The SSRO held four teach-in sessions for stakeholders, to discuss the changes to the single source regulatory framework brought in by the Procurement Act 2023 and associated secondary legislation.
There were two sessions each on pricing and reporting.
The aim was to develop attendees’ awareness of:
- the changes to pricing and reporting provisions effective from 1 April 2024;
- SSRO guidance to refer to when pricing and reporting in relation to Qualifying Defence Contracts (QDCs) & Qualifying sub-Contracts (QSCs); and
- how to seek support from the SSRO for contract specific queries.
The attachments contain a synopsis of the questions raised at each of these 4 teach-in sessions.
- The answers aim to help parties in applying the Regulations.
- The Q&A are a record of what was discussed at each teach-in – as such there is some repetition of topics across the sessions.
- The answers are correct as at 21 June 2024. NOTE: there will likely be development of the SSRO’s position on some of the topics covered as the Regulations are used in practice and we receive stakeholder feedback. This will contribute to updates to SSRO guidance.
Should you require further details on the material contained in these attachments, please contact the SSRO Helpdesk, which is the first point of contact for queries on the regulatory framework. The Helpdesk can be contacted:
- by phone via 020 3771 4785 (9am to 5pm Monday to Friday); or
- by email to helpdesk@ssro.gov.uk.
Session 1: Pricing guidance Teach In 20 February 2024
This session focused on:
- The new features of pricing contracts, including what componentisation means
- The seven new alternative pricing methods
Transition (the 4 profit rate steps)
How will provisional prices provided pre-April 2024, but not finally agreed until after April 2024, be affected?
These is no explicit provision for “provisional pricing” in the legislation. All QDCs and QSCs entered into must be priced in accordance with the regulations that apply at the time.
We recognise that a contract may have a price agreed, on the expectation that it will be amended at a later date to reflect the resolution of matters outstanding at the initial time of pricing.
If a price is agreed under the pre-April 2024 regulations and is then amended post April 2024, the new price will need to comply with the new regulations (for example applying a contract profit rate for the amendment that has four steps rather than six).
Components
How does Regulation 14 and componentisation work together?
The Schedule to the Regulations allows the parties to redetermine the price of a component of the contract price. For example, they may wish to re-determine an element of the allowable costs or change the pricing method of part of the contract. The amended contract price will comprise the sum of the amended and unamended components, each potentially with its own contract profit rate and allowable costs. These provisions continue to apply in the new regulations in the same way as they have done to date.
I have a QDC entered into prior to 1 April 2024. How does the new legislation on components affect my contract?
Under the previous regulations the parties were able to agree a price containing parts that the legislation now define as components.
“…..A part of the contract that is to be treated distinctly from other such parts in determining the price payable under the contract.”
A part of a contract is to be treated distinctly if:
– the regulations contain provision to that effect – the parties to the contract agree to it
Therefore, if the parties have agreed upon entering in a contract, or on amendment, to apply the regulations in a way that reflects the description above, it is now considered in law that the contract consists of components, and is subject to the associated reporting requirements for components.
Isn’t componentisation actually mandatory since long-term contracts have funding drops each year and are forced to use a different BPR, resulting in at least one component being generated each year?
Provision under the existing regulations that allows the parties to agree to amend only a component of (aka componentise) a contract for the purpose of redetermining a contract price continues based on the existing approach.
Contracts can also be amended in such a way that does not involve treating part of the contract distinctly from other parts for the purpose of determining the price, and so will not create new components. This might include, for example, the parties agreeing the same contract profit rate for the amended and unamended parts, or re-determining the entire contract price.
Not all amendments are pricing amendments, in which case there is no provision to reprice the contract.
If there is an amendment post April 2024 that does not follow regulation 14, will componentisation apply?
An amendment that results in new components being formed or which affects existing components must be priced in accordance with regulation 9C and the Schedule to the Regulations (previously regulation 14). The only amendments which need not follow regulation 9C are those which do not affect the contract price.
Commercial pricing
How does the option to use commercial pricing where “the SofS is satisfied a supplier (who may or may not be the primary contactor) has supplied GWS to same or substantially same specifications to other parties in a competitive environment” work? Would it be legal to share data regarding sales by other suppliers?
We would envisage this may apply in a situation where the commercial prices of the GWS trade are known or can be ascertained by the contracting parties – for example, the prices offered by resellers competing in the market for technology products such as mobile phones. In these circumstances the prices offered by those resellers may form the basis of a commercial price for a QDC or QSC, subject to any appropriate adjustments. If the price data is not known, then it will not be possible to apply this approach.
Can this method be applied to determine a QDC price based on a previous single source contract with a foreign government? (i.e. the USA under FARS or DFARS)
The contractor would need to demonstrate the conditions are met to apply this method. Simply having supplied the goods to a foreign government on a single source basis, seems unlikely in of itself to be sufficient for those conditions to be met.
Is commercial pricing optional (i.e. mutually agreed), or mandatory where the conditions for commercial pricing are satisfied?
There is no explicit requirement to use any of the new alternative pricing methods, even where the conditions are met. However, the alternative pricing methods have been introduced to simplify pricing and address issues that have previously arisen with application of the price formula. Therefore, we would expect that when the option exists to use this alternative pricing method, there would be merit in the parties considering its application.
If prior to 1 April 2024 a price has been submitted and contract negotiations are on-going but no contract is in place when the regulations come into force, can the new pricing methods be utilised after 1 April 2024?
