Guidance

1. General queries

Updated 6 February 2024

1.1 Can contractors act on behalf of the MOD to award and manage Qualifying Defence Contracts (QDCs)?

Published April 2023

Yes they can.

The rights and obligations under the single source regime, including pricing controls and transparency through reporting, operate by reference to whether a contract is a qualifying contract. A Qualifying Defence Contract (QDC) is defined in section 14 of the Act, and includes a condition that the contract be “a contract under which the Secretary of State procures goods works or services for defence purposes…”.

The definition of a QDC enables entities, other than the MOD, to award and manage QDCs, since section 14(2)(a) does not expressly require that the Secretary of State be a direct party to a QDC, but rather the contract must be one under which the Secretary of State procures.

That entities other than the MOD can award QDCs is supported by section 43(1), which defines an “authorised person” as “a person authorised by the Secretary of State”. This is a term relied upon throughout Part 2 of the Act (the provisions relating to single source contracts) and, where used, enables those entities so authorised to act as the MOD’s agent in awarding and managing QDCs.

1.2 In what circumstances would an amendment to an existing contract result in that contract becoming a QDC?

Published July 2023

Section 14 of the Defence Reform Act 2014 describes two circumstances in which an existing contract will become a QDC on amendment:

• Where the contract was entered into before 18 December 2014, the award was not the result of a competitive process, and the contract is amended on or after 18 December 2014; and
• Where the contract, regardless of when it was entered into, was awarded as a result of a competitive process, the contract is amended on or after 18 December 2014, and the amendment is not the result of a competitive process.

In both cases:

• in amending the contract the Secretary of State and the contractor must agree that the contract is to be a QDC; and
• the remaining conditions set out in section 14(2)(a) - (c) must also be satisfied in relation to the contract.

In very limited circumstances, an amendment to a contract may create a new contract under common law. Broadly, a new contract will arise when the effect of the amendment is to rescind the existing contract. Paragraph 3.47 of our contract reporting guidance refers and parties are advised to take their own legal advice if they are unsure of the effect of amending a contract.

1.3 Do the Single Source Contract Regulations apply to overseas companies?

Published July 2023

Yes. There are no exclusions to the Single Source Contract Regulations 2014 which apply because a contract is awarded to an overseas contractor.

1.4 To what extent does a memorandum of understanding (MOU) between the UK government and another government affect the need for companies to comply with the transparency and other requirements set out in the Defence Reform Act and Single Source Contract Regulations?

Published July 2023

An MOU does not disapply UK domestic law. All contractors who are party to a QDC or QSC are subject to the requirements of the Defence Reform Act 2014 and the Single Source Contract Regulations 2014.

1.5 How does the SSRO handle confidential information and can it be requested under Freedom of Information?

Published July 2023

In the course of delivering its statutory functions, the SSRO receives confidential and commercially sensitive information. Schedule 5 of the Defence Reform Act 2014 and Part 10 of the Single Source Contract Regulations 2014 make unauthorised disclosures of certain such information a criminal offence. The SSRO has published a statement on its website about how it handles and safeguards confidential and commercially sensitive information.

Under the Freedom of Information Act 2000, the SSRO is obliged to publish certain information about its activities and external parties are entitled to request information held by the SSRO (FOI requests). The SSRO has published a document which provides guidance on the procedures that the SSRO will follow for dealing with FOI requests, including how we determine whether requested information is exempt from disclosure and how we engage with the contracting parties as part of determining the information to be disclosed when appropriate.

1.6 Is the SSRO involved in determining whether UK defence contracts should be single source?

Published July 2023

The SSRO does not have a role in determining whether defence contracts should be awarded through a competitive process or not. Decisions about the procurement strategy for individual defence contracts are made by the MOD.

1.7 Can an Intention to Proceed (ITP) arrangement constitute a valid QDC or QSC?

Published July 2023

An Intention to Proceed (ITP) communication or letter is not a term defined by the Defence Reform Act 2014 or the Single Source Contract Regulations 2014. The term is commonly used where a formal contract is under negotiation and work relating to the subject matter of the contract is to be carried out before that contract is entered into. Other terms used to describe such communications include “comfort letter” and “memorandum of understanding”, where work is generally carried out at risk.

ITPs that do not have effect as binding legal contracts will not constitute QDCs or QSCs under the Act and Regulations.

However, not all ITP arrangements are entirely at risk and a contract may arise in some cases, depending on the particular circumstances. This will be the case where the normal legal requirements of contract formation apply. As referred to in paragraph 3.13 of our contract reporting guidance, in order for a contract to be formed there must be an agreement which is reached by the process of offer and acceptance, an exchange of consideration (something of value); and an intention by the parties that the agreement be legally binding. Such ITP contracts may be QDCs or QSCs if the other requirements set out in sections 14 or 28 of the Act (as the case may be) are satisfied.

