MoD: We've got a handle on contract costs. Audit Office: About that...

Complex system leaves big suppliers pushing back hard, Brit watchdog finds

Old and new: The cost of non-competitive MoD equipment is under the microscope

Ministry of Defence plans to cut costs on “non-competitive procurement” look nice but won’t work unless the cash-strapped ministry keeps a close eye on its contracts, the public sector spending watchdog said today.

The UK National Audit Office’s latest report into the MoD’s financial situation, snappily titled “Improving value for money in non-competitive procurement of defence equipment”, reveals that in financial year 2016-17 about 45 per cent of MoD contracts awarded that year were non-competitive, meaning the department awarded them directly to suppliers.

The NAO report focused on non-competitively awarded military equipment contracts, of which the MoD has a total of 1,891, discounting contracts let through the Cabinet Office, cross-departmental contracts and others.

“Of the 1,891 non-competitive equipment contracts that were shown as ‘live’ on 21 August 2017, 914 had contract end dates before 31 August, suggesting there was still work to do,” said the NAO. “Without accurate data, the Department may struggle to identify contracts due for renewal or amendment that may fall within the scope of the Regulations.”

The regulations in question are the Since Source Contract Regulations, government regs introduced in 2014 to put the MoD’s directly awarded procurement efforts on a statutory footing. Any contract worth more than £5m and awarded directly without a competitive element is subject to the regs, with their stated aim being to increase transparency and ultimately cut defence costs.

While part of the aim is that MoD suppliers should be paid a fair and reasonable price, “some of the Department’s largest contracts were set up before the Regulations in the form of framework contracts, with individual procurements or packages of support work then being contracted for as required,” said the NAO. “These arrangements were negotiated on the basis that they would deliver significant savings compared with more traditional contracts... [but] presents considerable challenges if the benefits of the approach are to be retained.”

Moreover, crafty suppliers, conscious that the aim of this game is to trim their profit margins down, this in itself creates more cost headaches. In one case of items that have to be reworked due to shoddy workmanship, although the contractor has to bear the cost of the work, the NAO found that “the supplier is now setting up a system to record the causes of re-work, but validating these claims will create extra work for the Department.”

“Some contractors have resisted complying with the UK’s Regulations,” noted the auditor, “partly because they already comply with the United States’ Federal Acquisition Regulations.” These, explained the NAO, “are more permissive than the UK’s in areas such as sales and marketing, and research and development.” This resistance comes on the grounds that clawing back costs “ignores the government’s broader ‘prosperity agenda’,” in the NAO’s words.

As everyone knows, defence contracts infamously involve eye-watering sums of money being flung around, often with limited oversight from the MoD. The watchdog pointed out that within the MoD, just five people have the in-depth expert knowledge to advise colleagues on implementing the regulations, while the department has “no requirement for staff to attend training on the regulations before implementing them.” With that being the case, it looks likely that public money will continue being blatted off down the ranges. ®

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