Defence Spending Watchdog Challenges £61m Of Non-Allowable Costs

15 July 2016

The Single Source Regulations Office (SSRO) has examined a number of ‘single source’ contracts. In one instance the regulator found a defence contractor had charged the MOD £32,500 for a ‘charitable donation’.

In other cases a company charged £34,000 for ‘staff welfare’, that included a Christmas party and another billed £10,000 for ‘entertaining costs’.

Other non-allowable costs include charging to remedy faulty workmanship and bills for hotels and exhibitions.

Clive Tucker, the SSRO’s chairman, said: ‘For too long single source defence procurement went without effective scrutiny, and this is precisely the sort of inappropriate expenditure that the Defence Reform Act was enacted to kill off.’

The total value of single source contracts amounted to more than £11bn in 2015/16. Approximately £8.3bn was spent by the MOD on such contracts in 2014/15, which by their nature are non-competitive. Single source procurement in defence represented 53% of the value of new MOD contracts placed in 2014/15.

The SSRO’s interim compliance statement, which has just been published, found that contractors’ conformity to the regulations has been ‘poor’.

Using a traffic light system of red, amber, green to assess reporting by contractors, the SSRO found that six out of eight indicators flashed up ‘red’. One indicator reports that only 9% of MOD contractors’ reports provided the required information.

The quality of information submitted remains a ‘serious concern’ with ‘incomplete calculations, facts and information’.

The report said: ‘This does not always reconcile to other supporting information received. In many cases contractors fail to provide the required information on metrics, outputs and defined pricing structure.’ The SSRO said this mean it is often unable to determine if an item is legitimate.

The MOD also faced criticism for failing to notify the regulator of new contracts within the correct time frame.  In addition, the regulator said that to date it has been notified of only 34 single source contracts to oversee, which is considerably less than it had expected.

When the MOD does provide information on a contract this appears at odds with that supplied by the contractor. The report noted: ‘In 13 cases there has been a disparity between the contract price notified by the contractors and the information provided by the MOD. The budget implications for the difference in contract values equates to £379m.’

In its first ‘determination’ published in May 2016 the SSRO recovered £1.3m from Rolls Royce’s Hawk jet contract over marketing costs and an ‘overstatement of risk of future cost variation’.

In addition, the SSRO is consulting on introducing multiple profit rates on single source contracts, saying that the margin on some contracts could be reduced by almost two-thirds.

On one exclusive single source agreement the SSRO discovered it could save the taxpayer £8.4m if a 4% ‘construction’ profit rate was used on a building deal awarded an 11% margin.

Companies who now enter exclusive single source contracts with the Ministry of Defence receive a fixed profit rate of 8.95%. No discretion is made between those who build highly complex weapon systems or those who clean barracks.

Tucker said: ‘It is the SSRO’s view that having a number of baseline profit rates for different activities would better reflect risk and reward.

‘A contract to build a missile or submarine does not compare to one to clean an office or construct a facility. Some contracts carry little risk and we argue should not be rewarded with high profit margins.’

The consultation closes on 18 August. Details of the review of single source baseline profit and capital servicing rates methodology and adjustment guidance 2016 are here.

The SSRO’s interim compliance statement is here.


Source :