(3) This subsection applies to a contract if—

(a) the contract is entered into on or after the relevant date, and

(b) the award of the contract is not the result of a competitive process.

(4) This subsection applies to a contract if—

(a) 5the contract was entered into before the relevant date,

(b) the award of the contract was not the result of a competitive process,

(c) the contract is amended on or after that date, and

(d) in amending the contract, the Secretary of State and the primary
contractor agree that it is to be a qualifying defence contract.

(5) 10This subsection applies to a contract, whether entered into before or after the
relevant date, if—

(a) the award of the contract is the result of a competitive process,

(b) the contract is amended on or after the relevant date,

(c) the amendment is not the result of a competitive process, and

(d) 15in amending the contract, the Secretary of State and the primary
contractor agree that it is to be a qualifying defence contract.

(6) Single source contract regulations must make provision for determining
whether the award, or amendment, of a contract is the result of a competitive
process.

(7) 20The Secretary of State may direct that a particular contract to which subsection
(3) applies is not a qualifying defence contract even though the contract
otherwise meets the requirements of subsection (2).

(8) In this section, “defence purposes” has the meaning given by the regulations.

(9) In this Part—

(a) 25“relevant date” means the date on which the first single source contract
regulations come into force;

(b) references to “single source contract regulations” are to be read in
accordance with subsection (1);

(c) references to a “primary contractor” are to be read in accordance with
30subsection (2)(a).

Pricing of contracts

15 Pricing of contracts

(1) Single source contract regulations must make provision about determining the
price payable under a qualifying defence contract to the primary contractor.

(2) 35The regulations must provide for the price payable under the contract to be
determined in accordance with the formula in subsection (4).

(3) The regulations must provide that where the Secretary of State and the primary
contractor propose to amend the contract in a way that would affect the price
determined by virtue of subsection (2) or this subsection—

(a) 40the price payable under the amended contract must be re-determined
in accordance with the formula in subsection (4), or

(b) the price payable in respect of the amendment must be determined in
accordance with that formula.

(4) The formula is—

• where—

  (a)

  “CPR” is the contract profit rate for the contract (see section 17),
  5and

  (b)

  “AC” means the primary contractor’s allowable costs under the
  contract (see section 20).

(5) The regulations may provide for a determination by virtue of subsection (2)
or (3) to be made at such times as may be specified in the regulations (and
10different times may be specified for different kinds of contract).

16 Pricing of contracts: supplementary

(1) Single source contract regulations may specify circumstances in which, if the
Secretary of State and the primary contractor so agree—

(a) the price determined in accordance with section 15 is to be taken as a
15target price, and

(b) the total price payable under the contract is subject to adjustment by
reference to any difference between—

(i) the amount of the primary contractor’s actual allowable costs
under the contract, and

(ii) 20the amount of the estimated allowable costs used for the
purpose of determining the target price.

(2) The amount of any adjustment by virtue of subsection (1)(b) must be
determined—

(a) by agreement between the Secretary of State, or an authorised person,
25and the primary contractor, or

(b) by the SSRO, where the matter is referred to it by the Secretary of State,
an authorised person or the primary contractor.

(3) Section 21 (final price adjustment) does not apply to a contract in a case where
an agreement of a kind mentioned in subsection (1) has effect.

17 30Contract profit rate

(1) Single source contract regulations must make provision for determining the
contract profit rate for a qualifying defence contract.

(2) The regulations must provide for the determination to be made by taking the
following sequence of steps, subject to section 18(2)—

35Step 1

Take the baseline profit rate (see section 19) which is in force at the relevant
time.

“The relevant time” means—

• in a case within section 15(2)—

  Defence Reform BillPage 12

  (i)

  when the contract is entered into, if the contract is a qualifying
  defence contract by virtue of section 14(3), or

  (ii)

  when the contract is amended, if the contract is a qualifying
  defence contract by virtue of section 14(4) or (5);

• 5in a case within section 15(3), when the contract is amended.

Step 2

Adjust that rate by an agreed amount, being an amount falling within specified
parameters above or below the baseline profit rate, so as to reflect the risk of
the primary contractor’s actual allowable costs under the contract differing
10from its estimated allowable costs.

