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Table of contents
1 Introduction 2
2 Purpose of the Framework 2
2.1 Purpose 2
2.2 Principles 2
2.3 What is included 2
2.4 What is not included 2
3 Legal basis 2
3.1 Primary and secondary legislation 2
3.2 References 2
3.3 Statutory guidance 2
3.4 Commercial policy and non-statutory guidance 2
3.5 Applicable contracts and suppliers 2
3.6 Definition of a Qualifying Contracts 2
3.7 Single source sub-contracts 2
3.8 Definition of a Qualifying Defence Supplier 2
3.9 Contract amendments 2
3.10 Exemption 2
3.11 Opt-in 2
3.12 Out of scope contracts 2
3.13 Legal basis of the SSRO 2
4 Pricing 2
4.1 Principles 2
4.2 Allowable costs 2
4.3 Profit 2
4.4 Firm, Fixed, TCIF, and Ascertained Cost contracts 2
4.5 Single source sub-contracts 2
4.6 Pricing contract amendments 2
4.7 Contract Pricing Statements 2
4.8 Maintenance of pricing records 2
4.9 Compliance 2
4.10 SSRO referrals relevant to pricing 2
5 Cost recovery through rates 2
5.1 Principles 2
5.2 Rates claims 2
5.3 Responsibility for demonstrating that costs are allowable 2
5.4 Efficiency targets 2
5.5 Business Unit Cost Analysis Reports 2
5.6 Rates Agreement Pricing Statement 2
5.7 Allowability assessment 2
5.8 Compliance 2
5.9 SSRO referrals relevant to cost recovery through rates 2
6 Contract monitoring 2
6.1 Principles 2
6.2 Monitoring the baseline 2
6.3 Monitoring final contract out-turn and variance 2
6.4 Frequent contract monitoring 2
6.5 Contract Reporting Plan 2
6.6 Proactive notification 2
6.7 Open book 2
6.8 Performance Evaluation Review 2
6.9 Post Award Review (Equality of Information) 2
6.10 Post Costing 2
6.11 Protection against excessive profits and losses (PEPL) 2
6.12 Compliance 2
6.13 SSRO referrals relevant to contract monitoring 2
7 Supplier management 2
7.1 Principles 2
7.2 Strategic planning of industrial requirements 2
7.3 Rationalisation and redundancy 2
7.4 Monitoring overhead recovery 2
7.5 Monitoring SMEs 2
7.6 Compliance 2
7.7 SSRO referrals relevant to supplier monitoring 2
8 Single Source Regulations Office 2
8.1 Purpose 2
8.2 Functions 2
8.3 Organisation and governance 2
8.4 Powers 2
8.5 Publications 2
8.6 Funding 2
9 Confidentiality 2
9.1 Unauthorised release 2
9.2 Authorised release 2
9.3 Statutory bar 2
9.4 FOI processes 2
9.5 MOD processes 2
9.6 SSRO processes 2
Appendix A Procedure and amounts for civil penalties 2
Appendix B Procedure for SSRO referrals 2
Appendix C Summary of SSRO Referrals 2
Appendix D Acronyms 2
Appendix E Document Versions 2
20140512-The new SSPF v3.doc
1 Introduction
1.1 This document describes the new Ministry of Defence (MOD) single source procurement framework that replaces the current Yellow Book (the Government Profit Formula and its Associated Arrangements).
1.2 The framework is expected to come into force on 6 April 2015 and preparations are continuing. The Defence Reform Act received Royal Assent on [14 May] on [14] May 2014, at which point it became the Defence Reform Act 2014. Work will continue throughout spring / summer 2014 to finalise the Single Source Contract Regulations (SSCRs) (which is secondary legislation to be made exercising powers in the Defence Reform Act), alongside continued development of associated statutory guidance and MOD commercial policy.
1.3 The purpose of this document is to describe to both MOD and industry practitioners of single source procurement how the new framework will work. This will be the last issue of this document in its current form – it will be replaced by more detailed procedures, documentation and training as the implementation of the new framework continues to mature.
1.4 The framework has two main components:
a) Part 2 of the Defence Reform Act, the SSCRs, and statutory guidance governing pricing, open book rights, and standard reporting; and
b) an arms-length body known as the Single Source Regulations Office (SSRO) which manages and monitors the framework and which replaces the current Review Board for Government Contracts. The SSRO also performs an expert determination role and performs analysis.
