Guidance

Q&As arising from Session 1: Pricing guidance Teach In 20 February 2024

Published 5 July 2024

This session focused on:

• The new features of pricing contracts, including what componentisation means
• The seven new alternative pricing methods

Transition (the 4 profit rate steps)

How will provisional prices provided pre-April 2024, but not finally agreed until after April 2024, be affected?

These is no explicit provision for “provisional pricing” in the legislation. All QDCs and QSCs entered into must be priced in accordance with the regulations that apply at the time.

We recognise that a contract may have a price agreed, on the expectation that it will be amended at a later date to reflect the resolution of matters outstanding at the initial time of pricing.

If a price is agreed under the pre-April 2024 regulations and is then amended post April 2024, the new price will need to comply with the new regulations (for example applying a contract profit rate for the amendment that has four steps rather than six).

Components

How does Regulation 14 and componentisation work together?

The Schedule to the Regulations allows the parties to redetermine the price of a component of the contract price. For example, they may wish to re-determine an element of the allowable costs or change the pricing method of part of the contract. The amended contract price will comprise the sum of the amended and unamended components, each potentially with its own contract profit rate and allowable costs. These provisions continue to apply in the new regulations in the same way as they have done to date.

I have a QDC entered into prior to 1 April 2024. How does the new legislation on components affect my contract?

Under the previous regulations the parties were able to agree a price containing parts that the legislation now define as components. 

“…..A part of the contract that is to be treated distinctly from other such parts in determining the price payable under the contract.”

A part of a contract is to be treated distinctly if:

- the regulations contain provision to that effect - the parties to the contract agree to it

Therefore, if the parties have agreed upon entering in a contract, or on amendment, to apply the regulations in a way that reflects the description above, it is now considered in law that the contract consists of components, and is subject to the associated reporting requirements for components.

Isn’t componentisation actually mandatory since long-term contracts have funding drops each year and are forced to use a different BPR, resulting in at least one component being generated each year?

Provision under the existing regulations that allows the parties to agree to amend only a component of (aka componentise) a contract for the purpose of redetermining a contract price continues based on the existing approach.

Contracts can also be amended in such a way that does not involve treating part of the contract distinctly from other parts for the purpose of determining the price, and so will not create new components. This might include, for example, the parties agreeing the same contract profit rate for the amended and unamended parts, or re-determining the entire contract price.  

Not all amendments are pricing amendments, in which case there is no provision to reprice the contract.

If there is an amendment post April 2024 that does not follow regulation 14, will componentisation apply?

An amendment that results in new components being formed or which affects existing components must be priced in accordance with regulation 9C and the Schedule to the Regulations (previously regulation 14). The only amendments which need not follow regulation 9C are those which do not affect the contract price.

Commercial pricing

How does the option to use commercial pricing where “the SofS is satisfied a supplier (who may or may not be the primary contactor) has supplied GWS to same or substantially same specifications to other parties in a competitive environment” work? Would it be legal to share data regarding sales by other suppliers?

We would envisage this may apply in a situation where the commercial prices of the GWS trade are known or can be ascertained by the contracting parties - for example, the prices offered by resellers competing in the market for technology products such as mobile phones. In these circumstances the prices offered by those resellers may form the basis of a commercial price for a QDC or QSC, subject to any appropriate adjustments. If the price data is not known, then it will not be possible to apply this approach.

Can this method be applied to determine a QDC price based on a previous single source contract with a foreign government? (i.e. the USA under FARS or DFARS)

The contractor would need to demonstrate the conditions are met to apply this method. Simply having supplied the goods to a foreign government on a single source basis, seems unlikely in of itself to be sufficient for those conditions to be met.

Is commercial pricing optional (i.e. mutually agreed), or mandatory where the conditions for commercial pricing are satisfied?

There is no explicit requirement to use any of the new alternative pricing methods, even where the conditions are met. However, the alternative pricing methods have been introduced to simplify pricing and address issues that have previously arisen with application of the price formula. Therefore, we would expect that when the option exists to use this alternative pricing method, there would be merit in the parties considering its application.

If prior to 1 April 2024 a price has been submitted and contract negotiations are on-going but no contract is in place when the regulations come into force, can the new pricing methods be utilised after 1 April 2024?