“Specified” means specified in the regulations.

Step 3

Deduct an agreed amount from the amount resulting from step 2, so as to
ensure that profit arises only once in relation to those allowable costs under the
15contract in respect of which the regulations provide that a deduction may be
made (and see section 20 as to allowable costs).

Step 4

Deduct the SSRO funding adjustment (see section 19) which is in force at the
time mentioned in step 1 from the amount resulting from step 3.

20Step 5

Where the Secretary of State determines that the amount resulting from step 4
should be increased so as to give the primary contractor a particular financial
incentive as regards the performance of provisions of the contract specified by
the Secretary of State, increase that amount by an amount specified by the
25Secretary of State.

Any increase must not exceed the maximum increase permitted by the
regulations.

Step 6

Take the amount resulting from step 5 and add to or subtract from it an agreed
30amount, so as to ensure that the primary contractor receives an appropriate
and reasonable return on the fixed and working capital employed by the
primary contractor for the purposes of enabling the primary contractor to
perform the contract.

This adjustment—

• 35is to be made having regard to the capital servicing rates determined
  under section 19, but

• does not apply to the extent that the costs of the fixed and working
  capital employed by the primary contractor are allowable costs under
  the contract.

40This adjustment—

• is to be made having regard to the capital servicing rates determined
  under section 19, but

• does not apply to the extent that the costs of the fixed and working
  capital employed by the primary contractor are allowable costs under
  45the contract.

(3) The contract profit rate is—

(a) the amount found at the end of step 6 in subsection (2), or

(b) in a case where step 6 is disapplied under section 18(2)(a), the amount
found at the end of the last of the steps in subsection (2) that apply in
50that case.

(4) For the purposes of subsection (2)—

(a) “agreed” means agreed by the Secretary of State, or an authorised
person, and the primary contractor;

(b) the adjustment agreed under step 2, 3 or 6 may be zero.

18 Contract profit rate: supplementary

(1) 5The Secretary of State or an authorised person, and the primary contractor,
must have regard to guidance issued by the SSRO in relation to any of the steps
set out in section 17(2).

(2) Single source contract regulations may—

(a) disapply the requirement to take any or all of steps 2 to 6 in section 17(2)
10in relation to a qualifying defence contract the value of which is less
than the amount specified for the purposes of this paragraph;

(b) provide for any or all of those steps to apply in relation to such a
contract with modifications set out in the regulations;

(c) where the Secretary of State is a party to a group of qualifying defence
15contracts with the same primary contractor, provide for section 17(2) to
apply in relation to those contracts—

(i) taken together or individually, and

(ii) with such modifications as may be set out in the regulations.

(3) Single source contract regulations may provide that the SSRO—

(a) 20may, on an application by a person within subsection (4), determine
whether the amount of an adjustment agreed under step 2, 3 or 6 in
section 17(2) is appropriate;

(b) may, in consequence of a determination by virtue of paragraph (a) that
the amount of such an adjustment is not appropriate, determine that
25the price payable under the contract is to be adjusted by an amount
specified by the SSRO.

(4) The following persons are within this subsection—

(a) the Secretary of State,

(b) an authorised person, and

(c) 30the primary contractor.

19 Rates etc relevant to determining contract profit rate

(1) The Secretary of State must, for each financial year, determine—

• the baseline profit rate,

• the SSRO funding adjustment,

• 35the capital servicing rate for fixed capital, and

• the capital servicing rate for working capital.

(2) For the purpose of assisting the Secretary of State in determining for a financial
year each of the rates mentioned in subsection (1) and the SSRO funding
adjustment, the SSRO must provide the Secretary of State with its assessment
40of what is the appropriate rate or funding adjustment for that year.

(3) The SSRO—

(a) must provide its assessment to the Secretary of State no later than 31
January in the preceding financial year, and

(b) must, in preparing its assessment, have regard to such matters as may
be specified in guidance issued by the Secretary of State (as well as
other matters that appear to the SSRO to be relevant).

