• Test 1

UK MOD DEFCONs, DEFFORMs and Regulations applicable to pricing of single source defence contracts

Implementation of new pricing frameworks

New single source contracts and supporting single source sub-contracts will be affected by the implementation of Part 2 of the Defence Reform Act and Single Source Contract Regulations 2014. For some the new pricing regulations will apply and for others a new suite of pricing and reporting DEFCONs will apply as they are negotiated into new contracts and sub-contracts.  For pre-existing contracts the contract conditions as negotiated and supporting Yellow book arrangements will continue to apply. For contracts subject to regulations, the tariff of (maximum and unlimited) penalties is available here and a copy of the Defence Reform Act is available here. Statutory guidance is available here

Even though it beggars belief why anyone would want to; contractor’s and MOD are able on a case by case basis to agree that pre-existing contracts  can become subject to these regulations, however this requires the contract price is re-established in accordance with the pricing formula (allowable cost comprising a mixture of actual costs incurred and estimates of costs to come).

 

Pre –existing contracts

Pre-existing contracts will remain subject to the DEFCONs contained within the Contract which will mainly comprise DEFCONs numbers 127, 176a, 643, 648, 648a, 653 and 696. Cost certification forms may also be required 648 and 653. Review Board references are contained in DEFCONs 650, 650a, 651 and 651a. 

 

New contracts other than qualifying defence contracts (QDCs) and qualifying defence sub-contracts (QSCs)

The law makes no provision for the SSRO to act as expert in the resolution of pricing disputes. Accordingly DEFCONs 127; 530; 643; 653 are revised (inadequately); DEFCONs 648; 648A; 650; 650A; 651; 651A are retired; and new DEFCONs 811; 812; 813; 814; 815 are introduced to secure MOD similar rights as are applicable for QDCs and QSCs under the Act. These DEFCONs need to be fully considered and negotiated on a case by case basis.  All released and retired MOD DEFCONs and DEFFORMs are dated and are available for download from the MoD ASG website once a password has been requested and supplied.

Contractual arrangements to secure amendments to prices of new competitive contracts following incorporation of a single source contract change remains under-developed.

 

Key elements of Defence Reform Act (Part 2)

  • Establishment of Single Source Regulations Office (SSRO). with substantial powers to: (1) issue statutory guidance, (2) make expert binding determinations and opinions to resolve a wide range of pre and post contract award disputes,  (3) application of penalties, and (4) provide other services to MOD
  • Secretary of State issues regulations as permitted within the Act.
  • Act applies to ‘qualifying defence contracts (QDC)’;  ‘qualifying sub-contracts (QDS)’ and contractors performing those single source contracts
  • QDC is (1) a single source contract (2) placed by MOD (3) for works, goods or services that are not excluded (4) are valued at greater than £5m (5) is contracted after 17th December 2014.
  • QDS is (1) a single source sub-contract (2) placed by the holder of either a QDC or a higher tier QDS (3) for works, goods or services that are not excluded (4) are valued at greater than £25m (5) is contracted after the regulations come into force.
    • The higher tier contractor is responsible for determining if a sub-contract is a QDS and advising MoD and the potential subcontractor.
    • The sub-contractor can appeal this assessment to the SSRO
  • The whole of any QDC or QDS or contract change to a QDC or QDS is required to be priced in accordance with the pricing formula. The pricing formula comprises (1) allowable costs and (2) the contract profit allowance
    • Failure to follow the regulations and statutory guidance (statutory guidance; without good reason) will give right to the contract price to be corrected
    • Prices for contract changes must be agreed in accordance with the pricing formula. If costs cannot be segregated the whole contract price must be re-determined
  • Allowable costs statutory guidance has been issued by the SSRO and replaces the existing Yellow Book Government Accounting Conventions for contracts which have to be priced in accordance with the regulations.
  • Contract profit rate has 6 steps which includes variation for extent of cost risk. SSRO has issue dstatutory guidance for this element.
    • Profit on cost once (POCO) is similar to US anti fee stacking regulation contained in FAR Part 31.205-26 but critically it excludes any of the FAR exemptions.
  • Regulations 8 and 9 set out when a contract can be excluded as satisfying the criteria of a competitive contract. The regulations lack consideration of the scope of the matters considered by the US within FAR 15.403 (obtaining certified cost or pricing data) e.g.15.401-1(c)(1)(iii)
  • Protection against excessive profits and losses (PEPL) replaces the existing DEFCON 648A calculation.
  • MOD have access to a company’s relevant accounting and other records; companies are obligated to answer an reasonable request for further information or explanation relating to those relevant records
  • Contractors are obligated to provide specified contract cost reports to MoD and SSRO. The reports require actual/forecast time phased expenditure set out in accordance with an SSRO defined WBS, and evaluated at MOD costing rates. Statutory guidance has been issued on these topics.
  • Contractors with more than, initially £20m, of qualifying contracts are required to provide specified business level reports to MOD and SSRO. These reports include details of overhead costs incurred and industrial capacity. Statutory guidance has been issued on these topics
  • Penalties apply if a contractor does not fulfil its reporting or notification obligations. Statutory guidance has been issued on these topics
  • Schedule 5 of the Act sets out restrictions on MOD disclosing information.

 

The regulated framework

  • Government has structured the legislation such that there is no duplication between Part 2 of the Act and the Single Source Procurement regulations. The implication of this decision is that an understanding of the requirements of the legislation can only be achieved by consideration and review of both the Act and the regulations; not an easy process.
  • Language of the Act and the regulations is not user friendly. The legal precision used is not necessarily supportive of a clear understanding of the rights and obligations of the parties. Often it is only MOD’s rights and a contractor’s obligations to MOD (and SSRO) that are addressed within the regulations and statutory guidance. Gaps (there are very many) need to be addressed between contractors and their subcontractor’s.
  • The Act and the regulations primarily address prime contracts between MOD and its prime contractor and law relating to rights and obligations between MOD, the higher tier, and lower tier qualifying sub-contracts has to be derived from flow-down schedules within the Act and flow-down regulation. This makes for a difficult, uncertain and often inconclusive reading of the rights and obligations of each of the parties and flow of funds in the case of any breach of obligations.
  • The SSRO own the responsibility to interpret the Act and the regulations and advise the parties of its binding opinion whenever a dispute is referred to it (pre or post contract award) e.g. pricing of a change to a QSC where there is no change to prime contractor’s SOW with MOD
  • Anti-avoidance regulations are not sufficiently developed to provide certainty as the rights and obligations of the parties e.g. regulation 5 (Calculating the value of a contract) as applicable to QSCs when the term ‘contract’ is not a contract in the normal sense but rather ‘the sum of contracts let to fulfil the requirement’. Paragraphs 6, 7 and 8 of regulation 5 look to require each contract placed to be subject to separate reporting under Part 5 of the regulations regardless of the value