Yes, it would be possible where contract negotiations straddle the date at which the regulations come into force to use the new pricing methods – the relevant date is the date the contract is entered into. However, these methods can only be used in the circumstances prescribed in the regulations and whilst the parties may agree there would be benefit in modifying an extant pricing proposal to utilise a new pricing method, there is no compulsion in the regulations to do so.
Contractors should be aware that pricing proposals submitted based on the six-step contract rate process would need to be revised to reflect the new four-step process if the contract is entered into after 1 April 2024. We expect the MOD and contractor will have anticipated the changes and constructed their bids accordingly.
Previously agreed price
Can you explain the following aspect of the ‘previously agreed price’ method in more detail?: “This pricing method does not apply where an amendment to a contract results in the creation of a new qualifying contract.”
The primary purpose of this pricing method is to allow an amendment to be made to an existing contract (a QDC by amendment) without needing those parts of the price that were agreed before the amendment to be redetermined.
If on the other hand an amendment has the effect of creating a new contract (under regulation 7A), then this method cannot be applied since the new contract will be distinct from those parts which were agreed prior to the amendment.
For a QDC by amendment: will the previously agreed part become a component?
Yes, because the application of this method involves the contract price being the sum of several components.
How would an Option Price that hadn’t been exercised be dealt with under the ‘previously agreed price’ method? And what if it was left to expire (see slide 44 of Pricing Session 1).
An option that had not been exercised, but whose price was agreed prior to the date of conversion would be an element where a price had been agreed but the goods, works or services not yet provided. Therefore, the option price would be maintained unless the parties agreed to reprice it.
If the option price had expired, such that there was no agreed option price at the date the contract became a QDC by amendment, that option price would need to be determined in accordance with one of the pricing methods. Critical to the application of this method is for the parties to identify the parts of the contract that have an agreed price at the date of conversion, and those that do not.
Novated contracts
Can the Novated contract pricing method result in a contract that is not a QDC become a QDC on amendment?
No, the novated contract method only applies to contracts that were QDCs prior to the novation. A non-qualifying contract that is novated will not become a QDC (see regulation 7(f)).
Competed rates applied to uncompleted volumes (CRUV)
To use the CRUV method, does there have to be a competitive framework with the MOD or with any other party? e.g. other Government departments
To use this method there will need to be a competitive framework in place that the MOD can utilise. The framework will need to have been let under a competitive process consistent with certain requirements set out in the regulations and described in our guidance. A cross-government framework agreement may be applicable provided the MOD could use it and it has been let in a manner consistent with the Regulations.
Agreed changes to the contract profit rate
If my contract was entered to before 1 April 2024 can I use the method to correct an error in the baseline profit rate or add an incentive adjustment?
Yes. Contracts priced prior to 1 April 2024 using the six-step profit formula can use this method.
Aggregation of components
Does applying a total Cost Risk Adjustment (CRA) create a new component, and does it need to be reported separately?
Yes. The regulations specify that where a part of the contract uses a different contract pricing method to the contract pricing method used in any other part of the contract, that part is a component. Applying a total CRA using the “aggregation of components method” to the underlying components that make up the contract price will therefore result in a new component being formed. The details of how this should be reported are explained in the current consultation.
Isn’t the maximum possible value (i.e. the headroom) of the total CRA and total incentive adjustment (IA) affected by the total price of all components?
Not necessarily. The maximum possible total CRA and IA are calculated by reference to the maximum possible amount of the component CRAs and IAs under the contract. Certain pricing methods (e.g. commercial pricing) do not allow any CRA or IA to apply at all and therefore these do not contribute to the overall headroom. Only those components that include a contract profit rate using the four-step process (or the previous six-step process) can contribute.
Profit On Cost Once (POCO)
Your guidance states: “Contracts with a POCO adjustment determined under the previous six step process are now subject to the new provisions to make an adjustment through allowable costs.”
Does this result in ‘double dipping’ on POCO for existing contracts i.e. Contractors being charged twice – once with the six steps and once through allowable costs?**
The Regulations make no explicit carve out of the new POCO regulation for legacy contracts with a step 3 adjustment. However, the parties should be able to agree that where there is an existing step 3 adjustment, this addresses the issue of duplicated profit to the extent that no further adjustment to allowable costs is required. However, if the whole or part of the contract price is re-determined, any previous step 3 adjustment can no longer apply and may need to be replaced with an adjustment to allowable costs.
This session focused on:
- The new features of pricing contracts, including what componentisation means
- The seven new alternative pricing methods
Transition (the 4 profit rate steps)
How will provisional prices provided pre-April 2024, but not finally agreed until after April 2024, be affected?
These is no explicit provision for “provisional pricing” in the legislation. All QDCs and QSCs entered into must be priced in accordance with the regulations that apply at the time.
We recognise that a contract may have a price agreed, on the expectation that it will be amended at a later date to reflect the resolution of matters outstanding at the initial time of pricing.
If a price is agreed under the pre-April 2024 regulations and is then amended post April 2024, the new price will need to comply with the new regulations (for example applying a contract profit rate for the amendment that has four steps rather than six).
Components
How does Regulation 14 and componentisation work together?
The Schedule to the Regulations allows the parties to redetermine the price of a component of the contract price. For example, they may wish to re-determine an element of the allowable costs or change the pricing method of part of the contract. The amended contract price will comprise the sum of the amended and unamended components, each potentially with its own contract profit rate and allowable costs. These provisions continue to apply in the new regulations in the same way as they have done to date.