(4) The Secretary of State must publish each of the rates mentioned in subsection
5(1) for a financial year, and the SSRO funding adjustment for that year, in the
London Gazette no later than 15 March in the preceding financial year.

(5) Subsection (6) applies if, in the case of a particular rate or the SSRO funding
adjustment, there is a difference between the rate or funding adjustment
determined under subsection (1) and the SSRO’s assessment of the appropriate
10rate or funding adjustment for the financial year in question.

(6) The Secretary of State must, when publishing the relevant rate or the funding
adjustment, also publish reasons for the difference.

20 Allowable costs

(1) The SSRO must issue guidance about determining whether costs are allowable
15costs under qualifying defence contracts.

(2) In determining whether a particular cost is an allowable cost under a
qualifying defence contract, the Secretary of State or an authorised person, and
the primary contractor, must be satisfied that the cost is—

(a) appropriate,

(b) 20attributable to the contract, and

(c) reasonable in the circumstances.

(3) In determining whether the requirements set out in subsection (2)(a) to (c) are
met in relation to a particular cost, the Secretary of State or an authorised
person, and the primary contractor, must have regard to guidance issued
25under subsection (1).

(4) The Secretary of State or an authorised person may at any time require a
primary contractor to show (whether by reference to guidance issued under
subsection (1) or otherwise) that the requirements set out in subsection (2)(a) to
(c) are met in relation to a particular cost claimed by the primary contractor as
30an allowable cost under a qualifying defence contract.

(5) The SSRO may determine the extent to which a particular cost is an allowable
cost under a qualifying defence contract where the Secretary of State, an
authorised person or the primary contractor applies to the SSRO for such a
determination.

(6) 35The SSRO may determine that the price payable under the contract is to be
adjusted by an amount specified by the SSRO in consequence of a
determination under subsection (5), having regard to the extent to which the
cost in question was treated as an allowable cost when the price payable under
the contract was determined (or last determined) in accordance with section 15.

21 40Final price adjustment

(1) Single source contract regulations may provide for adjustments to be made to
the total price payable by the Secretary of State under a qualifying defence
contract.

(2) The regulations must specify the procedure to be followed in determining the
amount of any adjustment.

(3) Provision made under subsection (2) must include provision for the amount of
any adjustment to be determined—

(a) 5by agreement between the Secretary of State, or an authorised person,
and the primary contractor, or

(b) by the SSRO, where the matter is referred to it by the Secretary of State,
an authorised person or the primary contractor.

(4) Provision under this section may be expressed so as to apply—

(a) 10to particular kinds of qualifying defence contracts;

(b) to qualifying defence contracts the value of which is of or above the
amount specified for the purposes of this paragraph.

(5) The Secretary of State may direct that provision under this section does not
apply in relation to a qualifying defence contract the value of which is—

(a) 15of or above the amount specified for the purposes of subsection (4)(b),
but

(b) less than the amount specified for the purposes of this paragraph in the
regulations.

(6) The regulations may specify matters to which the Secretary of State must have
20regard in deciding whether to make a direction under subsection (5).

22 Recovery of unpaid amounts

(1) This section applies where—

(a) the SSRO determines by virtue of section 18(3)(b), 20(6) or 21(3)(b) that
the price payable under a qualifying defence contract is to be adjusted,
25and

(b) as a result of the adjustment—

(i) the Secretary of State is required to pay an amount to the
primary contractor, or

(ii) the primary contractor is required to repay an amount to the
30Secretary of State.

(2) If all or part of the amount mentioned in subsection (1)(b)(i) or (ii) is not paid
or repaid before the payment date, the unpaid balance carries interest from that
date at the rate for the time being specified in section 17 of the Judgments Act
1838.

(3) 35The “payment date” is the date determined by the SSRO, in making the
determination in question, as the date by which the amount must be paid or
repaid.

(4) The person to whom the amount is required to be paid or repaid (“the
creditor”) may recover from the other person as a debt due to the creditor the
40unpaid balance and any unpaid interest.

Transparency

23 Records

(1) Single source contract regulations must contain provision requiring a person
(“P”) to keep relevant records.

