Overview of MOD commercial guidance

6.

To assist the MOD to comply with its obligations under the DRA and SSCR the Commercial Policy Team has created this suite of guidance. The guidance has been created for MOD Commercial Officers, so “you” indicates an action on the Commercial Officer. It is split into 12 chapters, listed below, to make it easier to use.

7.

We have also created a glossary of terms to help you understand the Regulations and associated guidance.

8.

This Chapter 1 summarises the suite of commercial guidance. A brief overview of the content of each chapter now follows. Annex A to this Chapter illustrates the difference between SSCR and the former Yellow Book regime.

9.

The DRA and the SSCR applies to new contracts that meet the requirements of being a QDC. A contract is a QDC if:

1. it is a single source contract placed on or after 18 December 2014 but before 31st March 2015, with a value of over £500,000,000 (£500M) (ex VAT); or
2. it is a single source contract of £5M (ex VAT) or above, placed on or after the 31st March 2015.

10.

Chapter 2 provides the detailed criteria which a contract must fulfil in order to be a QDC, including details of some exclusions. A contract that meets the criteria of being a QDC, is a QDC, and its status cannot be changed by negotiation. The only way a QDC can become a contract that is not a QDC, is by obtaining a formal exemption from the Secretary of State for Defence. Chapter 2 explains what you must do if you believe it appropriate to seek an exemption.

11.

The chapter explains in what circumstances the MOD will seek agreement to make an amended contract a QDC. You can agree with the prime contractor that the amended contract should be treated as a QDC:

1. if you amend a contract, on or after 18 December 2014, that was entered into on a single source basis before that date and the amended contract has a value of £5M (ex VAT) or above and meets the other criteria of being a QDC;
2. if you amend a contract on a single source basis on or after 18 December 2014 where that contract was entered into through competition either before or after that date, and the amended contract has a value of £5M (ex VAT) or above and meets the other criteria of being a QDC.

12.

Chapter 2 also introduces the concept of a Qualifying Sub-contract (QSC). A QSC can only exist where the sub-contract involves the provision of anything for the purpose of a QDC / QSC or prospective QDC / QSC; the value threshold to be a QSC is £25M (ex VAT). It is the responsibility of the prime contractor to determine if a sub-contract is a QSC and to advise the sub-contractor and the MOD of that assessment. A sub-contractor with a QSC has similar obligations to a prime contractor holding a QDC, in respect of any sub-contract they place.

13.

The chapter explains other matters, such as how to determine the value of a potential contract for assessing QDC status, and whether there has been a competitive process or not. It also explains that if there is disagreement between the MOD and a contractor as to whether a contract is a QDC, you can refer the matter to the external Single Source Regulations Office (SSRO), via the Single Source Advisory Team (SSAT) for an advisory opinion.

14.

The price to be paid with respect to a single source contract should be fair and reasonable to both parties. The DRA and the SSCR explain that the contract price for a QDC must in almost all cases be determined in accordance with the pricing formula: $(\mathrm{Contract\; profit\; rate}\times \mathrm{Allowable\; costs})+\mathrm{Allowable\; costs}$

15.

The chapter explains that Allowable Costs (AC) applies to all QDCs. For example for a firm priced QDC, AC will be based on estimated costs; for an ascertained cost priced QDC, AC will be based on actual costs. The DRA and the SSCR describe three principles on which to determine whether a cost is allowable - costs must be appropriate, attributable and reasonable. These principles cover both direct and indirect costs that are charged to the contract. The SSRO have published the 'Single Source Cost Standards (SSCS): statutory guidance on allowable costs (SGAC)'' on their website. It is the contractor’s responsibility under Section 20 of the DRA to only propose costs they believe are allowable in accordance with the SGAC, and they have an obligation to show how their costs are allowable when requested to do so by the MOD.

16.

A QSC must also be priced in accordance with the pricing principles. The extent to which a qualifying sub-contractor shares pricing information with the prime will be a matter of commercial judgement. However, this does not in any way reduce the legal obligation of the qualifying sub-contractor to price in accordance with the SGAC. It is the prime contractor’s responsibility to seek assurance that the costs are allowable.

17.

Amendments to QDCs or QSCs must be priced in accordance with the pricing principles outlined in the chapter. The chapter explains what to do if you are dealing with a Non-qualifying contract becoming a QDC through an amendment, as well as what to do when amending an existing QDC.

18.

The DRA does not change MOD policy, and you should approach the price negotiation in terms of the ‘No Acceptable Price, No Contract’ (NAPNOC) principle.

19.

The CPR aims to provide a contractor with a fair and reasonable profit for a QDC. The CPR is expressed as a percentage and is applied to the agreed Allowable Costs of the contract to determine the contract price. There are six steps that you must follow to determine the CPR:
Baseline profit rate (BPR) ± Risk adjustment - POCO adjustment - SSRO funding adjustment + Incentive adjustment ± Capital servicing adjustment = Contract profit rate

20.