I have a QDC entered into prior to 1 April 2024. How does the new legislation on components affect my contract?
Under the previous regulations the parties were able to agree a price containing parts that the legislation now define as components.
“…..A part of the contract that is to be treated distinctly from other such parts in determining the price payable under the contract.”
A part of a contract is to be treated distinctly if:
– the regulations contain provision to that effect – the parties to the contract agree to it
Therefore, if the parties have agreed upon entering in a contract, or on amendment, to apply the regulations in a way that reflects the description above, it is now considered in law that the contract consists of components, and is subject to the associated reporting requirements for components.
Isn’t componentisation actually mandatory since long-term contracts have funding drops each year and are forced to use a different BPR, resulting in at least one component being generated each year?
Provision under the existing regulations that allows the parties to agree to amend only a component of (aka componentise) a contract for the purpose of redetermining a contract price continues based on the existing approach.
Contracts can also be amended in such a way that does not involve treating part of the contract distinctly from other parts for the purpose of determining the price, and so will not create new components. This might include, for example, the parties agreeing the same contract profit rate for the amended and unamended parts, or re-determining the entire contract price.
Not all amendments are pricing amendments, in which case there is no provision to reprice the contract.
If there is an amendment post April 2024 that does not follow regulation 14, will componentisation apply?
An amendment that results in new components being formed or which affects existing components must be priced in accordance with regulation 9C and the Schedule to the Regulations (previously regulation 14). The only amendments which need not follow regulation 9C are those which do not affect the contract price.
Commercial pricing
How does the option to use commercial pricing where “the SofS is satisfied a supplier (who may or may not be the primary contactor) has supplied GWS to same or substantially same specifications to other parties in a competitive environment” work? Would it be legal to share data regarding sales by other suppliers?
We would envisage this may apply in a situation where the commercial prices of the GWS trade are known or can be ascertained by the contracting parties – for example, the prices offered by resellers competing in the market for technology products such as mobile phones. In these circumstances the prices offered by those resellers may form the basis of a commercial price for a QDC or QSC, subject to any appropriate adjustments. If the price data is not known, then it will not be possible to apply this approach.
Can this method be applied to determine a QDC price based on a previous single source contract with a foreign government? (i.e. the USA under FARS or DFARS)
The contractor would need to demonstrate the conditions are met to apply this method. Simply having supplied the goods to a foreign government on a single source basis, seems unlikely in of itself to be sufficient for those conditions to be met.
Is commercial pricing optional (i.e. mutually agreed), or mandatory where the conditions for commercial pricing are satisfied?
There is no explicit requirement to use any of the new alternative pricing methods, even where the conditions are met. However, the alternative pricing methods have been introduced to simplify pricing and address issues that have previously arisen with application of the price formula. Therefore, we would expect that when the option exists to use this alternative pricing method, there would be merit in the parties considering its application.
If prior to 1 April 2024 a price has been submitted and contract negotiations are on-going but no contract is in place when the regulations come into force, can the new pricing methods be utilised after 1 April 2024?
Yes, it would be possible where contract negotiations straddle the date at which the regulations come into force to use the new pricing methods – the relevant date is the date the contract is entered into. However, these methods can only be used in the circumstances prescribed in the regulations and whilst the parties may agree there would be benefit in modifying an extant pricing proposal to utilise a new pricing method, there is no compulsion in the regulations to do so.
Contractors should be aware that pricing proposals submitted based on the six-step contract rate process would need to be revised to reflect the new four-step process if the contract is entered into after 1 April 2024. We expect the MOD and contractor will have anticipated the changes and constructed their bids accordingly.
Previously agreed price
Can you explain the following aspect of the ‘previously agreed price’ method in more detail?: “This pricing method does not apply where an amendment to a contract results in the creation of a new qualifying contract.”
The primary purpose of this pricing method is to allow an amendment to be made to an existing contract (a QDC by amendment) without needing those parts of the price that were agreed before the amendment to be redetermined.
If on the other hand an amendment has the effect of creating a new contract (under regulation 7A), then this method cannot be applied since the new contract will be distinct from those parts which were agreed prior to the amendment.
For a QDC by amendment: will the previously agreed part become a component?
Yes, because the application of this method involves the contract price being the sum of several components.
How would an Option Price that hadn’t been exercised be dealt with under the ‘previously agreed price’ method? And what if it was left to expire (see slide 44 of Pricing Session 1).
An option that had not been exercised, but whose price was agreed prior to the date of conversion would be an element where a price had been agreed but the goods, works or services not yet provided. Therefore, the option price would be maintained unless the parties agreed to reprice it.
If the option price had expired, such that there was no agreed option price at the date the contract became a QDC by amendment, that option price would need to be determined in accordance with one of the pricing methods. Critical to the application of this method is for the parties to identify the parts of the contract that have an agreed price at the date of conversion, and those that do not.
Novated contracts
Can the Novated contract pricing method result in a contract that is not a QDC become a QDC on amendment?
No, the novated contract method only applies to contracts that were QDCs prior to the novation. A non-qualifying contract that is novated will not become a QDC (see regulation 7(f)).