(2) 5“Relevant records” means accounting and other records (whether in hard or
electronic form)—

(a) which P may reasonably be expected to keep, and

(b) which are sufficiently up-to-date and accurate for use by the Secretary
of State or an authorised person for any of the purposes listed in
10subsection (3).

(3) Those purposes are—

(a) auditing reports provided by P under section 24 or 25;

(b) where P is a primary contractor, verifying—

(i) whether a cost of P is an allowable cost,

(ii) 15the reason for any difference between an estimated and actual
allowable cost of P, or

(iii) any other matter relating to the price payable to P under a
qualifying defence contract;

(c) where P is a primary contractor, monitoring P’s performance of the
20obligations to which it is subject under a qualifying defence contract;

(d) where P is a primary contractor, determining whether a contract
between P and another person is a qualifying sub-contract.

(4) The regulations may provide for the requirement to keep relevant records—

(a) to begin at a time specified by or determined in accordance with the
25regulations (which may be before a qualifying defence contract is
entered into), and

(b) to end at a time so specified or determined.

(5) The regulations may provide—

(a) for the Secretary of State or an authorised person to be entitled to
30examine relevant records where reasonably required for a purpose
listed in subsection (3);

(b) for the Secretary of State or an authorised person to require P to make
copies available (in hard or electronic form) for the purpose of enabling
relevant records to be examined;

(c) 35for any entitlement to examine relevant records to be exercisable
subject to provision in the regulations—

(i) about the times at which relevant records may be examined,
and

(ii) about notice to be given before they may be examined;

(d) 40for P to be required to comply with any reasonable request by the
Secretary of State or an authorised person for further information or
explanation relating to relevant records (whether after examination of
the records by virtue of paragraph (a) or otherwise).

(6) The SSRO may, on an application by P, review the way in which the Secretary
45of State or an authorised person has acted in exercising any function by virtue
of subsection (5).

(7) If, on a review under subsection (6), the SSRO considers that the Secretary of
State or an authorised person has acted unreasonably in exercising the
function, the SSRO may make a declaration to that effect.

24 Reports on qualifying defence contracts

(1) 5Single source contract regulations must require a primary contractor to
provide reports relating to qualifying defence contracts to which the primary
contractor is a party—

(a) to the Secretary of State or an authorised person, and

(b) to the SSRO.

(2) 10The regulations—

(a) must specify the matters to be covered in reports;

(b) must make provision about when reports are to be provided (which
may include provision for the Secretary of State or authorised person
and the primary contractor to agree when particular reports are to be
15provided);

(c) may make provision about the form of reports (which may or may not
be electronic);

(d) may require a primary contractor to have regard to guidance issued by
the SSRO in preparing reports.

(3) 20The regulations may provide for a requirement to provide a specified kind of
report to apply, in the case of contracts of a specified kind, only at the request
of the Secretary of State or an authorised person.

“Specified” means specified in the regulations.

“Specified” means specified in the regulations.

(4) 25The provision under this section that may, by virtue of section 42(2), be made
by the regulations includes different provision—

(a) in relation to contracts of different values;

(b) in relation to different kinds of contract;

(c) about the matters to be covered in reports provided at different times.

(5) 30Provision under this section does not apply in cases specified in the
regulations.

25 Reports on overheads and forward planning etc

(1) Single source contract regulations must require a designated person, for a
financial year in relation to which the ongoing contract condition is met, to
35provide the reports mentioned in subsection (2)—

(a) to the Secretary of State or an authorised person, and

(b) to the SSRO.

(2) The reports referred to in subsection (1) are—

(a) reports relating to the overhead costs and forward planning of—

(i) 40a person (“P”) who is a party to one or more qualifying defence
contracts, and

(ii) any person with whom P is associated, where that person
provides anything for the purposes of any qualifying defence
contract to which P is a party, and

(b) 45other reports of a specified description.

(3) In this section, “designated person” means—

(a) where P is associated with one or more other persons, the ultimate
parent undertaking in relation to P and those other persons, and

(b) otherwise, P.

