Supply Side
The Single Source Regulations Office – Looking at Non-Competitive Military Procurement

The UK’s Ministry of Defence (MOD) Single Source Regulations Office (SSRO) addresses those UK military procurement situations where there is only one supplier. That means no competitive process is possible, so alternative ways of settling on “fair prices” have to be developed and implemented.  It covers many of the major defence equipment areas; there aren’t too many firms that can build (or maintain) nuclear submarines, for instance.

The SSRO was set up in 2014 and has recently issued a half-year “interim compliance statement”. The statement about the report is here and the full report is available here.  The statement covers the work to date of the SSRO, and makes for very interesting reading given the scale of the challenge.

“Approximately £8.3 billion 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 per cent of the value of new MOD contracts placed in 2014/15”.

That fits the historical situation, where around half the value of MOD contracts appears to be single-source. So the scale of this is considerable and we suspect this is similar for defence procurement in most major countries. That makes the overall thrust of the SSRO report somewhat worrying.

“Overall compliance is currently poor. Six of the eight compliance indicators have red status, one amber, and one green, reflecting significant issues which continue to be reported”.

The indicators cover aspects such as effective reporting of information, use of the correct, agreed profit margin, and firms claiming only “allowable costs”. But all is not well with the current situation.

“The quality of information submitted remains a “serious concern” with “incomplete calculations, facts and information. One indicator reports that only 9 per cent of MOD contractors’ reports provided the required information”.

But that is not just a supply side issue. The information provided by the MOD is not good either in many cases.  “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 £379 million”.

The aspect of the report that has caused the most comment is around the costs that the contractors have claimed; basically, the contracts work on a “cost plus” basis so the MOD pays all the appropriate costs that the supplier submits. It is easy to see why the press got excited about some of the report’s comments!

In one instance the SSRO 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”. The suppliers then get their profit margin (generally 10.6%) on top of these amounts. Other ‘non-allowable’ costs, such as charging to remedy faulty workmanship and bills for hotels and exhibitions have all been met by the taxpayer.

What does this tell us about single source? Well, any procurement professional will say that a truly competitive market is much preferable to a monopoly, and the way contractors appear to be trying to exploit their position would seem to confirm this.

We might also wonder why some of these points were not picked up earlier – why don’t the MOD contract managers challenge those providers before it gets to the SSRO? Whilst it is a long time since there was any evidence of outright corruption in MOD procurement, there may be an issue around the “revolving doors” between the MOD and contractors. Many MOD people, both uniformed officers and civilians, end their careers in the private sector provider community. Before that, they are involved in the commercial process, including the contract management phase and activity. Might they be a bit too gentle with contractors, knowing that they might get offered a lucrative role when they want to leave the public sector?

There are also serious questions to be asked about the ethics of some suppliers – how can you possibly think charging the taxpayer for your charitable donation or Christmas Party is acceptable? Let us hope the existence of the SSRO makes suppliers look harder at their own practices.

The SSRO is clearly saving considerable sums of money, and we will watch their progress with interest. Any public sector organisation that is involved with contracts of this mature should also be aware of the issues that the SSRO is uncovering – how many other suppliers are taking advantage of non-competitive stations, cost-plus contracts and the like, we wonder, in how many European countries?