Guidance

Q&As arising from Session 2: Reporting Teach-In held on 12 March 2024

Published 5 July 2024

This session focused on:

• The new legislation
• The SSRO’s new and updated reporting guidance
• Changes to DefCARS

Additional costs of reporting in contracts

We priced a contract which included costs for reporting. These costs are going to now increase from 1 April 2024, can we re-price the contract?

This is a contractual matter between the MOD and the contractor. If the contract is priced based on actual allowable costs, then any additional reporting costs may simply form part of the ‘to go’ contract price subject to the parties being satisfied that those costs are AAR. For the remaining default pricing methods, while there is not a compulsion for the MOD to agree to amend the contract, if the price of the contract were being re-determined on amendment (for some reason) the contractor could seek to claim the reporting costs from part of the Allowable Costs under the re-determined price.

QDCs by amendment, the date of conversion (under the “previously agreed price” contract pricing method) and components

Can you please confirm whether the date of conversion [i.e. the date a contract became a QDC by amendment under section 14(4) or (5)] has any impact on reporting? If the date of conversion of a contract (and as part of that the price agreed) is pre-1 April 2024, do we need to retrospectively create two components?

Components will not be created by virtue of the pre-conversion and post-conversion parts of the contract if the date of conversion of the contract into a QDC was prior to 1 April 2024. The method of pricing a QDC by amendment under the previous Regulations involved redetermining the whole contract price, including the pre-conversion part from the non-QDC which was agreed to be subsumed into the QDC. This approach did not create any distinct parts of the contract price.

From 1 April 2024, the parties can agree that the price of the pre-conversion part of the non-QDC be retained and form part of the QDC by applying the “previously agreed price” alternative pricing method (regulation 19C) and this would be considered a component. This approach avoids having to reprice the whole contract on conversion and ensures the previously agreed parts of the price can be identified separately from the remaining parts in statutory reports.

Notification of components

Will you be able to guarantee that components will be added to DefCARS within 24 hours of us notifying you that such components have been created?

We will do our best to ensure there are no delays in setting up components in DefCARS. Our processes avoid having to seek MOD confirmation that components should be set up in relation to a contract and this which will speed up the process. Contractors can also help to avoid any delays by ensuring that basic component information is provided as set out in the SSRO’s updated reporting guidance.

If some reporting does not need to happen until early 2025, should I notify the SSRO about my components now or can it wait?

It would be sensible to notify us as soon as possible so that we can set up the component in the system. Contractors may wish to submit a baseline of price information in an On-demand component level Contract Pricing Statement and provide a component level Contract Reporting Plan, so that it is clear to them when further information is due.

Further legislative change in relation to components

Could there be legislative change to alleviate the volume of componentised reporting?

The new Regulations came into force on 1 April 2024 and there are further changes expected in October 2024. The MOD will decide what further changes they might make in October 2024 following a consultation with stakeholders.  

The SSRO has a duty to keep the provision made by the legislation under review and, in doing so, aim to ensure VFM and fair prices. Any issues we observe that indicate the framework might benefit from further change, once the new legislation is being applied, may form part of any future recommendations to the Secretary of State for legislative change.

DefCARS

Will DefCARS be able to cope with a significant increase in reporting (and additional data load on the system)?

DefCARS has scope to handle additional data. Should anything change outside of our expectations we would look to adapt as necessary. We are not expecting an issue in the ability of DefCARS to handle additional data.

Meeting reporting requirements for components

Is there anything in the legislation which prevents me from providing component level information via an attachment rather than in the way DefCARS is asking for it?

The SSRO’s reporting guidance is statutory guidance that the contractor is required by the legislation to have regard to. The threshold for departing from the guidance is high and contractors should seek legal advice if they are considering that course of action.

The reporting of component level information using DefCARS allows for information to be collected in a standardised format. The benefits of providing the ability for contractors to report component level information in the same way as contract level information include:

• familiarity with the layout of the current reporting system, where component level information can easily be reported in a structured format and linked to the overall contract and where the current auto-population rules for subsequent component level information will continue to apply as present;
• the ability to set a reporting plan within the system for component level information, which will provide a timeline for when this information will need to be updated, both as the contract is delivered and when it has completed; and
• the ability to analyse component level information separately, improving the value of the data submitted on the system to the contractor and the MOD.

Does DefCARS automatically calculate the overall contract price by adding the prices of individual components?