(4) 5A requirement imposed by virtue of subsection (1) does not apply unless—

(a) in a case where P is associated with other persons, P or any of those
other persons is a party to at least one qualifying defence contract the
value of which is of or above the amount specified in the regulations, or

(b) in a case where P is not associated with other persons, P is a party to at
10least one qualifying defence contract the value of which is of or above
that amount.

(5) The “ongoing contract condition” is met in relation to a financial year if, at any
time in that year, obligations relating to the supply of goods, works or services
under one or more of the qualifying defence contracts referred to in subsection
15(4)(a) or (b) (as the case may be) are outstanding.

(6) The regulations—

(a) must specify the matters to be covered in reports;

(b) must make provision about when reports are to be provided (which
may include provision for the Secretary of State or authorised person
20and the designated person to agree when particular reports are to be
provided);

(c) may make provision about the form of reports (which may or may not
be electronic);

(d) may require designated persons to have regard to guidance issued by
25the SSRO in preparing the reports.

(7) The requirement to provide a report does not apply in cases specified in the
regulations.

(8) The Secretary of State may direct that a particular contract is not to be taken
into account in determining whether the ongoing contract condition is met in
30relation to a financial year.

(9) An undertaking is the “ultimate parent undertaking” for the purposes of
subsection (3) in relation to two or more persons who are associated with each
other, or in relation to itself and one or more persons who are associated with
it, if the undertaking—

(a) 35is a parent undertaking of those other persons, and

(b) is not a subsidiary undertaking in relation to another undertaking.

“Parent undertaking” and “subsidiary undertaking” have the meanings given
by section 1162 of the Companies Act 2006.

26 Duty to report relevant events, circumstances and information

(1) 40A primary contractor must notify the Secretary of State on becoming aware
of—

(a) the occurrence, or likely occurrence, of an event that is likely to have a
material effect in relation to a qualifying defence contract to which the
primary contractor is a party,

(b) 45circumstances that are likely to have a material effect in relation to such
a contract, or

(c) information that is likely to be materially relevant to such a contract.

(2) For the purposes of this section—

(a) an event has a material effect in relation to a contract if it has a material
effect in relation to any of the matters mentioned in subsection (3),

(b) circumstances have a material effect in relation to a contract if they have
5a material effect in relation to any of those matters, and

(c) information is materially relevant to a contract if it is materially
relevant to any of those matters.

(3) The matters referred to in subsection (2) are—

(a) the costs of the primary contractor under the contract,

(b) 10the total price payable to the primary contractor under the contract, and

(c) the primary contractor’s ability to perform a material obligation of the
contract.

27 Records and reports: restrictions

(1) Single source contract regulations may disapply a requirement imposed by
15virtue of section 23(5), 24, 25 or 26 to the extent that compliance with the
requirement would require a person (“P”) to contravene a relevant restriction.

(2) A “relevant restriction” is—

(a) a prohibition or restriction imposed by an enactment, or

(b) an obligation of confidentiality owed by P to another person, unless
20that other person—

(i) is associated with P, or

(ii) gives consent to P’s complying with the requirement in
question.

(3) The regulations may provide, in relation to a case where the Secretary of State
25or an authorised person reasonably suspects that an obligation of
confidentiality has been entered into otherwise than for genuine commercial
reasons—

(a) for the SSRO to investigate the matter on a reference by the Secretary of
State or authorised person, and

(b) 30for a requirement mentioned in subsection (1) to continue to apply
(despite provision under that subsection) where the SSRO finds that the
obligation was entered into otherwise than for genuine commercial
reasons.

(4) An obligation of confidentiality entered into wholly or partly for the purpose
35of avoiding any requirement imposed by virtue of section 23(5), 24, 25 or 26 is
to be treated for the purposes of provision under subsection (3) as entered into
otherwise than for genuine commercial reasons.

Sub-contracts

28 Qualifying sub-contracts

(1) 40Single source contract regulations may make provision in relation to qualifying
sub-contracts.

(2) For the purposes of this Part—

(a) “qualifying sub-contract” means a contract to which subsection (3) or
(4) applies;