1.5 The framework does not cover all aspects of single source procurement. For example it does not limit contract durations, determine how overhead costs should be recovered, or set out key performance indicators. The framework also does not cover the decision to use single source procurement; it sets out requirements once this decision is made. The purpose of the new framework and what is covered (and not covered) is described in more detail in section 2.
1.6 Unlike the Yellow Book, which is not legally binding (although aspects of it have become custom and practice), the new framework has a clear legal basis - this is described in section 3.
1.7 Section 4 describes how single source contracts must be priced, and section 5 covers overhead recovery. Some of this will be familiar to current users of the Yellow Book, however there are also significant changes, such as to Equality of Information (EofI) and adjustments to the Baseline Profit Rate.
1.8 The following sections 6 and 7 outline almost entirely new components of the framework, namely contract monitoring and supplier monitoring. Unlike its predecessor, the new framework includes significant reporting requirements. It should be noted that these are minimum requirements, and there is nothing to stop MOD and suppliers from agreeing more extensive requirements within contract terms.
1.9 The SSRO is described in section 8. This covers its four primary functions, namely keeping Part 2 and the SSCRs under review and recommending changes to them, monitoring the framework’s application, providing an expert determination role, and performing analysis. The governance of the SSRO is also explained, including the composition and recruitment process of its members and the various committees, as well as the funding.
1.10 The final section 9 describes confidentiality. Part 2 of the Defence Reform Act includes a provision that makes unauthorised disclosure a criminal offence - this section explains that offence.
2 Purpose of the Framework
2.1 Purpose
2.1.1 The purpose of the single source procurement framework is to ensure a fair and reasonable price (and only a fair and reasonable price) is paid for goods and services procured in the absence of competition.
2.2 Principles
2.2.1 The key guiding principles of the new framework are:
a) to address issues that arise from single-source procurement – for example replicating the missing competitive pressure present in an efficient market;
b) to focus on areas where standardisation is of value – a framework provides consistency, but at the expense of being able to define a bespoke solution. The framework has been designed to benefit from wide application and stability over time;
c) to be proportionate – higher value contracts carry a greater risk to value for money (VFM), so there should be greater protections. We also do not want to discourage the greater involvement of Small and Medium Sized Enterprises (SMEs) in defence by a framework that is too burdensome; and
d) to provide VFM – a balanced approach has been taken between asking for information the MOD would ideally like, and asking for information that is readily available using current industry systems and processes.
2.3 What is included
2.3.1 The framework covers contract pricing (including pricing of single source sub-contracts), pricing contract amendments, and cost recovery rates. When pricing, adherence to key principles and use of a baseline profit rate are compulsory, with MOD and suppliers open to the risk of a binding price adjustment by the SSRO once on contract if they are not applied.
2.3.2 The framework includes mandatory transparency requirements. These include access to records where the MOD 'pulls' information from suppliers, and standardised reporting where suppliers 'push' information to both the MOD and the SSRO. There is a civil penalty regime in the event of non-compliance.
2.3.3 In addition to the above pricing and transparency requirements, the framework imposes certain additional duties on both the MOD and suppliers. For example suppliers must flow down the framework to single source sub-contractors, and the MOD must treat sensitive supplier information with due care. The consequences for failing to meet these duties vary from financial penalties to criminal charges.
2.3.4 Finally the framework also includes governance arrangements to ensure that it is kept up to date, and that application and adherence is independently monitored.
2.4 What is not included
2.4.1 The framework does not prescribe:
a) contract duration, including break options and / or extensions;
b) contract type i.e. firm price, fixed price, pain / gain share models such as Target Cost Incentive Fee (TCIF), or ascertained cost (cost plus) contracts;
c) payment plans e.g. milestone payments, monthly payments with an annual reconciliation etc.;
d) how overhead should be recovered, for example whether using indirect cost recovery rates or alternatively pricing overheads directly within a contract;
e) how risk should be partitioned between the parties;
f) contractual change mechanisms which determine how the price should be adjusted for envisaged changes e.g. for quantity or operating hours;
g) performance mechanisms which set out price reductions for non-performance or additional profit for higher performance (although the framework places a limit on the maximum positive reward that can be used and when a positive reward might be appropriate); or
h) intellectual property rights or commercial exploitation levies.
2.4.2 All of the above may be set out in commercial guidance[1]; however the content of and adherence to this commercial guidance is not within the scope of the framework.
