Defence Reform Act 2014

Defence Reform Act 2014

2014 CHAPTER 20

Commentary on Sections

Part 2: Single Source Contracts

Section 15: Pricing of contracts

58. QDCs, and amendments to QDCs, must be priced in accordance with the formula provided at subsection (4).

59. There are many different types of commercial arrangement used in QDCs, and subsection (5) combined with section 43(2)(b) allows for the formula to be adapted for all contract types. The provisions here allow flexibility in the point in time at which the formula is applied, and whether costs are estimated or actual costs. For common commercial arrangements the formula will be applied as follows:

a)

for firm price contracts (where the price is agreed at the time the contract is entered into and will not change unless the contract is later amended) – at the time the contract is entered into, based on estimated costs in nominal terms (i.e. including inflation);

b)

for fixed price contracts (where the price is agreed at the time of contract subject to specified costs which may vary with inflation) – at the time the contract is entered into, based on estimated costs in real terms (i.e. excluding inflation);

c)

for target cost incentive fee (TCIF) contracts (which have a “target cost” agreed at the time the contract is entered into, and agreed mechanisms for sharing any variation between actual costs and that target cost) – at the time the contract is entered into, based on estimated costs (section 16 separately provides for this) and again as required throughout the contract and at the end of the contract, based on actual costs; and

d)

for cost-plus contracts (which are not priced at the time the contract is entered into, rather a profit rate is agreed which will be charged on actual allowable costs that arise under the contract) – as required throughout the contract and at the end of the contract, based on actual costs.

60. There are two elements in the formula – the “contract profit rate” (CPR) which is calculated by a six step process described at section 17, and the “allowable costs”, for which provision is made at section 20.