Competed rates applied to uncompleted volumes (CRUV)
To use the CRUV method, does there have to be a competitive framework with the MOD or with any other party? e.g. other Government departments
To use this method there will need to be a competitive framework in place that the MOD can utilise. The framework will need to have been let under a competitive process consistent with certain requirements set out in the regulations and described in our guidance. A cross-government framework agreement may be applicable provided the MOD could use it and it has been let in a manner consistent with the Regulations.
Agreed changes to the contract profit rate
If my contract was entered to before 1 April 2024 can I use the method to correct an error in the baseline profit rate or add an incentive adjustment?
Yes. Contracts priced prior to 1 April 2024 using the six-step profit formula can use this method.
Aggregation of components
Does applying a total Cost Risk Adjustment (CRA) create a new component, and does it need to be reported separately?
Yes. The regulations specify that where a part of the contract uses a different contract pricing method to the contract pricing method used in any other part of the contract, that part is a component. Applying a total CRA using the “aggregation of components method” to the underlying components that make up the contract price will therefore result in a new component being formed. The details of how this should be reported are explained in the current consultation.
Isn’t the maximum possible value (i.e. the headroom) of the total CRA and total incentive adjustment (IA) affected by the total price of all components?
Not necessarily. The maximum possible total CRA and IA are calculated by reference to the maximum possible amount of the component CRAs and IAs under the contract. Certain pricing methods (e.g. commercial pricing) do not allow any CRA or IA to apply at all and therefore these do not contribute to the overall headroom. Only those components that include a contract profit rate using the four-step process (or the previous six-step process) can contribute.
Profit On Cost Once (POCO)
Your guidance states: “Contracts with a POCO adjustment determined under the previous six step process are now subject to the new provisions to make an adjustment through allowable costs.”
Does this result in ‘double dipping’ on POCO for existing contracts i.e. Contractors being charged twice – once with the six steps and once through allowable costs?**
Session 2: Reporting Teach-In held on 12 March 2024
This session focused on:
- The new legislation
- The SSRO’s new and updated reporting guidance
- Changes to DefCARS
Additional costs of reporting in contracts
We priced a contract which included costs for reporting. These costs are going to now increase from 1 April 2024, can we re-price the contract?
This is a contractual matter between the MOD and the contractor. If the contract is priced based on actual allowable costs, then any additional reporting costs may simply form part of the ‘to go’ contract price subject to the parties being satisfied that those costs are AAR. For the remaining default pricing methods, while there is not a compulsion for the MOD to agree to amend the contract, if the price of the contract were being re-determined on amendment (for some reason) the contractor could seek to claim the reporting costs from part of the Allowable Costs under the re-determined price.
QDCs by amendment, the date of conversion (under the “previously agreed price” contract pricing method) and components
Can you please confirm whether the date of conversion [i.e. the date a contract became a QDC by amendment under section 14(4) or (5)] has any impact on reporting? If the date of conversion of a contract (and as part of that the price agreed) is pre-1 April 2024, do we need to retrospectively create two components?
Components will not be created by virtue of the pre-conversion and post-conversion parts of the contract if the date of conversion of the contract into a QDC was prior to 1 April 2024. The method of pricing a QDC by amendment under the previous Regulations involved redetermining the whole contract price, including the pre-conversion part from the non-QDC which was agreed to be subsumed into the QDC. This approach did not create any distinct parts of the contract price.
From 1 April 2024, the parties can agree that the price of the pre-conversion part of the non-QDC be retained and form part of the QDC by applying the “previously agreed price” alternative pricing method (regulation 19C) and this would be considered a component. This approach avoids having to reprice the whole contract on conversion and ensures the previously agreed parts of the price can be identified separately from the remaining parts in statutory reports.
Notification of components
Will you be able to guarantee that components will be added to DefCARS within 24 hours of us notifying you that such components have been created?
We will do our best to ensure there are no delays in setting up components in DefCARS. Our processes avoid having to seek MOD confirmation that components should be set up in relation to a contract and this which will speed up the process. Contractors can also help to avoid any delays by ensuring that basic component information is provided as set out in the SSRO’s updated reporting guidance.
If some reporting does not need to happen until early 2025, should I notify the SSRO about my components now or can it wait?
It would be sensible to notify us as soon as possible so that we can set up the component in the system. Contractors may wish to submit a baseline of price information in an On-demand component level Contract Pricing Statement and provide a component level Contract Reporting Plan, so that it is clear to them when further information is due.
Further legislative change in relation to components
Could there be legislative change to alleviate the volume of componentised reporting?
The new Regulations came into force on 1 April 2024 and there are further changes expected in October 2024. The MOD will decide what further changes they might make in October 2024 following a consultation with stakeholders.
The SSRO has a duty to keep the provision made by the legislation under review and, in doing so, aim to ensure VFM and fair prices. Any issues we observe that indicate the framework might benefit from further change, once the new legislation is being applied, may form part of any future recommendations to the Secretary of State for legislative change.
DefCARS
Will DefCARS be able to cope with a significant increase in reporting (and additional data load on the system)?
DefCARS has scope to handle additional data. Should anything change outside of our expectations we would look to adapt as necessary. We are not expecting an issue in the ability of DefCARS to handle additional data.
Meeting reporting requirements for components
Is there anything in the legislation which prevents me from providing component level information via an attachment rather than in the way DefCARS is asking for it?
The SSRO’s reporting guidance is statutory guidance that the contractor is required by the legislation to have regard to. The threshold for departing from the guidance is high and contractors should seek legal advice if they are considering that course of action.
