What is the SSRO and why does it matter to you?

16 November 2016

 

The new Single Source Contract Regulations (SSCR) (or ‘the orange book’) went live in April 2015 for all single source contracts valued over £5m. There are currently estimated to be around 34 Qualifying Defence Contracts (QDCs) at a value of £11bn across 17 different suppliers. So what actually is it?

The Single Source Regulations Office (SSRO) was established in May 2014 by the Defence Reform Act, it is an Executive non-Departmental Public Body or, more informally, a ‘quango’. The purpose of this independent body was to ensure a ‘fair and reasonable price’ and ‘good value for money’ on single source (non-competitive) contracts, which make up around 56% UK defence contracts let each year.

There are three big problems that arise through single source procurement. The first of these is the absence of competition, which means that suppliers can set prices knowing that they won’t be undercut. Secondly, due to the specialist nature of the services, most suppliers are likely to win follow-on work and therefore are under little pressure to demonstrate continuous improvement. Finally, with only one supplier, and often only one customer, there is poor commercial leverage on both sides and a high stakes game of chicken can ensue.

The SSRO has therefore has three key areas to focus on: pricing rules, transparency rules and the role of the SSRO as an adjudicator.

New pricing rules aim to tackle the runaway costs arising from a non-competitive environment, by setting a baseline profit rate of 8.95% for each QDC. The new transparency rules support this drive for value by ensuring that all costs recoverable by the supplier are allowable, attributable and reasonable. Scrutiny of what constitutes allowable and reasonable costs should also encourage suppliers to push continuous improvement.

The role of the SSRO as an adjudicator is an interesting one. The MoD or a supplier can refer a QDC to the SSRO for a ‘determination’. The SSRO then have the power to change the price of the contract to its value if all of the regulation had been applied correctly, including applying the correct base profit rate or reassigning costs as allowable (or not!). The SSRO's guidance on which costs are allowable is not binding, but any deviation needs to be fully justified and auditable.

In order to maintain oversight of the contracts, there are also strict reporting guidelines for both the MoD and suppliers to follow when submitting to the SSRO. Failure to comply with the SSRO requirements can result in a penalty of up to £1m.

In our next two blogs we will be looking at the impact the new pricing and transparency rules are likely to have on both the MoD and their suppliers, along with the new reporting requirements that will be challenging them both.

 

Lorna Wilkinson | Operations Consulting
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