The chapter explains each of the individual steps in more detail. The Baseline Profit Rate (BPR), the SSRO funding adjustment and the Capital Servicing Allowances are revised annually, taking effect from April each year. The Risk and Profit On Cost Once (POCO) adjustments are agreed between the MOD and the contractor on a contract-by-contract basis. The incentive adjustment is at the MOD's discretion, also on a contract-by-contract basis.

Annotation:
Although the baseline profit rate, SSRO funding adjustment, and capital servicing rates are revised annually (see section 19), the ones that are in force at the time of agreement of the contract are used to determine the contract profit rate. The contract profit rate is not subsequently altered unless a contract is amended.

21.

The CPR is the sum of the above six steps, and will be applied in the pricing formula outlined in Chapter 3. Note that some steps may result in a nil adjustment.

22.

The chapter explains what you should do when calculating the profit rate for groups of contracts, for example pricing numerous comparatively low value QDCs placed with one contractor within a particular period.

23.

Chapter 5 outlines the purpose of contract reporting, and lists some of the benefits that the new reporting system will bring.

24.

The chapter explains the process for completion and delivery of contract reports. The contractor (of the QDC or QSC) is solely responsible for completion of the reports, although some content will need to be agreed in advance with the Project Team. The chapter details the dates by which contractors must submit their reports, and who they must submit reports to.

25.

There are a number of reports which the contractor is required to submit to the MOD (SSAT) and the SSRO at the start of the contract:

1. Contract Pricing Statement (CPS) – this mandated report details the basis of the agreed price. It is MOD policy for the contractor to submit the CPS prior to contract award, in exceptional circumstances where this does not happen it must be submitted within a month of the initial reporting date.
2. Contract Reporting Plan (CRP) – this mandated report records the timeframe for submitting reports required under the provisions of the DRA and SSCR. You should agree the CRP with the contractor prior to contract signing - where this does not happen it must be submitted within a month of the initial reporting date.
3. Contract Notification Report (CNR) – this mandated report must be submitted by the contractor within one month of the initial reporting date. It is effectively the baseline for the QDC against which subsequent contract reports will be measured.

SSRO guidance:
These three reports are all combined in to a single Contract initiation report (CIR). It must be provided within one month of the contract being entered into.

26.

There are three reports which may be required throughout the duration of your contract:

1. Quarterly Contract Report (QCR) – this is a mandated report for any QDC with an estimated value of £50M (ex VAT) or more. The contractor must provide the QCR to the SSAT and SSRO within one month of the end of each calendar quarter, from the date of entering into the QDC until the contract is complete.
2. Interim Contract Report (ICR) – this report contains similar information to the QCR, and may be useful for contracts under £50M in value. ICRs must be provided by the contractor for all contracts below and above £50M either at intervals agreed between the MOD and Contractor, or if dates are not agreed the SSCR specify a default period.
3. On-demand contract reports - while the contract reports detailed in the chapter are mandated by the SSCR to be provided at specific times from the date you place your contract, you may also request further reports. The chapter details the procedure for requesting reports and what content you can request.

27.

The chapter explains when you would require a QCR, an ICR or an on demand contract report for your contract. It also includes information on the content of the three reports and what actions you need to take on receipt.

28.

The DRA / SSCR sets out the minimum legal requirements for contract reporting - you do not need to include contract conditions to obtain these reports. However, it may be appropriate for you to seek additional reporting requirements for your contract. In these cases, you will need to include narrative contract conditions to obtain the additional reporting.

29.

The DRA and SSCR place a statutory obligation on contractors to be transparent. Chapter 6 details which records a contractor may reasonably be expected to keep, when they must start keeping them, and how long they must retain them for.

30.

Although not referred to directly as ‘open book’ within the DRA or the SSCR, the new legislation provides the MOD with rights to access and examine certain contractor records for QDCs and QSCs. Chapter 6 outlines the purpose for which you are able to examine relevant records, and the amount of notice you must give your contractor when requesting information.

31.

Although you can use open book principles at any time, the chapter outlines the typical circumstances where it may be appropriate to examine relevant records. For example, you may wish to do so after contract award, where you have concerns regarding the pricing assumptions; or during the life of the contract, to better understand a contractor’s explanation of a developing cost variance. The chapter also explains your open book rights beyond contract completion.

32.

Under the new framework provided by the DRA and SSCR, the MOD will introduce a new audit approach, the Post Award Review (PAR). Chapter 6 explains that you can conduct a PAR at any time up to two calendar years after contract completion and there is no once-only limit. The PAR is primarily intended to be conducted early in the life of the contract, to test the pricing assumptions used in pricing the contract.

33.

