Regulator aims to cut defence contract costs

11 June 2013

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Up to £200 million a year could be slashed from Ministry of Defence (MoD) contracts under proposals to change the rules that govern how deals are awarded.

In a White Paper published yesterday evening, defence secretary Philip Hammond outlined proposals for a new independent body that would oversee contracts that cannot be put out to competitive tender either for national security reasons or because of specialist armed forces’ requirements.

Almost half of the money spent on defence equipment each year is awarded through single source procurement – a method used to purchase equipment such as submarines, aircraft carriers and planes.

The new Single Source Regulations Office, as recommended in a review by Lord Currie, would independently oversee a system to provide a fair profit for companies alongside incentives to drive down costs. The MoD estimates up to £200 million a year can be saved under the proposal. 

“For decades, the MoD has been at a disadvantage in commercial negotiations and reforming single source procurement will radically change how the MoD conducts a high proportion of its business,” Hammond said.

“The new independent body will deliver a more effective and efficient way of providing the specialist capabilities our armed forces need to keep the UK secure and at the right price.”

Further detail on plans to reform the MoD’s procurement organisation Defence Equipment & Support were also contained in the White Paper. The MoD is currently assessing three options, including a government-owned, contractor-operated (GoCo) procurement model – favoured by Hammond - in which a private sector partner would manage the procurement and support of defence equipment.

Although the government would retain strategic control, the private sector partner would have substantial operating freedom and be incentivised through a performance-based contract.

Matthew Fell, CBI director for competitive markets, described the GoCo procurement model as a “bold, new approach”, but urged the government to engage widely with the defence industry to build confidence in its ability to deliver.

He added: “The government needs to strike the right balance with the new Single Source Regulations Office so that it drives competitive pricing on the one hand, while maintaining the incentives for continued investment in the UK’s world-class defence industry.”

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