SSRO will put pressure on Defence Suppliers to create ‘value for money’, but what does this mean for them?

05 December 2016



The SSRO interim compliance statement published in July 2016 indicated that suppliers on qualifying defence contracts (QDCs) were only 43% compliant with the new regulation. This alone is a clear indicator of the challenges faced by suppliers in tackling the new requirements being placed on them.

New reporting requirements are a major cause of pain for Suppliers, with only 9% meeting the reporting requirements at the publication of the July interim statement. It seems that very few Defence contractors can provide a complete audit trail and justification of their costs, which may indicate a need for improved training, assurance or even improved IT solutions within the business.

The new profit rate rules are also causing problems, with over half of the QDCs submitted to the SSRO using the wrong profit rate, or missing a justification for why they had deviated from the SSRO’s six step calculation. It is unclear at this stage what the reasons for this might be, but it is clear that some support and guidance is needed around submitting a compliant profit rate.

The squeeze on profitability also creates a need for suppliers to identify opportunities for growth or efficiencies within their own business. The SSRO rules incentivise suppliers taking on increased risk directly through improved profit rates, which would require suppliers to have an in-depth understanding of the risks and opportunities emerging in their business.

New rules on allowable costs also drive the need for efficiencies, with the SSRO reviewing £61m of questionable costs at the publication of the July interim statement. Disallowed costs now include faulty workmanship which may cause many suppliers to review their Quality Management. Sales and marketing costs are also under fire, as many suppliers would find it hard to directly attribute these to a particular contract, highlighting the need for improved cost allocation capability.

The final hurdle for suppliers is their increased accountability for their supply chain. Disallowable costs occurring due to faulty workmanship or late delivery by their supply chain will now hit the profit margins of the primary suppliers on the QDC, rather than adding to the bill for the MoD. Suppliers will need to get a grip on their supply chain quickly in order to mitigate this risk.

Suppliers are in need of both short-term tactical solutions to help them cope with SSRO compliance issues, but they will also need to consider their longer term SSRO strategy in order to maximise their potential under the new regulation.

However, the SSRO is a mediator between two parties and in our next blog we discuss how the changes in regulation will also put pressure on the MoD.

Lorna Wilkinson | Operations Consulting

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