If a contractor feels you have not acted reasonably in relation to your rights then they have the right to refer the matter to the SSRO. Example situations where this might arise are listed in Chapter 6.

34.

There is a requirement for contractors to proactively notify the MOD of any material change, or any risk of a change, to the performance, cost or schedule of a contract. The chapter outlines some examples where a contractor would be expected to notify the MOD.

35.

Carefully managing the process that occurs at the end of a contract (both for QDCs and QSCs) can be useful for numerous reasons, such as ensuring that contractor deliverables have been received and to the standards expected. Chapter 7 initially outlines some of the general purposes of end of contract management, and also the actions required specifically for a QDC.

36.

There are two mandatory SSCR reports at the end of a qualifying contract which must be submitted by the contractor to the SSRO and SSAT:

1. Contract Completion Report (CCR); and
2. Contract Costs Statement (CCS).

37.

Final price adjustments will differ depending on the pricing method used for the QDC.

38.

If a QDC has been priced using firm / fixed / volume driven pricing, the default position under the SSCR is that it is subject to Protection against Excessive Profits and Losses (PEPL) (it is possible to exempt QDCs valued at under £50M (ex VAT) from PEPL under exceptional circumstances). Chapter 7 explains how the end of contract reports can indicate whether a PEPL adjustment is required. Details of thresholds and a calculation for PEPL are included in Annex C to Chapter 3. An Microsoft Excel calculator for PEPL is available on the Commercial Toolkit.

39.

In a QDC or a component of a QDC which is priced using the Target Cost Incentive Fee (TCIF) method, the target cost will have been calculated using the estimated Allowable Costs agreed at the date the contract was entered into. You will determine the final contract price at the end of the contract by reference to the actual Allowable Costs incurred by the contractor as detailed in the CCS. The final price is subject to an adjustment by the associated contract terms.

40.

The MOD has the right to access a contractor’s relevant records in order to compare the estimated contract costs with outturn costs. Chapter 7 details some of the reasons why you might carry out a formal post-costing investigation, and the amount of notice you must give the contractor if you require access to relevant records.

41.

The SSCR place obligations on the contractor and the MOD to retain relevant records and the chapter details the specific retention periods. You should read this guidance in conjunction with the Contract Administration Commercial Policy Statement which gives retention periods specific to commercial records, as extracted from Joint Service Publication (JSP) 441 - Managing Information in Defence.

42.

Chapter 7 details the compliance regime linked to end of contract activities and record keeping including the SSRO's role in giving determinations about Allowable Costs and remedies.

43.

Chapter 8 introduces some of the main purposes of supplier reporting, as well as the basic terminology and procedures which the contractor is required to follow. You do not need a detailed understanding of these as the supplier reports will not be listed in the Contract Reporting Plan (see Chapter 5 Contract Reporting) and will not be sent to the Commercial Officer, although the output of any analysis can be made available to you by the SSAT.

44.

As soon as a supplier holds a QDC or QSC of over £20M (ex VAT) (for financial years 2015/16 and 2016/17) or £50M (ex VAT) (from 2017 onwards), then they will need to provide specific supplier reports. Chapter 8 provides more detail on who needs to provide these reports and when.

45.

In exceptional circumstances it may be possible to dis-apply the requirement to provide some, or all, supplier reports, Chapter 8 refers to this.

46.

There are eight supplier level reports and these are briefly described in Chapter 8.

47.

Chapter 9 explains what the new restrictions are, and why a new criminal offence has been introduced. Increased transparency and statutory obligations could create additional risks for contractors, and the potential unauthorised release of information is of genuine concern for industry.

48.

Schedule 5 covers the restrictions on disclosing information. Information is subject to restrictions on disclosure (and therefore is SSCR protected) if:

1. it has been obtained by the Secretary of State for Defence by virtue of the DRA or it has been derived from such information (for instance analysis);
2. it relates to the affairs of an individual or a business; and
3. it falls under one of the categories set out in the SSCR.

49.

Information you receive from the SSRO / SSAT should have an appropriate protective marking. You could also receive information directly from the contractor that would fall under Schedule 5 of the DRA. You can use the Annexes in Chapter 9 to help you determine if information you receive is protected under the SSCR.

50.

If you are found guilty of the offence of an unauthorised release of SSCR protected information you could be liable to imprisonment of up to 2 years, or to a fine, or both. You can use the Annexes to help you establish when you need to protect information.

51.

The chapter also describes the circumstances under which you would be able to disclose SSCR protected information.

52.

The compliance and remedies regime of the SSCR is applied through a combination of the compliance notices and civil penalty notices issued by the SSAT. Any compliance notice or civil penalty may be challenged by a contractor, firstly to the SSAT but ultimately to the independent SSRO.

53.

The SSAT is an internal, newly-formed MOD team. The purpose of creating the SSAT is to ensure consistent implementation of the new SSCR across the MOD and to ensure all parties meet their obligations under the new legislation. The role of the SSAT is still being developed, however its likely role and responsibilities in operating the compliance regime are outlined in Chapter 10.