No. The component information is standalone in the system. This is necessary because the reporting requirements can be different for individual components, depending on the type of component, its value, and its duration. Since the Regulations may require component level information to be reported at different times, it is not possible for an accurate contract price to always be determined simply based adding together individual component prices.

Why have you chosen the approach to treating components in DefCARS as if they were separate contracts for reporting?

In order to facilitate the reporting of component level information, the SSRO has identified that the most practical solution in the short term is to use the existing contract level reporting functionality in DefCARS.

The benefits of providing the ability for contractors to report component level information in the same way as contract level information include:

• familiarity with the layout of the current reporting system, where component level information can easily be reported in a structured format and linked to the overall contract and where the current auto-population rules for subsequent component level information will continue to apply as present;
• the ability to set a reporting plan within the system for component level information, which will provide a timeline for when this information will need to be updated, both as the contract is delivered and when it has completed; and
• the ability to analyse component level information separately, improving the value of the data submitted on the system to the contractor and the MOD.

BPR changes creating new components

Does an annual change in the baseline profit rate (BPR) create new components?

An annual change in the BPR does not, of itself, create new components since the contract profit rate(s) agreed when the contract is entered into apply for the term of the contract unless there is some intervening act (e.g. an amendment).

The Regulations identify that a component exists or is formed where a part of the contract has a different contract profit rate to the contract profit rate used in any other part of the contract. 

A BPR change will only result in new components if – 

• the parties agree to amend the contract in such a way that involves a new contract profit rate being applied to a distinct part of the contract; and
• the four steps are applied in such a way that results in the new contract profit rate differing from the contract profit rate on the unamended parts of the contract.

We also understand that some contractors have agreed that, upon amending a contract, rather than having a distinct profit rate for the unamended and amended components to apply a single blended rate to the allowable cost of all parts (in effect redetermining the entire contract price). If the regulated pricing methods are the same across those parts, then amending the price in this way would not be considered to create components.

First update reports

In which QCR do I report my first set of component level information, the one due at the end of April 2024 or the end of July 2024?

The transitional provisions (regulation 44) provide that the new QCR provisions do not apply to contracts entered into before 1 April 2024 until 1 April 2025 (and so the first QCR which contains component level information would be the one to be submitted by the end of July 2025, if applicable).

If a new contract is entered into on 1 April 2024, the first QCR submission would be due at the end of October 2024 (covering the period from 1 April to 30 September 2024).

Components specified in my contract

Does my contract need to specify the components that exist in order for them to be reported on?

No. Whether components of the contract price exist or not is determined by reference to the legislation, not the contract. Components do not need to be described in the contract to exist and, similarly, a contract that references there being “components” does not mean that these are necessarily components for the purposes of the legislation.

Reporting frequency

Do we need to go back to the MOD to agree the frequency for ICR submissions for existing contracts?

If the reporting dates have not been agreed between the parties, then the default dates set out in regulation 27 will apply. Reporting dates other than the default dates are to be agreed between the parties and the contractor should approach the MOD if they wish to request alternative reporting dates.

If I am required to provide component level information in an ICR every three or five years, where is the five-year point measured from? Is it the time of agreement to the component being set up?

The date that ICRs are required to be submitted is determined (or, where agreed between the parties, informed) by reference to either the time of agreement or the initial reporting date. These are terms which are defined in the Regulations, and both include the possibility that the reporting date will be determined by reference to date the contract was entered into.

It is important to note that the new provisions of the Regulations are not retrospective. Therefore, contractors are not required to now submit historic reports, for which reporting dates will have lapsed on 1 April 2024, which would not have been required but for the Regulations being amended. Contractors are only required to comply with the new reporting obligations as they apply from 1 April 2024.

If the reporting dates have not been agreed between the parties, then the default dates set out in regulation 27 will apply. Reporting dates other than the default dates are to be agreed between the parties and the contractor should approach the MOD if they wish to request alternative reporting dates.

Do we need to make report submissions for completed components within existing contracts?

Whether component level information is required to be reported for completed components in relation to contracts entered into prior to 1 April 2024 will depend on, for the most part, when the component completed.

Assuming the contract completion date has not occurred, and the component completion date occurred more than 12 months ago, then no component level information would be required. Similarly, where the component completion date occurred within the last 12 months but there will be less than 12 months between that date and the contract completion date, no component level information would be required. Otherwise, a contractor would still be required to submit component completion reports for each component within 12 months after the component completion date.

