Defence suppliers to earn more for on-time delivery

The Ministry of Defence has announced reforms to Single Source Contract Regulations that will link the profit rates defence companies can earn to whether they deliver equipment on time and on budget, with incentive payments rising significantly for strong performers and profit floors falling for those on lower-risk contracts who fail to meet targets, the UK Defence Journal understands.

The changes, laid before Parliament on 14 May, introduce four substantive reforms to the framework governing contracts placed with single suppliers, a common arrangement in defence where competition is not always possible. Maximum incentive payments will rise from 2% to 10% of costs for suppliers who hit agreed performance targets. Profit floors on lower-risk contracts will be reduced, while higher-risk contracts will be able to attract stronger returns to encourage suppliers to take on the kind of risk-bearing work the government has identified as a priority.

A new Innovation Uplift will reward smaller businesses and new market entrants who invest their own funds in developing new products without a guaranteed government contract. The threshold at which contracts fall under the regulations will also rise from £5 million to £25 million, removing the mandatory reporting burden from nearly all small and medium-sized enterprises while keeping 97% of single-source contracting value within the model.

Minister for Defence Procurement and Industry Luke Pollard framed the reforms as a direct response to the state of the procurement programme inherited by the current government. “To deliver the warfighting readiness our country requires, we need procurement that delivers on time and on budget. We inherited a programme where 96% of our major defence projects had issues with delivery or cost. That is not acceptable. That’s why suppliers who deliver better outcomes and take on appropriate risk will be rewarded, but those who do not, will make less profit. That is how we make sure we get more equipment to the front line faster.”

National Armaments Director Rupert Pearce said the changes gave the department improved tools for managing supplier performance. “The NAD Group is committed to driving greater performance across the defence enterprise. These changes give us better tools to reward innovation, incentivise delivery, and ensure that public money is spent where it generates real value. We will work closely with industry and the Single Source Regulations Office to implement them effectively.”

The reforms, say the Government, deliver on commitments made in both the Strategic Defence Review and the Defence Industrial Strategy, both of which identified procurement performance as a critical area requiring improvement alongside the government’s commitment to increase defence spending.

Single Source Contract Regulations govern a significant portion of UK defence spending, covering contracts placed without competitive tender. The framework was last substantially reformed in 2014, and the scale of cost and schedule overruns across the MoD’s major programme portfolio has made the case for further change increasingly difficult to ignore. A statutory instrument covering the incentive payment changes is being laid immediately, with a further instrument covering the remaining reforms to follow before the summer recess. Consultation with industry on the changes will take place in the coming weeks.