The reporting of component level information using DefCARS allows for information to be collected in a standardised format. The benefits of providing the ability for contractors to report component level information in the same way as contract level information include:
- familiarity with the layout of the current reporting system, where component level information can easily be reported in a structured format and linked to the overall contract and where the current auto-population rules for subsequent component level information will continue to apply as present;
- the ability to set a reporting plan within the system for component level information, which will provide a timeline for when this information will need to be updated, both as the contract is delivered and when it has completed; and
- the ability to analyse component level information separately, improving the value of the data submitted on the system to the contractor and the MOD.
Does DefCARS automatically calculate the overall contract price by adding the prices of individual components?
No. The component information is standalone in the system. This is necessary because the reporting requirements can be different for individual components, depending on the type of component, its value, and its duration. Since the Regulations may require component level information to be reported at different times, it is not possible for an accurate contract price to always be determined simply based adding together individual component prices.
Why have you chosen the approach to treating components in DefCARS as if they were separate contracts for reporting?
In order to facilitate the reporting of component level information, the SSRO has identified that the most practical solution in the short term is to use the existing contract level reporting functionality in DefCARS.
The benefits of providing the ability for contractors to report component level information in the same way as contract level information include:
- familiarity with the layout of the current reporting system, where component level information can easily be reported in a structured format and linked to the overall contract and where the current auto-population rules for subsequent component level information will continue to apply as present;
- the ability to set a reporting plan within the system for component level information, which will provide a timeline for when this information will need to be updated, both as the contract is delivered and when it has completed; and
- the ability to analyse component level information separately, improving the value of the data submitted on the system to the contractor and the MOD.
BPR changes creating new components
Does an annual change in the baseline profit rate (BPR) create new components?
An annual change in the BPR does not, of itself, create new components since the contract profit rate(s) agreed when the contract is entered into apply for the term of the contract unless there is some intervening act (e.g. an amendment).
The Regulations identify that a component exists or is formed where a part of the contract has a different contract profit rate to the contract profit rate used in any other part of the contract.
A BPR change will only result in new components if –
- the parties agree to amend the contract in such a way that involves a new contract profit rate being applied to a distinct part of the contract; and
- the four steps are applied in such a way that results in the new contract profit rate differing from the contract profit rate on the unamended parts of the contract.
We also understand that some contractors have agreed that, upon amending a contract, rather than having a distinct profit rate for the unamended and amended components to apply a single blended rate to the allowable cost of all parts (in effect redetermining the entire contract price). If the regulated pricing methods are the same across those parts, then amending the price in this way would not be considered to create components.
First update reports
In which QCR do I report my first set of component level information, the one due at the end of April 2024 or the end of July 2024?
The transitional provisions (regulation 44) provide that the new QCR provisions do not apply to contracts entered into before 1 April 2024 until 1 April 2025 (and so the first QCR which contains component level information would be the one to be submitted by the end of July 2025, if applicable).
If a new contract is entered into on 1 April 2024, the first QCR submission would be due at the end of October 2024 (covering the period from 1 April to 30 September 2024).
Components specified in my contract
Does my contract need to specify the components that exist in order for them to be reported on?
No. Whether components of the contract price exist or not is determined by reference to the legislation, not the contract. Components do not need to be described in the contract to exist and, similarly, a contract that references there being “components” does not mean that these are necessarily components for the purposes of the legislation.
Reporting frequency
Do we need to go back to the MOD to agree the frequency for ICR submissions for existing contracts?
If the reporting dates have not been agreed between the parties, then the default dates set out in regulation 27 will apply. Reporting dates other than the default dates are to be agreed between the parties and the contractor should approach the MOD if they wish to request alternative reporting dates.
If I am required to provide component level information in an ICR every three or five years, where is the five-year point measured from? Is it the time of agreement to the component being set up?
The date that ICRs are required to be submitted is determined (or, where agreed between the parties, informed) by reference to either the time of agreement or the initial reporting date. These are terms which are defined in the Regulations, and both include the possibility that the reporting date will be determined by reference to date the contract was entered into.
It is important to note that the new provisions of the Regulations are not retrospective. Therefore, contractors are not required to now submit historic reports, for which reporting dates will have lapsed on 1 April 2024, which would not have been required but for the Regulations being amended. Contractors are only required to comply with the new reporting obligations as they apply from 1 April 2024.
If the reporting dates have not been agreed between the parties, then the default dates set out in regulation 27 will apply. Reporting dates other than the default dates are to be agreed between the parties and the contractor should approach the MOD if they wish to request alternative reporting dates.
Do we need to make report submissions for completed components within existing contracts?
Whether component level information is required to be reported for completed components in relation to contracts entered into prior to 1 April 2024 will depend on, for the most part, when the component completed.
Assuming the contract completion date has not occurred, and the component completion date occurred more than 12 months ago, then no component level information would be required. Similarly, where the component completion date occurred within the last 12 months but there will be less than 12 months between that date and the contract completion date, no component level information would be required. Otherwise, a contractor would still be required to submit component completion reports for each component within 12 months after the component completion date.
Component completion
What is the definition of the completion of a component? Can obligations be added to the component after the component completion date?
The component completion date is defined in regulation 4(1A) as the date on which the contractor completes all obligations under that component which entitle it to final payment in respect of that component; or if the component is terminated before that date, but any other part of the contract is not terminated, the date on which the component is terminated.
