefit. These largely appear as an Appendix to the relevant 810 series DEFCON.

In a number of the 810 series DEFCONS the UK MoD require the Contractor to take all reasonable steps to secure the subcontractors observance of the flowed down pricing obligations. There is case law as to what the phrase "all reasonable steps" may involve for the Contractor however the Contractor may wish to define this term and its bounds with the main contract with the UK MoD. In certain DEFCONS the MoD also requires the Contractor and the Subcontractor to agree that the MoD may directly enforce the benefit of the flowed down pricing terms of the subcontract with the subcontractor. Any direct enforcement by the MoD could disrupt the subcontractor performance of the subcontract and the contractor will need to consider this risk when negotiating the main contract terms aand conditions with the UK MoD.

Copies of the new 810 series pricing DEFCONS can be found on our Resources page. A number of the DEFCONS have a related DEFFORM and these are also available on our resources page.

Some Specific Issues of the DRA

1) As all pricing of qualifying contracts under the DRA/SSCR is based on a number of allowable cost +adjustments + profit models it makes no provision for pricing commercial products based on commercial list prices.

2) The DRA/SSCR incorporates provisions that are intended to protect the UK MoD against the contractor earning excessive profits and the contractor against making excessive losses (PEPL). How this will work in practice is yet to be seen however one can envisage an increasing use by the MoD of pricing under TCIF with a maximum price to remove the risk it would otherwise face of the contractor potentially being able to recover excess losses. Contractors should therefore consider carefully if TCIF is an acceptable approach to pricing each individual contract where it is proposed to be used.

3) The Contractor will have an obligation to ensure that costs allocated to a qualifying MoD single source contract are consistent with the SSRO's guidance on allowable costs. (both direct cost and overhead). This guidance document currently appears immature in a number of areas although the Contractor can seek an opinion from the SSRO as to a costs allowability before contract award.

4) The responsibility for agreeing the profit element of 1st tier subcontracts is placed on the main contractor, however the main contractor does not have the legal access rights to the pricing information that is available to the MoD directly with the Subcontractor under the DRA. The main contract will need to define how the main contractor/MoD approach subcontract pricing in a manner that is consistent with the DRA/SSCR.

5) The DRA /SSCR places significant obligations on the contractor in terms of being able to demonstrate and maintain compliance with its requirements and the contractor personnel who are obliged to carry out this work on a project basis should reasonably aim to book the time they incur to the project. The contractor will need to ensure his QMAC and accounting system is structured such that these costs can be correctly allocated to place the burden of the cost on the party that is benefiting.

We have developed a dedicated website for the Pricing of UK MoD Single Source Contracts that can be found using the following link www.single-source-contracts.co.uk