If an ITP arrangement is a contract and the ‘main’ contract is subsequently entered into, then a question may arise as to whether the ITP is subsumed into the main contract, or the main contract is treated as an amendment or extension to the ITP, or whether the two are entirely separate. If the contracts remain separate, the value of each may need to be determined by aggregation in accordance with Regulation 5. Paragraph 3.44 of our contract reporting guidance refers.

The parties are advised to take their own legal advice in circumstances where they are unsure of the effect of an ITP arrangement.

1.8 How should contract values be calculated where the contracting authority enters into more than one contract with the same organisation to fulfil a requirement for goods, works or services?

Published July 2023

Regulation 5 of the Single Source Contract Regulations 2014 describes how the value of a contract is to be calculated, and what must be included and excluded from the calculation.

Regulation 5(5) refers to a requirement in certain cases to aggregate the value of the proposed contract being assessed with the value of other contracts and proposed contracts. Where the contracting authority:

• proposes to enter into a contract for the purpose of fulfilling a requirement for goods, works or services; and
• has also entered into, or proposes to enter into, one of more other single source contracts with the same person (or associated persons) for the purpose of fulfilling that requirement, then the value of the proposed contract being assessed is the aggregate of the consideration which the contracting authority has paid or expects to be payable under (i) the proposed contract being assessed; and (ii) all of those other contracts or proposed contracts.

Some contracts must or may be disregarded for the purposes of aggregation and these are described in Regulation 5(6) - (8).

Paragraphs 3.44 – 3.46 of the SSRO’s contract reporting guidance cover how the value of a sub-contract is determined, and includes examples which illustrate how aggregation applies in that context.

1.9 What versions of SSRO issued statutory guidance should be used where a QDC/QSC is amended?

Published July 2023

When determining the price of a QDC or QSC, the parties must have regard to statutory guidance (on Allowable Costs and adjustments to the baseline profit rate) issued by the SSRO. The version that applies is the statutory guidance in force at the time of agreement, which will usually be the date the contract is entered into or, for a QDC by amendment, the date of that amendment.

If an amendment is made to an existing QDC or QSC in a way that affects the price, then a re-determination of the price will be required in accordance with Regulation 14 and the Schedule to the Single Source Contract Regulations 2014. In that event, the time of agreement becomes the date of the re-determination.

The statutory guidance in force at the relevant time will be the most up-to-date final version published by the SSRO on its website. Parties should ensure that they have used the correct versions of guidance, making sure they are aware of any ongoing or recent SSRO consultations on statutory guidance (also on the SSRO website), and the relevant publication dates for updated guidance.

1.10 What is the SSRO’s responsibility for the legislation?

Published October 2023

The legislation governing the single source regulatory framework consists of the Defence Reform Act 2014 and the Single Source Contract Regulations 2014. The SSRO’s role in relation to the legislation includes:

1. Assisting those subject to the regulatory framework in understanding and applying the legislation by issuing statutory guidance in relation to certain aspects of it;
2. Giving opinions and making determinations on specified matters relating to qualifying contracts or proposed qualifying contracts, which may clarify how the legislation is to be interpreted or applied; and
3. Keeping under review the provision made by the legislation and, as it considers appropriate, recommending changes to the legislation to the Secretary of State.

1.11 What is the role of the SSRO in negotiating contracts?

Published October 2023

The SSRO issues statutory guidance in relation to certain aspects of the regulatory framework, including that which the negotiating parties must have regard to when determining the price payable under a QDC or QSC. This guidance covers the agreement of allowable costs under the contract and contract profit.

The SSRO’s role does not extend to direct involvement in facilitating the agreement of the specific terms of individual QDCs or QSCs. However, where parties are unable to reach agreement, the SSRO may in some circumstances be asked to give an opinion or make a determination on matters related to the application of the legislation to the contract. Our website provides further information on referring a matter to the SSRO for an opinion or determination.

1.12 What changes have been made to the legislation since it was introduced in 2014?

Published October 2023

There have been three statutory instruments which have amended the original Single Source Contract Regulations 2014. They are:

1. The Single Source Contract (Amendment) Regulations 2018. These came into force on 1 August 2018 and the changes made are explained in the Explanatory Notes.
2. The Single Source Contract (Amendment) (No.2) Regulations 2018. Parts 1 & 2 came into force on 31 January 2019, and part 3 came into force on 1 April 2019 and the changes made are explained in the Explanatory Notes.
3. The Single Source Contract (Amendment) Regulations 2019. These came into force on 1 September 2019 and the changes made are explained in the Explanatory Notes.