Once the entitlement to final payment under the component is triggered, the component will have completed under regulation 4(1A) and no further obligations can be added to that component.
Contract pricing methods and the meaning of costs which are distinguishable from profits
Could you clarify the meanings of distinguishable and indistinguishable costs? Does it relate to whether we are able to separate the component costs within our cost collection system?
Regulation 22(10)(aa) provides that references to a contract pricing method under which costs are indistinguishable from profits are references to the following contract pricing methods: 19A (Commercial Pricing), 19B(3) (Prices determined in accordance with law), 19C (Previously agreed price) and 19E (Competed rates applied to uncompleted volumes).
Whether costs are distinguishable from profit is determined by whether they can be separately identified. It is not determined by the separability of component costs within a cost collection system.
Reporting the contract profit rate
Do I still report a blended contract profit rate at the contract level if I have reported different contract profit rates for different components?
Yes. DefCARS will not calculate an overall contract profit rate based on component level profit rates and so the contractor will need to overwrite the contract profit rate value in DefCARS for all of the components that use the default pricing method.
Contract value assessment
Does the value assessment of the contract get revisited if a contract is amended and components are created/added at a later date?
No. Regulation 5(3) confirms when the contracting authority must determine the value of a contract. That value is not re-assessed during the contract term, even if new components are subsequently added.
Contract value assessment and qualifying status of a contract
If you have a contract that was assessed to be a QDC because the contracting authority had anticipated the consideration payable would be in excess of £5m, but it is subsequently considered that this threshold will never actually be reached, is there a way that the QDC status can be removed?
No. The Regulations do not provide a mechanism by which a QDC can be removed from the regime (unlike for a QSC). The contract will, therefore, remain a QDC.
QCRs for components
If the value of my contract is below £50m and so I am not required to submit QCRs, does the creation/addition of a component with a value over £50m mean that I now need to provide component level information on a quarterly basis?
No. Regulation 26(5) confirms that a QCR (which includes the component level QCR information) is not required for contracts with a value of less than £50m. Since the contract value does not increase simply because new components are added, the component level QCR information would not be required to be reported.
DefCARS (components)
When adding a component to DefCARS will the security requirements from the contract be copied over?
Users who have access to the contract information will not be automatically given access to the component information. Administration Users for the reporting organisation in DefCARS will need to add the users who they want to have access to the component information. This might be the same users who have access to the contract information but it does not necessarily need to be. All administration arrangements for the reporting organisation in DefCARS will apply to the component, as normally happens for a contract.
I have multiple components that I may be required to report on. Can the system accept an upload of information so that I don’t need to complete a submission for each?
Not currently. The SSRO’s DefCARS Future Technology Strategy explains that one of our priorities for the system is the development of data uploads, including upload templates. We undertook a pilot exercise in quarter three of 2023/24 to test an upload capability. We are working to analyse the results of the pilot with the contractors involved in the testing and will seek to develop this capability as part of a longer-term solution for better and more timely reporting. This will be undertaken once the MOD’s revisions to the legislation have concluded, and once we have a complete picture of future reporting requirements. We will consult on longer term solutions when the future reporting requirements are known.
Notification of components
Does materiality not factor into the reporting of components? There are thresholds of £50m for QCRs and £5m for QDCs, but no threshold for reporting components. Why would, for example, an immaterial £50k amendment to a QDC require separate reporting? Could we simply agree with the MOD not to report as a component and both parties agree to be non-compliant?
The Defence Reform Act 2014 (as amended by the Procurement Act) now provides for the determination of the price of a “component” of a contract. Section 15(6) defines a “component” as a part of the contract that is to be treated distinctly from other such parts in determining the price payable under the contract and the new regulations 9A describes when a component will exist, which does not include materiality thresholds. Ultimately it is a matter for the parties, applying their commercial judgement, to decide how their contract price is constructed. Pricing a contract as the sum of many immaterial distinct parts is something which seems challenging in of itself, and we expect that the parties would want to avoid such an approach. However, if the approach taken is one that, in accordance with the legislation, creates multiple components, the new Regulations require additional transparency about those components.
Session 3: Pricing Teach-In held on 10 April 2024
This session focused on the changes to existing features of pricing contracts, including:
- the cost risk adjustment; and
- POCO.
Agreement of components
Can a contractor and the MOD agree that something is not a component?
The circumstances in which a component is formed are set out in law. These circumstances are also set out in the introductory section of each piece of SSRO pricing guidance. If the parties agree to price their contract such that those circumstances apply, then components are formed and the parties cannot agree otherwise. The only way for the parties to agree that something is not a component is to agree to price their contract in such a way that the requirements for having formed a component are not met.
Componentisation
Does a pricing amendment force a component to be created?
An amendment which affects the price of a QDC or QSC is a “pricing amendment”. Not all amendments will be pricing amendments. A pricing amendment could result in the contract meeting one or more of the criteria set out in law for a component having been formed:
- uses a different pricing method from that used in any other part of the contract;
- has a different contract profit rate to that used in any other part of the contract; or
- has its price redetermined in accordance with specific circumstances laid out in the regulations which result in component being formed.
Where the parties agree to amend a contract in such a way that would affect the original contract price and as result any one or more of these three criteria are met, then components are formed.
It is possible to group what would currently be termed as multiple ‘amendments’ into a single component, so long as the relevant criteria apply to each of those grouped amendments. For example, a collection of amendments which apply the same CPR (but which is different to that used in the unamended part of the contract) could be treated as a single component.
