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Defence Reform Act 2014

Section 25: Reports on overheads and forward planning etc

91.Most single source contractors are members of larger corporate groups. This section enables reporting on overhead costs and planning issues by those corporate groups, in addition to the reports on specific QDCs that will be provided under section 24. The information that must be included in the reports will be set out in the SSCRs.

92.As with the contract reports, it is likely that reporting requirements will change over time as the SSRO recommends refinements to them. However, it is intended that the first SSCRs will provide for eight reports. Four of the reports, required for each of a contractor’s business units in which costs are incurred which are recovered by allowable costs in a QDC, will split out a contractor’s overhead costs in a standard set of categories. These four reports are very similar, with one providing for reporting of actual costs and another for estimated costs. For process reasons, each of these two reports will be required twice – once reflecting a contractor’s claim, and then again once costs have been agreed with the MOD. This will allow the MOD to benchmark comparable business units against each other and will identify areas where costs are at odds with typical value. Another report will capture the key assumptions used in providing estimated overheads. A further report will compare actual overhead costs incurred on QDCs with the forecasts used to price these overheads, and will allow the MOD to identify any systematic over- or under-recovery of overhead costs by contractors.

93.Two more reports will be required annually and at the contractor-level (only one report per year per corporate group). The first of these will be a strategic planning report that requires details of the key industrial infrastructure that is being paid for out of QDC prices. Any forecast investment and rationalisation plans will also be provided where the contractor expects to recover consequential costs from the MOD, as well as current throughput compared with capacity. This will allow the MOD to check that it is not paying for unnecessary capacity, and to be advised of significant costs and the risk of losing key industrial capability before this occurs. The second contractor-level report will contain information about key small to medium sized enterprises (SMEs), and the extent to which their subcontracting procurement processes are open to SMEs.

94.The duty to provide reports under this section will be on contractors who have an ongoing QDC in the relevant financial year (“the ongoing contract condition”). Where the contractor is associated with one or more other persons, the obligation to report will be on their ultimate parent undertaking rather than on the contractor itself (subsection (3)). The purpose of this is to ensure that the duty to provide these reports is only placed upon a group of companies once as opposed to placing the duty upon multiple companies within the same group – this simplifies the reporting duty, as for some reports only one instance of the report will be required for the whole group of companies.

95.Finally, subsection (8) gives the Secretary of State a power to direct that a particular contract is not to be taken into account for the purposes of deciding if the ongoing contract condition is met that year. It is intended that this power will be used where the reporting duty upon a designated person under this section could otherwise lead to the whole contract being exempted under the Secretary of State’s power under section 14(7) or 28(6) – rather than exempt a contract from this Part, this subsection allows the Secretary of State to exempt a contract only from this reporting requirement.

96.Failure to comply with reporting requirements imposed under this section may lead to a financial penalty under sections 31(3)(a)(ii) and 32.

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