54.

The chapter goes on to list the areas in which contractors may be issued with a compliance / penalty notices if they are considered to have contravened the SSCR. These include but are not limited to:

1. assessing QSC status i.e. a contractor has failed to make an assessment of a contract to determine if it is a QSC, or has made an incorrect assessment;
2. contract and supplier reports (relating to the CPS and CNR outlined in Chapter 5 Contract Reporting) i.e. a contractor fails to submit their CPS within one month of entering a contract;
3. post contract i.e. the contractor fails to submit the CCR within six months of the contract completion date;
4. the duty to notify i.e. subsequent events indicate that a contractor failed to notify you at the time about an event that had a material effect on a contract; and
5. the duty to keep relevant records for the required period.

55.

The chapter explains what information the compliance notice must contain (i.e. details of the contravention), and the timeframes within which it must be issued by the SSAT.

56.

The chapter also outlines that the SSAT may issue a penalty notice, and details the circumstances where a penalty might be appropriate. The chapter explains what information the penalty notice should contain, and the time limits in which a penalty notice must be issued by the SSAT.

57.

The chapter highlights that QSCs are subject to the same reporting and record keeping requirements as QDCs. Annex A to Chapter 10 details the prescribed maximum penalties which the SSAT can issue to contractors in different circumstances, depending on the contract value.

58.

Chapter 11 explains the role of the SSRO which is a new, executive Non-departmental Public Body (NDPB) expected to develop to become an expert body on single source defence procurement. It also explains the SSRO's responsibility as the custodian of the new, legislative Single Source Procurement Framework (SSPF) introduced by the DRA and the SSCR.

59.

It covers how you will interact with the SSRO via the SSAT, who are the MOD's point of contact with the SSRO.

60.

The SSRO is responsible for reviewing the primary and secondary legislation three years after the commencement date of December 2014, and every five years after that, and for making recommendations to the Secretary of State for Defence arising from those reviews. The chapter explains the purpose of the review.

61.

The chapter explains that the SSRO is responsible for proposing a Baseline Profit Rate, an adjustment for SSRO funding, and market capital servicing rates to Secretary of State for Defence no later than 31 January each year.

62.

The DRA requires the SSRO to publish statutory guidance on certain aspects of the SSPF and Chapter 11 gives details of this guidance.

63.

The SSRO must issue an opinion or determination on matters referred to it by either the MOD or industry. The chapter details the circumstances in which the SSRO would issue an opinion or determination.

64.

The SSRO has a responsibility to analyse the data it receives on QDCs and QSCs and the chapter describes the analyses that the SSRO is expected to undertake.

65.

The SSAT is an internal, newly-formed MOD team. The purpose of creating the SSAT is to ensure consistent implementation of the new SSCR across the MOD and to ensure all parties meet their obligations under the new legislation. Although the role of the SSAT is still being developed their likely role and responsibilities are outlined in Chapter 12, with an emphasis on how you will interact with the SSAT.

66.

The chapter details the work the SSAT is expected to carry out in this area, such as managing the MOD's input to the annual profit rate reviews and the more comprehensive periodic reviews, on behalf of the Secretary of State for Defence (i.e. the SSAT is likely to coordinate MOD submissions to the SSRO on all these matters). It is expected that industry will make similar arrangements, to represent their views to the SSRO).

67.

The likely referrals process between the SSAT and the SSRO is also described in the chapter, highlighting the action you need to take if referrals are made.

68.

The SSAT is expected to be the single point of contact into the MOD for submitting contract reports and supplier level reports. The chapter describes some of the communication that contractors are expected to maintain with the SSAT, for example, prime contractors are expected to notify the SSAT if they assess that a sub-contract is a QSC.

69.

Other contractor responsibilities are also highlighted, such as the responsibility to keep relevant records and advising the SSAT of material events which could affect the contract delivery. The SSAT is expected to be responsible for onward communication within the MOD so that the right information gets to the right people at the right time.

70.

The SSAT is expected to be the only part of the MOD that can issue a compliance notice to the contractor for a breach of the SSCR. The chapter lists some of the reasons a contractor might be issued with a compliance notice, and describes the process that follows. Penalty notices are also detailed, including what information the penalty notices should contain.

71.

The SSAT may, in time, be required to perform analysis of reporting data, which will inform and enhance the way contracts are managed and negotiated in the future. The role of the SSAT in engaging MOD staff and raising awareness of the SSPF is also outlined in the chapter. The SSAT will also manage the SSRO as an NDPB, providing governance and oversight.

72.

The Web Access Page for the DRA and SSCR contains a summary of the legislation, details of who you can speak to for advice, and what training is available. It also contains links to other relevant topics and information and to the individual chapters.