SSRO determination on the extent to which sales and marketing costs in a qualifying defence contract are Allowable and the appropriate cost risk adjustment
The SSRO was asked by Rolls-Royce to determine two matters relating to the price of the Adour Availability Contract.
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The SSRO was referred a request for a determination on two matters by Rolls-Royce regarding its contract with the MOD for the availability of Adour engines, which power Hawk jet aircraft.
The contract was awarded on the condition that the SSRO’s verdict was sought on these two issues: the extent to which sales and marketing costs could be included and whether the level of cost adjustment for risk was appropriate.
Following a rigorous process that took into consideration the information provided by Rolls-Royce and the MOD to the SSRO for the purposes of the referral, including data received via written evidence from both the contractor and the MOD, face to face meetings and a site visit, the SSRO has arrived at a formal determination that has removed £1.27 million from the contract.
On the first of the issues, the SSRO determined that Rolls-Royce had not produced the necessary evidence to demonstrate a clear beneficial link between forecast sales and marketing costs being claimed and the contract in question. It is for the contractor to demonstrate that sales and marketing activity would convert to actual sales and that these would benefit the cost base of the contract.
On the second issue, the SSRO determined that the level of programme risk in the contract was insufficient to attract a positive adjustment to the baseline profit rate. The 12.5 per cent adjustment in the contract should therefore be removed and not increased to 25 per cent as proposed by Rolls-Royce.
The determination has been redacted for commercial sensitivity reasons.