Application of the Allowable Costs guidance

2.1

It is a legal requirement to have regard to this guidance in determining whether costs are Allowable under a QDC or QSC. This guidance applies to QDCs or QSCs entered into or amended on or after 29 September 2021 and replaces version 5 of the guidance published on 16 March 2020. The SSRO has provided separate guidance that will assist the contracting parties to determine the time of agreement for a particular QDC or QSC. Where a change in guidance occurs during contract negotiations, the contractor must report an agreed deviation from the statutory guidance if the previous guidance has informed the majority of the negotiation.

SSRO guidance: Previous versions of the SSRO's guidance are not reproduced on this website. You can find them on the SSRO's website.

2.2

For the purpose of pricing a QDC, the Act requires the Secretary of State and the primary contractor to be satisfied that particular costs meet the requirements of Allowable Costs under section 20(2)(a) to (c) of the Act, having regard to SSRO guidance. In the case of a QSC, it is the Secretary of State and the sub-contractor who must be so satisfied. To be satisfied, the Secretary of State may require the primary contractor (in the case of a QDC) or the sub-contractor (in the case of a QSC) to show that the requirements are met (with reference to SSRO guidance or otherwise). In such cases, the burden of proof rests with the contractor or sub-contractor, as the case may be. Whether or not the Secretary of State requires the contractor or sub-contractor to show that the requirements of Allowable Costs are met, the Secretary of State and the contractor or sub-contractor must be satisfied that the costs are Allowable Costs.

2.3

If the primary contractor has entered into sub-contracts to a QDC (including any QSC), then the prices of those sub-contracts will be costs in the QDC. The Secretary of State and the primary contractor will need to be satisfied that the prices are Allowable Costs (section 20(2)). The Secretary of State may require the primary contractor to demonstrate this is the case (section 20(4)). The legislation does not prescribe how this may be demonstrated, or what would be sufficient evidence that a sub-contract price satisfies the AAR test. It may be that the price of a sub-contract may be demonstrated to be Allowable without the need to demonstrate that all the component costs are Allowable.

2.4

In the case of a sub-contract that is also a QSC, the contract price must conform to the price formula and the costs must be Allowable. In terms of whether a cost in a QSC is Allowable, the application of section 20(2) and (4) is modified by section 30(1) of the Act. The Secretary of State and the sub-contractor must be satisfied that the costs are Allowable. The obligation to demonstrate to the Secretary of State that a cost included in the price of a QSC is Allowable sits with the sub-contractor. The price of any sub-contract to the QSC will need to be an Allowable Cost in the QSC and the guidance given at paragraph 2.3 will apply equally.

2.5

In relation to a QDC, Regulation 20 requires the primary contractor to keep ‘relevant records’. In the case of a QSC, it is the sub-contractor who is so required. Section 23 of the Act defines relevant records as accounting and other records (whether in hard or electronic form) which the primary contractor or sub-contractor, as the case may be, ‘may reasonably be expected to keep’ and ‘which are sufficiently up-to-date and accurate’ for use by the Secretary of State for specific purposes, such as verifying certain matters relating to the price payable under a QDC or QSC, including whether a cost is an Allowable Cost.

2.6

The Act and Regulations do not specify what information is required in order to be satisfied that a cost is an Allowable Cost. In determining what type and standard of information is required, the relevant parties identified in paragraph 2.2 should take a proportionate approach considering:

1. the specific requirements and circumstances of the contract;
2. the materiality of particular costs; and
3. what it is reasonable to expect would be available

2.7

Transparency between the parties as to what type and standard of information each considers is required to be satisfied that a cost is an Allowable Cost will facilitate the achievement of a proportionate approach.

2.8

The information used to show that costs are Allowable Costs should make sufficiently clear to both the Secretary of State and the primary contractor (in a QDC) or sub-contractor (in a QSC) how the costs meet the requirements to be appropriate, attributable to the contract and reasonable in the circumstances.

2.9

Any general enquiries related to this guidance should be addressed to the helpdesk@ssro.gov.uk. The SSRO responds as quickly as possible to such requests, provided they are matters of general guidance and not contract-specific.

2.10

If the parties to a QDC or QSC, in advance of entering into the contract, would like a view as to whether costs under the contract may be Allowable Costs, then a referral may be made to the SSRO for an opinion. The SSRO has published guidance as to how it will deal with such referrals for an opinion.

2.11

Following contract award, the parties to a QDC or QSC may apply to the SSRO to determine the extent to which costs are Allowable Costs. If such a referral is made, the SSRO will make a determination as to the extent to which costs are Allowable Costs (section 20(5) and 20(6)). The final determination has legal consequences for the parties. The SSRO has published guidance as to how it will deal with such referrals for a determination.