Yes, it would be possible where contract negotiations straddle the date at which the regulations come into force to use the new pricing methods – the relevant date is the date the contract is entered into. However, these methods can only be used in the circumstances prescribed in the regulations and whilst the parties may agree there would be benefit in modifying an extant pricing proposal to utilise a new pricing method, there is no compulsion in the regulations to do so. 

Contractors should be aware that pricing proposals submitted based on the six-step contract rate process would need to be revised to reflect the new four-step process if the contract is entered into after 1 April 2024. We expect the MOD and contractor will have anticipated the changes and constructed their bids accordingly.

Previously agreed price

Can you explain the following aspect of the ‘previously agreed price’ method in more detail?: “This pricing method does not apply where an amendment to a contract results in the creation of a new qualifying contract.”

The primary purpose of this pricing method is to allow an amendment to be made to an existing contract (a QDC by amendment) without needing those parts of the price that were agreed before the amendment to be redetermined.

If on the other hand an amendment has the effect of creating a new contract (under regulation 7A), then this method cannot be applied since the new contract will be distinct from those parts which were agreed prior to the amendment.

For a QDC by amendment: will the previously agreed part become a component?

Yes, because the application of this method involves the contract price being the sum of several components.

How would an Option Price that hadn’t been exercised be dealt with under the ‘previously agreed price’ method? And what if it was left to expire (see slide 44 of Pricing Session 1).

An option that had not been exercised, but whose price was agreed prior to the date of conversion would be an element where a price had been agreed but the goods, works or services not yet provided. Therefore, the option price would be maintained unless the parties agreed to reprice it.

If the option price had expired, such that there was no agreed option price at the date the contract became a QDC by amendment, that option price would need to be determined in accordance with one of the pricing methods. Critical to the application of this method is for the parties to identify the parts of the contract that have an agreed price at the date of conversion, and those that do not.

Novated contracts

Can the Novated contract pricing method result in a contract that is not a QDC become a QDC on amendment?

No, the novated contract method only applies to contracts that were QDCs prior to the novation. A non-qualifying contract that is novated will not become a QDC (see regulation 7(f)).

Competed rates applied to uncompleted volumes (CRUV)

To use the CRUV method, does there have to be a competitive framework with the MOD or with any other party? e.g. other Government departments

To use this method there will need to be a competitive framework in place that the MOD can utilise. The framework will need to have been let under a competitive process consistent with certain requirements set out in the regulations and described in our guidance. A cross-government framework agreement may be applicable provided the MOD could use it and it has been let in a manner consistent with the Regulations.

Agreed changes to the contract profit rate

If my contract was entered to before 1 April 2024 can I use the method to correct an error in the baseline profit rate or add an incentive adjustment?

Yes. Contracts priced prior to 1 April 2024 using the six-step profit formula can use this method.

Aggregation of components

Does applying a total Cost Risk Adjustment (CRA) create a new component, and does it need to be reported separately?

Yes. The regulations specify that where a part of the contract uses a different contract pricing method to the contract pricing method used in any other part of the contract, that part is a component.  Applying a total CRA using the “aggregation of components method” to the underlying components that make up the contract price will therefore result in a new component being formed. The details of how this should be reported are explained in the current consultation.

Isn’t the maximum possible value (i.e. the headroom) of the total CRA and total incentive adjustment (IA) affected by the total price of all components?

Not necessarily. The maximum possible total CRA and IA are calculated by reference to the maximum possible amount of the component CRAs and IAs under the contract. Certain pricing methods (e.g. commercial pricing) do not allow any CRA or IA to apply at all and therefore these do not contribute to the overall headroom. Only those components that include a contract profit rate using the four-step process (or the previous six-step process) can contribute.

Profit On Cost Once (POCO)

Your guidance states: “Contracts with a POCO adjustment determined under the previous six step process are now subject to the new provisions to make an adjustment through allowable costs.”

Does this result in ‘double dipping’ on POCO for existing contracts i.e. Contractors being charged twice – once with the six steps and once through allowable costs?**

The Regulations make no explicit carve out of the new POCO regulation for legacy contracts with a step 3 adjustment. However, the parties should be able to agree that where there is an existing step 3 adjustment, this addresses the issue of duplicated profit to the extent that no further adjustment to allowable costs is required. However, if the whole or part of the contract price is re-determined, any previous step 3 adjustment can no longer apply and may need to be replaced with an adjustment to allowable costs.