Not all pricing amendments will result in a component being formed. For example, several amendments which all attract the same contract profit rate and pricing method as the unamended part of the contract.
The SSRO has stated that the requirements of componentisation are not retrospective, but where existing contracts have parts treated distinctly we are still required to report on these at component level from 1 April. How is this not retrospective?
The new requirements are prospective. Contracts entered into before 1 April are not required to be re-opened to comply with the new regulations and, similarly, contractors are not required to revise or re-submit historic reports.
However, some existing contracts are priced in a way that now means they consist of “components” as defined under the new regulations. Therefore, going forward, contractors with existing contracts must report on these components in accordance with the new regulations. But note that regulation 44 of the Single Source Contract (Amendment) Regulations 2024 contains transitional provisions such that in respect of existing contracts some of the new regulations have delayed or altered effect – see slides 18 & 19.
If we have multiple tasks priced as part of a QDC and some of them have different profit rates, are the tasks separate components?
The parts of the contract that have different profit rates will each be components. If several tasks share the same contract profit rate and pricing method, these will not be components unless the parties agree otherwise.
What if no element of my contract triggers the requirement to componentise but I or the MOD still feel this would be useful?
Creating components other than when the legislation requires it is a matter for the contractor to agree with the MOD. The contractor would need to consider if they wish to agree to treat one or more parts of the contract distinctly for the purpose of pricing, in the absence of any legal requirement to do so. In the absence of an agreement between the parties to price in this way, no new components would be formed.
The four profit rate steps
We have provisionally priced a contract that started before 1 April 2024, however the agreed contract price will be finalised when the contract is signed in June 2024. Does this mean we have to redo the work to price everything again? i.e. the cost audit, or does it still stand?
The Regulations do not allow for provisional pricing. The price prior to 1 April 2024 should have been determined using the regulations in force at the time. If it is to be redetermined on or after 1 April 2024 then the new regulations will apply. The extent of any repricing will depend on the circumstances of the contract and what it is proposed will be changed. If the changes are limited, for example a small change to a defined element of allowable costs, then it should not be necessary to reprice the entire contract.
Componentisation and blended profit rates
The SSRO has made reference to “blended profit rates” in its teach-in materials. It was understood that the SSRO did not consider ‘blended profit rates’ to follow the regulatory requirement. Is this view changing?
No. Prior to 1 April 2024, the price of a QDC was required to be determined only in accordance with the pricing formula and this applied to the entire contract. However, the SSRO observed a limited number of cases where this was not happening – for example, in relation to QDCs by amendment (for the part of a contract relating to the period before the contract came into the regime), or where the parties were agreeing to form the price from several components with different contract profit rates. This results in non-compliant prices, which the SSRO reports in accordance with its compliance methodology. In order for contractors to comply with their reporting obligations in these circumstances, they may have “blended” multiple profit rates across a contract to arrive at a single rate.
Given we are aware of this occurring in practice, we have drawn attention to the consequences for componentisation of using a blended CPR.
Rates agreed on a group basis
Is the option to agree rates on a group basis available for qualifying sub-contracts (QSCs)?
No, this provision of the legislation applies only to Qualifying Defence Contracts (QDCs) and not QSCs.
Cost risk adjustment (CRA)
Are we required to consider the type of activities performed in the contract or component when negotiating a CRA?
In agreeing the CRA at Step 2, the particular type of activities to be carried out under the contract or component are to be taken into account. However, for the vast majority of contracts, application of the BPR at Step 1 alone will fulfil this requirement. An activity-based adjustment should only be made where there is clear evidence that not making such an adjustment would result in an unfairly high or low rate of profit on the contract or component.
See paragraphs 4.16 – 4.18 of the SSRO’s Guidance on the baseline profit rate and its adjustment for further information.
Components and amendments
Would the parties need to agree taking a separate BPR against a differing contract scope being added as an amendment?
If a pricing amendment is being made which uses a default pricing method then a contract profit rate for the amended part of the contract would need to be determined using the four-step process. Step 1 involves taking the BPR in force at the “time of agreement” (in this case being the date the contract price is re-determined), which may be a different BPR to that for the unamended part.
Costs incurred when pursing enhanced performance for an incentive adjustment
What happens where parties have not had a ‘conversation’ regarding costs incurred in pursuing enhanced performance linked to a step 3 incentive adjustment? Should there be a referral to the SSRO?
The SSRO’s guidance on the baseline profit rate and its adjustment now states that the treatment of any costs incurred by the contractor associated with the activities or enhanced performance delivery should be agreed by the parties prior to an agreement to an incentive adjustment. It is a legal requirement to have regard to this guidance.
It would be up to the parties to decide whether to pursue a referral in respect of such cost, if those had not been discussed or agreed. The allowability of any costs should be fully discussed between the MOD and the contractor before any referral is made and the SSRO would likely wish to establish as part of its investigations the reason that the guidance had not been followed.
POCO
Will POCO have an impact on amendments to group sub-contracts?
The POCO adjustment affects the price of the QDCs, and does not impact the original or amended price of the group subcontracts.
However, the converse is not true, and a pricing amendment to a group subcontract could affect the POCO adjustment for the prime.
For example, if the QDC was priced on the basis of actual allowable costs, then an amendment to a group subcontract price that increased the amount of profit under that contract, may result in a higher POCO adjustment to the allowable costs of the QDC.
