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July 1, 2022

Reform of the UK’s Single Source Contract Regulations

The Ministry of Defense (MoD) first issued SSCRs in 2014 to address problems occurring with non-competitive defense procurement.

By GlobalData

The UK’s well developed indigenous defense industry affords the MoD a variety of channels through which it can explore various procurement opportunities. The Defense and Security Industrial Strategy (DSIS), published in 2021, sets out Britain’s ambitions to no longer use ‘global competition by default’ when acquiring military equipment, instead reviving the use of the domestic defense industry as a strategic capability in its own right.  The National Security and Investment Act (NSIA), social value requirements, and reforms to the Single Source Contract Regulations (SSCRs), are methods of note being implemented by the government to achieve the targets of the DSIS. SSCRs regulate the procurement of goods by the MoD when contracts are placed without competition.

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The Ministry of Defense (MoD) first issued SSCRs in 2014 to address problems occurring with non-competitive defense procurement. Up to December 2021, the regulations have encompassed £62.1 billion of contracts. The reforms are aimed at improving the fair price principles of the regulations that ensure value for money for the taxpayer is achieved, whilst keeping the UK defense market as an attractive investment location. SSCRs are supposed to provide a fair price of a contract by calculating/estimating the associates costs that could be attributed to the program and adding a profit margin to this. However, the original iterations of the legislation have thrown up certain issues, especially regarding dual use technology, over payments on some contracts, and complaints over the speed of the process.

The process of reforming the SSCRs is currently underway, with an industry consultation of proposed changes having been undertaken in May 2022. The changes will be focused around three areas of improved: choice and flexibility, speed and simplicity, and stimulating innovation and exploiting technology. The proposed reforms will aim to increase the simplicity of the SSCRs and increase their speed of implementation. Beyond this, they are being restructured to enable the MoD to meet its wider objectives, including fostering innovation and the exploitation of technology.

Another key part of the DSIS was the focus on social value and the contributions required: 10% of tender-evaluation weighting must measure social-value objectives. However, sometimes pursuit of meeting social value requirements can incur costs to suppliers that cannot be attributed to specific contracts. The proposed changes will allow appropriate costs in this area, so as not to disincentivize contractors. Not only will this be financially beneficial for suppliers, but it should also help the MoD progress towards meeting its broader goals in terms of encouraging innovation and enhancing the social value of defense spending.

The current method of calculating the price for single-source contracts has led to problems for less traditional procurement programs. These issues have been notable for items such as software licenses, of which the MoD are procuring an increasing number. Here the cost of production may be relatively low, however there would be a requirement for recouping of ongoing costs through the unit price; the current regulations do not account for this and so a proposed change would see the calculations refer to market prices, rather than solely relying on the pricing formula. This change will be integral to the success of the MoD in its attempt to grow its activities in the cyber domain if it is to create and maintain positive industry relations in this area. Often the products acquired are dual use, increasing the competitive edge needed by the MoD when dealing with companies used to operating in the civilian domain. The reference to market prices will have added value for dual use technologies, where MoD business may only be a small part of the supplier’s business, with supplier-set tariffs existing across both commercial and defense operations.

Once implemented, the reforms will be beneficial to both the MoD and to its suppliers. SSCR reforms have been written to remove legislative stumbling blocks that exist to all stakeholders. There has been a close level of cooperation between industry and government throughout the process, which should result in a greater level of success.

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