Guidance

2. QSC assessment and notification queries

Updated 6 February 2024

2.1 How do I assess whether a sub-contract is a Qualifying Sub-Contract (QSC)?

Published April 2023

Where a primary contractor to a QDC or sub-contractor to a Qualifying Sub-Contract (QSC) proposes to enter into a sub-contract (or further sub-contract) and that proposed sub-contract involves the provision of anything for the purposes of the QDC or QSC (as the case may be), regulation 61 of the Single Source Contract Regulations 2014 requires that primary contractor or sub-contractor to assess whether the proposed sub-contract would be a QSC if it were entered into (a “QSC Assessment”). The definition of a QSC is contained in section 28 of the Defence Reform Act 2014, and supplemented by the requirements of regulation 58. This includes that the sub-contract has an assessed minimum value of £25 million. The value must be determined in accordance with regulation 5.

Chapter 3 of our contract reporting guidance includes guidance in the context of QSC reporting and notification requirements which may further assist.

Link to QSC notification templates

2.2 What information is a primary contractor required to obtain for a new QSC?

Published July 2023

In relation to each sub-contract or intended sub-contact that the primary contractor has or intends to enter into, including QSCs, the primary contractor is required to report certain information in the Contract Notification Report (Regulation 25), Quarterly Contract Report (Regulation 26), Interim Contract Report (Regulation 27) and Contract Completion Report (Regulation 28). The required information is set out in the respective Regulations and is explained in Table 19 of our contract reporting guidance. Once a QSC has been entered into, the qualifying sub-contractor will then be subject to their own reporting requirements.

When assessing whether a proposed sub-contract would be a QSC, Regulation 61 requires that the contracting authority (being the party who would be liable to pay the contract price under a QSC) must keep a record of the assessment, give written notice to the MOD and the sub-contractor if it considers the sub-contract would be a QSC, and in all cases give written notice that an assessment has been made to the MOD and the SSRO. The SSRO has produced assessment notification templates and guidance on submitting the notification, which can be found on the SSRO’s website.

2.3 What is the primary contractor’s responsibility if the sub-contractor in a QSC fails to comply with the Regulations?

Published July 2023

The Defence Reform Act 2014 and Single Source Contract Regulations 2014 do not impose sanctions on a contracting authority for a qualifying sub-contractor’s failure to comply with their obligations under the Act and Regulations.

However, sections 31 and 32 of the Act enables the Secretary of State to issue compliance and penalty notices to a contracting authority in circumstances where:

• it fails to make an assessment of whether a proposed sub-contract would be a QSC under Regulation 61;
• it makes a negative assessment and the Secretary of State believes that the assessment is incorrect; or
• it fails to notify the Secretary of State and the proposed qualifying sub-contractor of a positive assessment.

2.4 Who undertakes the value assessment of a sub-contract and is a primary contractor of a proposed QDC required to make a formal assessment of whether a proposed sub-contract would be a QSC even if the QDC has not yet been entered into?

Published July 2023

Regulation 5(1) of the Single Source Contract Regulations 2014 requires the contracting authority to determine the value of a contract. For first-tier QSCs, the relevant contracting authority will be the primary contractor.

In accordance with section 29(3) of the Act and Regulation 61(4), where a contractor is proposing to enter into a QDC, the fact that they haven’t yet done so does not remove the obligation under Regulation 61 for them to assess whether a proposed sub-contract, if entered into, would be a QSC. This will be the case where the proposed sub-contract involves the provision by the proposed sub-contractor of anything for the purposes of the proposed QDC.

Paragraphs 3.36 to 3.46 of the SSRO’s contract reporting guidance cover how the value of a QSC is determined and the reporting of QSC assessments.

2.5 Can an amended single source contract be a QSC?

Published February 2024

In order for a sub-contract to be a QSC, in broad terms, it requires:

• the prime contractor to have undertaken a QSC assessment (in accordance with regulation 61 of the Single Source Contract Regulations 2014);
• for that assessment to be a positive one al pr(i.e. for the prime to have assessed that the sub-contract satisfies the requirements of section 28 of the Defence Reform Act 2014, as supplemented by regulation 58); and
• for the prime to have complied with notification requirements in section 29(2)(b) or (4)(b) (as the case may be).

The QSC assessment, which includes a determination by the prime contractor of the value of the sub-contract calculated in accordance with regulation 5, is undertaken only when it is proposed to enter into the sub-contract. If the sub-contract does not satisfy the requirements of section 28 or regulation 58 (because, for example, the value is below the £25m threshold), then the QSC assessment would be negative and the sub-contract will not be a QSC. Regulation 61 only calls for a QSC assessment to be undertaken at the time when it is proposed to enter into the sub-contract and therefore not after the sub-contract has been entered into (including where subsequent amendments are made).

The only exception to this would be where, in very limited circumstances, an amendment to a sub-contract creates a new contract. A new contract can arise under common law when the effect of the amendment is to rescind the existing contract – either by express agreement between the parties, or by implication. If the effect of the proposed amendment would be to rescind the existing sub-contract and create a new sub-contract, this would call for a new QSC assessment under Regulation 61 and give rise to the potential for a positive QSC assessment and, therefore, a QSC. Paragraph 3.47 of our contract reporting guidance provides further information, but contractors should seek their own legal advice if they are unsure of whether a proposed amendment will result in a new contract.