Component completion

What is the definition of the completion of a component?  Can obligations be added to the component after the component completion date?

The component completion date is defined in regulation 4(1A) as the date on which the contractor completes all obligations under that component which entitle it to final payment in respect of that component; or if the component is terminated before that date, but any other part of the contract is not terminated, the date on which the component is terminated.

Once the entitlement to final payment under the component is triggered, the component will have completed under regulation 4(1A) and no further obligations can be added to that component.

Contract pricing methods and the meaning of costs which are distinguishable from profits

Could you clarify the meanings of distinguishable and indistinguishable costs? Does it relate to whether we are able to separate the component costs within our cost collection system?

Regulation 22(10)(aa) provides that references to a contract pricing method under which costs are indistinguishable from profits are references to the following contract pricing methods: 19A (Commercial Pricing), 19B(3) (Prices determined in accordance with law), 19C (Previously agreed price) and 19E (Competed rates applied to uncompleted volumes).

Whether costs are distinguishable from profit is determined by whether they can be separately identified. It is not determined by the separability of component costs within a cost collection system.

Reporting the contract profit rate

Do I still report a blended contract profit rate at the contract level if I have reported different contract profit rates for different components?

Yes. DefCARS will not calculate an overall contract profit rate based on component level profit rates and so the contractor will need to overwrite the contract profit rate value in DefCARS for all of the components that use the default pricing method.

Contract value assessment

Does the value assessment of the contract get revisited if a contract is amended and components are created/added at a later date?

No. Regulation 5(3) confirms when the contracting authority must determine the value of a contract. That value is not re-assessed during the contract term, even if new components are subsequently added.

Contract value assessment and qualifying status of a contract

If you have a contract that was assessed to be a QDC because the contracting authority had anticipated the consideration payable would be in excess of £5m, but it is subsequently considered that this threshold will never actually be reached, is there a way that the QDC status can be removed?

No. The Regulations do not provide a mechanism by which a QDC can be removed from the regime (unlike for a QSC). The contract will, therefore, remain a QDC.

QCRs for components

If the value of my contract is below £50m and so I am not required to submit QCRs, does the creation/addition of a component with a value over £50m mean that I now need to provide component level information on a quarterly basis?

No. Regulation 26(5) confirms that a QCR (which includes the component level QCR information) is not required for contracts with a value of less than £50m. Since the contract value does not increase simply because new components are added, the component level QCR information would not be required to be reported.

DefCARS (components)

When adding a component to DefCARS will the security requirements from the contract be copied over?

Users who have access to the contract information will not be automatically given access to the component information. Administration Users for the reporting organisation in DefCARS will need to add the users who they want to have access to the component information. This might be the same users who have access to the contract information but it does not necessarily need to be. All administration arrangements for the reporting organisation in DefCARS will apply to the component, as normally happens for a contract.

I have multiple components that I may be required to report on. Can the system accept an upload of information so that I don’t need to complete a submission for each?

Not currently. The SSRO’s DefCARS Future Technology Strategy explains that one of our priorities for the system is the development of data uploads, including upload templates. We undertook a pilot exercise in quarter three of 2023/24 to test an upload capability. We are working to analyse the results of the pilot with the contractors involved in the testing and will seek to develop this capability as part of a longer-term solution for better and more timely reporting. This will be undertaken once the MOD’s revisions to the legislation have concluded, and once we have a complete picture of future reporting requirements. We will consult on longer term solutions when the future reporting requirements are known.

Notification of components

Does materiality not factor into the reporting of components? There are thresholds of £50m for QCRs and £5m for QDCs, but no threshold for reporting components. Why would, for example, an immaterial £50k amendment to a QDC require separate reporting? Could we simply agree with the MOD not to report as a component and both parties agree to be non-compliant?

The Defence Reform Act 2014 (as amended by the Procurement Act) now provides for the determination of the price of a “component” of a contract. Section 15(6) defines a “component” as a part of the contract that is to be treated distinctly from other such parts in determining the price payable under the contract and the new regulations 9A describes when a component will exist, which does not include materiality thresholds. Ultimately it is a matter for the parties, applying their commercial judgement, to decide how their contract price is constructed. Pricing a contract as the sum of many immaterial distinct parts is something which seems challenging in of itself, and we expect that the parties would want to avoid such an approach. However, if the approach taken is one that, in accordance with the legislation, creates multiple components, the new Regulations require additional transparency about those components.