Ministry of Defence: Contracts

Ministry of Defence written question – answered on 8th November 2018.

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Photo of Derek Thomas Derek Thomas Conservative, St Ives

To ask the Secretary of State for Defence, what deductions from profit margins are permissible under MOD contracts; and what steps the Government is taking to ensure that there are no costs to the public purse from failed bids and other business related costs.

Photo of Stuart Andrew Stuart Andrew Assistant Whip, The Parliamentary Under-Secretary of State for Defence

Holding answer received on 07 November 2018

When placing contracts through a competitive procurement process the Ministry of Defence (MOD) relies on competitive pressures to restrict profit margins to market rates. Such market pressure is absent in non-competitive contracting where the MOD relies instead upon the protections offered by Part 2 of the Defence Reform Act 2014 (DRA) and the Single Source Contract Regulations 2014 (SSCR).

Under the DRA and SSCR the MOD can make deductions to the profit margin earned on a Qualifying Defence Contract or Qualifying Subcontract, where that profit margin exceeds levels set out in the legislation.

In both competitive and single source contracting, the MOD can negotiate with a contractor Key Performance Incentives and Liquidated Damage provisions. These will have the effect of reducing payments, and hence profit margins, when performance is not to the agreed level.

MOD policy is not to pay suppliers for the costs of their failed bids. In a non-competitive procurement the MOD may consider payment of bid costs if it is the MOD that stops the tender process, at no fault of the supplier.

The MOD will have regard to the Single Source Regulations Office 'Statutory Guidance on Allowable Costs', when considering what if any business-related costs it is appropriate for the Department to accept into contract prices.

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