Introduction to Allowable Costs

Contents: This section of the SSRO's guidance introduces Allowable Costs and the legislation that underpins its requirements.

About this guidance

1.1

The Defence Reform Act 2014 (the Act) requires that qualifying defence contracts (QDCs) and qualifying sub-contracts (QSCs) are priced on the basis of Allowable Costs. A contract is a QDC if it meets the definition laid down in section 14(2) of the Act. A QSC is a contract between a primary contractor and another contractor or between a sub-contractor and another contractor where it meets the definition laid down in section 28 of the Act and has been assessed and notified as a QSC pursuant to the procedure under section 29 of the Act.

1.2

The Act also states [Refer: regulation 3] that, in carrying out its functions, the SSRO must aim to ensure that:

  1. good value for money is obtained in government expenditure on QDCs and QSCs; and
  2. persons (other than the Secretary of State) who are parties to QDCs and QSCs are paid a fair and reasonable price under those contracts.

1.3

Section 20 of the Act specifies when costs are Allowable and sets out related provisions as follows:

  1. section 20(1) of the Act stipulates that the SSRO must issue guidance about determining whether costs are Allowable Costs under QDCs and QSCs.
  2. section 20(2) of the Act states that both parties need to be satisfied that costs are appropriate, attributable to the contract and reasonable in the circumstances (AAR).
  3. section 20(3) of the Act states that the Secretary of State and the contractor must have regard to the SSRO’s guidance in determining whether a cost satisfies the AAR test.
  4. section 20(4) of the Act states that a contractor (prime contractor or sub-contractor) may at any time be required to show that a particular cost is Allowable.

1.4

This guidance applies to the Ministry of Defence (MOD) and all contractors who have been awarded QDCs or QSCs. Terminology used but not expressly defined in this guidance is articulated in the Act or the Single Source Contract Regulations 2014 (the Regulations). Specific accountancy terms have not been defined in this guidance as definitions of these terms exist in relevant accounting standards.

1.5

The following sections set out the SSRO’s statutory guidance issued pursuant to section 20 of the Act.

Note: The annotations on this page are applied to underlying text taken from version 5.1 of the Allowable Costs guidance, available at ssro.gov.uk. Errors or ommisions can occur, or updates may not be reflected. Always check the source document.