A consolidated version of the Single Source Contract Regulations 2014 is available at: The Single Source Contract Regulations 2014 (legislation.gov.uk)

1.13 Does it impact whether a contract is a QDC if it is jointly funded by the contracting authority and the contractor?

Published October 2023

Whether a contract is a QDC is determined by reference to section 14 of the Defence Reform Act 2014. This includes consideration of (a) the identity of the parties; (b) what is being procured; and (c) the value.

If the contracting authority is procuring goods, works or services for defence purposes from a contractor, then conditions (a) and (b) would appear to be satisfied. The source of the funding is relevant in terms of determining whether condition (c) is met. Regulation 5 confirms that the value of a contract is the consideration (net of VAT) which the contracting authority expects will be payable under the contract.

If the contract is jointly or partly funded by the contractor, such that a portion of the contract cost is borne by the contractor (and therefore not part of the price “payable” under the contract), then this portion can be excluded from the value calculation. If that is the case, then only the consideration which the contracting authority expects to pay ought to be used to determine if the value of the contract is £5 million or above.

In order to give effect to a joint funding arrangement, there must be a facility for the contractor’s agreed ‘portion’ of the costs to fall outside of the definition of allowable costs, thereby not forming part of the contract price. Section 20 of the Act requires that all Allowable Costs must satisfy AAR, but it does not expressly provide that all costs which satisfy AAR are allowable costs. The conclusion to this construction would be that: Allowable Costs must be AAR, but not all costs which are AAR must be Allowable Costs. The MOD (and contractor) could therefore determine that the costs that the contractor has agreed to fund are not Allowable Costs, irrespective of whether they would satisfy the AAR test. Alternatively, the parties could determine that the costs for which a contractor has contractually agreed to be responsible do not satisfy the AAR test and therefore are not Allowable Costs. The parties should ensure that any joint funding agreement is appropriately reflected in the calculating of any actual or outturn cost. For example, if a final price adjustment is contemplated.

The contractor will need to consider the particular circumstances of the jointly funded contract when complying with reporting requirements.

1.14 If I have a QDC over £50 million but a large part of the price is a sub-contract which has been exempted from the regulatory framework does that mean that supplier reports are not required as its exclusion would mean that the thresholds for supplier reporting are not met?

Published October 2023

The exemption of the sub-contract in this case is not relevant. The requirement to submit supplier reports applies for a financial year in which the on-going contract condition is met. This requires that there are obligations outstanding for the supply of goods, works or services under any one of the contractor’s QDCs or QSCs that satisfies the value threshold at any time in the relevant financial year. This is triggered when a contractor or someone in the contractor’s group is party to at least one QDC or QSC with a value at or above the prescribed threshold, set at £50 million, at which stage the strategic level supplier reports (the Strategic Industry Capacity Report (SICR) and Small and Medium Enterprise (SME) report) for the group become due from the Designated Person.

If, once this £50m threshold has been met, the total value of what any business unit provides for any QDC or QSC in the relevant period is at least £10 million, the unit becomes a Qualifying Business Unit (QBU) and overhead supplier reports for that QBU become due. In this case, it does not matter that the majority of the costs within the QDC relate to an exempt sub-contract, as the £50 million value threshold has been exceeded for the QDC. Further information on supplier reporting and threshold requirements can be found in the SSRO’s reporting guidance on the preparation and submission of supplier reports.

1.15 What makes a single source contract a QDC and can a framework contract or contracts let under it be a QDC?

Published October 2023

A contract will be a QDC if it satisfies the criteria set out in section 14 of the Defence Reform Act 2014 (and supplemented by the Single Source Contract Regulations 2014). Such contracts could include framework contracts and contracts let under a framework contract.

Broadly, a contract will be a QDC if the following conditions are satisfied:

• It is a contract under which the Secretary of State procures goods, works or services for defence purposes;
• The value of the contract is at least £5m (or £500m if entered into prior to 31 March 2015);
• It is not an excluded contract, being one which:
  • is entered into with the government of another country;
  • is made within the framework of an international cooperative defence programme;
  • is made wholly for the purposes of the acquisition of land (and other rights or interests over that land), the management or maintenance of any land, buildings or structures;
  • would, by complying with parts 4-6 of the Regulations or section 26 of the DRA, require the contractor to disclose information which would create a risk to national security; or
  • is a novation of a non-qualifying defence contract.
• The contract was entered into:
  • On or after 18 December 2014, having not been subject to a competitive process, and the Secretary of State has not exempted the contract by giving a direction under section 14(7) of the Act;
  • Before 18 December 2014, having not been subject to a competitive process, and amended after that date and in amending the contract the parties agreed it would be a QDC; or
  • Before or after 18 December 2014, having been subject to a competitive process, and amended after that date other than by a competitive process, and in amending the contract the parties agreed it would be a QDC.