For an amendment which has been priced before 1 April which includes a POCO adjustment, but which has not yet been incorporated into the main contract, would the price need to be re-calculated to adjust the POCO adjustment to reflect the new costs associated with group profits adjustment?
The pricing of amendments entered into from 1 April 2024 must comply with the new regulations. Therefore, the contract profit rate for an amendment entered into on or after 1 April 2024 cannot have a POCO adjustment as part of the contract profit rate, which must instead be applied to the allowable costs of the amendment.
Transitional provisions
The new regulations apply prospectively to existing contracts in the same way that they apply to new contracts in their entirety, except that in a limited number of cases the new regulations have delayed or altered effect for existing contracts. These cases are listed in Regulation 44 of the Single Source Contract (Amendment) Regulations 2024 and referred to as the “transitional provisions”. The transitional provisions are:
Reporting
Contract Pricing Statement and Contract Reporting Plan:
For contracts entered into (or any amendment agreed) before 1 April 2024, the amendments made to regulation 23 (the Contract Pricing Statement) and regulation 24 (the Contract Reporting Plan) do not apply. Instead, contractors are required to report in accordance with the earlier regulations, meaning those reports need not cover the amendments relating to components or alternative pricing.
Quarterly Contract Report:
For contracts entered into before 1 April 2024, the amendments made to regulation 26 (the Quarterly Contract Report) do not apply until 1 April 2025. Until that time, contractors are instead required to report in accordance with the earlier regulations, meaning the report need not cover the amendments relating to components or alternative pricing.
Interim Contract Report:
For contracts entered into before 1 April 2024, the requirement to report cost recovery base information under regulation 27(4A)(e) and (g)(ii) within the Interim Contract Report does not apply.
Pricing amendments
Schedule to the Regulations:
For contracts in which the price had been determined under Part 3 of the Schedule to the previous Regulations (i.e. where there were multiple pricing amendments), from 1 April 2024 the price is instead to be treated as though it had been determined under Part 2 of the Schedule to the new Regulations (i.e. re-determining the price using a default pricing method).
Referrals
Matters in relation to which the SSRO must make a determination:
For contracts entered into (or any amendment agreed) before 1 April 2024, regulations 52(7) (pre-conditions to the Secretary of State seeking a determination on certain matters) and 52(8) (matters to which the SSRO must have regard in making a determination under Regulation 52) of the new Regulations, which broadly reflect amendments relating to componentisation, do not apply.
Session 4: Reporting Teach-In held on 8 May 2024
This session focused on:
- Responding to areas of interest raised at 12 March session
- Feedback from stakeholders
- Clarification of any aspects of the guidance
Final price adjustment and components
Is a final price adjustment applicable at the component or the contract level for a contract entered into before 1 April 2024?
Prior to 1 April 2024 the regulations required the final price adjustment to be calculated with reference to the contract profit, the contract profit rate, the loss level and the outturn costs related only to the relevant defined component or components of the contract.
The regulations now make explicit provision for the parties to agree to treat two or more components as aggregated for the purpose of calculating the final price adjustment. This means that the adjustment can be applied on a component by component basis, or at the overall level of the contract price that excludes any components that use a pricing method to which an FPA is not permitted. It is at the discretion of the parties which approach they take.
The FPA continues to only be applicable to components that use the firm, fixed or volume-based pricing method, and in the circumstances prescribed in the regulations.
Components under the previous regulations
I have a contract entered into under the regulations prior to 1 April 2024. What provisions existed under those regulations which enabled separately priced components of a contract?
Prior to 1 April 2024, the provisions to determine a contract price comprised of one or more components were:
- Different regulated pricing methods (now known as default pricing methods) to be used for defined components of the contract.
- An amendment of a regulated pricing method used for a defined component of a contract.
- An amendment to a defined element of allowable costs under the contract or a defined component of the contract.
- A change to a contractual requirement for a contract or defined component of the contract.
If a contract entered into prior to 1 April 2024 applied any of these provisions in determining the original or amended price of the contract, then it may (but not always) now meet the definition of having created components under the new legislation.
If a contract amendment took place before 1 April 2024 and a different contract profit rate to that of the original contract was used, would a separate component be created?
A separate component would exist because part of the contract is using a different contract profit rate to the CPR used in another part of the contract (regulation 9A(1)(b)).
ICR reporting
If I have identified components in my contract and have an ICR due on 31 May 2024 with a reporting date of 31 March 2024, when does my component level information become due?
Where a new reporting requirement (either submitting a new report or within a report that is otherwise required to be submitted) introduced under the new regulations is triggered by a date or event which occurs before 1 April 2024, that new reporting requirement does not apply, since the requirement to report will not be triggered.
Since the ‘trigger’ is the reporting date of 31 March 2024, at which time the requirement to report component level information was not in force, the need to report this information does not arise (regardless of the due or submission dates).
Meeting the regulatory reporting requirements
What happens if we report incorrectly?
Contractors are required to understand the Regulations which apply to their contracts. The SSRO can provide support to assist contractors to develop their understanding but it is the contracting parties who must meet their legal obligations and ensure that reports are submitted and correct.
The MOD has the power to undertake enforcement action for breaches of the reporting requirements. However, in order to allow time for familiarisation with the new Regulations, the MOD has confirmed that in respect of the reporting of component level information it does not intend to take enforcement action in respect of breaches which occur before April 2025.