3 Legal basis
3.1 Primary and secondary legislation
3.1.1 The Defence Reform Act (“the Act”) received Royal Assent on [14] May 2014. It incorporates three measures, one of which is single source procurement (the other two relating to how the MOD may operate its procurement function in future, and reserve forces). Note that subsequent references to the Act refer only to Part 2 of the Act unless otherwise stated.
3.1.2 Once passed, the Act does not come into immediate effect. It must be commenced by an order, and different provisions can be commenced at different times. It is expected that some elements will be commenced in mid 2014, to allow the SSRO to be formally stood up. The framework as a whole will not apply to contracts until 6 April 2015.
3.1.3 The Act, which is primary legislation, gives the Secretary of State (SofS) the power to make regulations (secondary legislation). The distinction is that primary legislation must go through the full Parliamentary process. Secondary legislation goes through a different process, and so is easier to make and amend than primary legislation.
3.1.4 In order to understand how the framework will work, the primary and secondary legislation must be considered together. Collectively they represent the law that will apply to single source procurement. The documents relating to the parliamentary process of the Act are available online at www.parliament.uk[2]. The secondary legislation will be made in one Statutory Instrument (SI), being the Single Source Contract Regulations (SSCRs). The SSCRs will be a “draft affirmative” SI, which means it cannot be made until a draft has been laid before, and approved by a resolution of, each House of Parliament. It is expected that the draft SSCRs will be laid in Parliament at the end of November 2014. Both the Act and the SSCRs will, in due course, be available online at www.legislation.gov.uk.
3.1.5 The Act includes a requirement for the SofS to review the Act and the SSCRs three years after the SSCRs first come into force, and every five years thereafter.
3.1.6 The Act gives the SofS a number of powers. These can be exercised by other Ministers or, in appropriate, cases by civil servants. Given the possibility of future changes to the MOD’s procurement function, in some places the Act says that a power may be exercised by SofS or an “authorised person”, which could be a future contractor but at present it is not envisaged that an “authorised person” will be appointed.
3.2 References
3.2.1 Any references to the SSCRs in this document refer to draft Version 3, issued on 17 March 2014. These are draft regulations which are subject to ongoing review and consultation – they will change before they are laid in draft before Parliament in later 2014.
3.3 Statutory guidance
3.3.1 In addition to primary and secondary legislation, the framework also includes statutory guidance. The powers to make statutory guidance are set out in the Act. There is a legal requirement to have regard to that guidance. In practice this means that the guidance must be followed, unless there are good reasons for not doing so in the particular circumstances.
3.3.2 In addition to this statutory guidance, there will be a range of commercial guidance (whether from the MOD or industry) which will not have a statutory basis but will support the general operation of the framework – for example, commercial policy maintained by the MOD under its Acquisition Operating Framework. Such non-statutory guidance is not covered by this document.
3.3.3 The framework includes the following statutory guidance:
Published by the SSRO:
a) guidance on the six steps for calculating the contract profit rate. We envisage that this will include how to determine the profit adjustment for contract risk; how to determine the profit adjustment to ensure a supplier only gets profit on cost once (POCO); when it is appropriate to apply a profit uplift as an incentive, e.g. for exceptional performance;
b) guidance on allowable costs[3] that can be included in contract prices;
c) guidance on preparing contract and supplier reports. We envisage that this will include guidance on the Defined Pricing Structure (DPS), to describe the standard cost categories that should be used for some standard reports; template reports for some standard reports;
d) matters that the SofS must take account of when determining the appropriate level of civil penalty to impose on a supplier for a contravention under the framework;
Published by the SofS:
e) the principles the SSRO must have regard to in determining the baseline profit rate and capital servicing rates;
f) the principles the SSRO must have regard to in determining the SSRO funding adjustment.
3.3.4 The SSRO has an overriding aim to maintain a single source procurement framework that assures value for money for the UK taxpayer and allows a fair and reasonable price for suppliers. The SSRO may, if it has good reasons, deviate from the statutory guidance set out by the SofS in the calculation of the baseline profit rate, the capital allowances, and / or the SSRO funding adjustment.
3.4 Commercial policy and non-statutory guidance
3.4.1 Not all elements of single source procurement fall within scope of the framework (e.g. see 2.4). As long as it is not inconsistent with the framework, either the MOD or our single source suppliers are free to set and follow commercial policy or guidance on any other matters.
3.4.2 To ensure that both parties meet their statutory requirements, it will be beneficial to set out in contractual documents how these requirements will be met. For example, to set out the dates the different standard reports are required and exact format they should take. It is anticipated that commercial policy and non-statutory guidance will be developed along these lines.