SSRO determination on the extent to which a contractor’s particular unanticipated costs are allowable costs under a firm-priced qualifying defence contract
The SSRO is empowered by the Defence Reform Act 2014 to determine how the regulatory framework for non-competed defence contracts should be applied in certain cases. In March 2023, the SSRO was asked by a defence contractor to determine the extent to which specific costs it had incurred in relation to the COVID-19 pandemic could be included in the price of a firm-priced contract with the Secretary of State for Defence.
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In September 2023, the SSRO made a determination on a matter referred to it by a defence contractor. This determination was made using a power given to the SSRO by the Defence Reform Act 2014. The referral concerned the extent to which specific staff and storage costs incurred by the contractor in relation to the COVID-19 pandemic were allowable costs to be included in the price of a firm-priced contract with the Secretary of State for Defence. The costs had not been included in the original estimate of costs used in pricing the referred contract.
The SSRO’s determination was made by a Referral Committee, appointed by the SSRO’s Chair, which took account of evidence presented by the parties to the contract, the requirements of the regulatory framework and the SSRO’s statutory guidance on the requirements of allowable costs.
The determination makes clear that, under the regulatory framework, the allowable costs to be included in the price of a firm-priced contract are those which are estimated at the time of agreement unless a provision of the contract or a pricing amendment permits otherwise. In this case, the SSRO determined that only a small amount of the referred storage costs were allowable under the referred contract as they were included in the price by an agreed pricing amendment. As there were no contract provisions or pricing amendments related to the remainder of the referred costs, the SSRO determined that they were incurred at the contractor’s own risk and were not allowable under the referred contract.
The SSRO has published details of its determination in this case to support wider learning about the application of the regulatory framework for single source defence contracts. In particular, the SSRO’s referral investigation has highlighted the need for the parties to qualifying defence contracts to:
- have regard to the SSRO’s allowable costs and profit rate guidance when determining how risk and uncertainty is to be reflected in the pricing of those contracts;
- ensure that staff who are agreeing amendments to qualifying contracts are familiar with the regulatory requirements for re-determining the price of a qualifying contract when making contract pricing amendments; and
- familiarise themselves with the regulatory provisions which explain the procedure for determining any final price adjustment that may be applied to a qualifying contract.
Further information on the outcome of previous referrals and on the SSRO’s referrals processes can be found on our website. Any party considering a referral to the SSRO can discuss this with us informally by contacting our Referrals team (020 3771 4785 or referrals@ssro.gov.uk).