12.—(1) This paragraph applies to a qualifying defence contract if, at the time of agreement, the primary contractor is party to, or proposes to enter into, a group sub-contract.
(2) Where paragraph (1) applies to a qualifying defence contract, and the Secretary of State is satisfied that—
(a)the allowable costs of that qualifying defence contract that relate to the price payable under any group sub-contract have been decreased by an amount equal to the attributable profit on that group sub-contract, and
(b)the allowable costs of that qualifying defence contract that relate to the price payable under any further group sub-contract which relates to the group sub-contract described in paragraph (a) have been decreased by an amount equal to the attributable profit on that further group sub-contract,
the POCO adjustment is zero.
(3) Where paragraph (1) applies to a qualifying defence contract, and the Secretary of State is not satisfied of the matters described in paragraph (2)—
(a)the parties may agree an amount by which the contract profit rate for that qualifying defence contract must be decreased in order to exclude the attributable profit that has been included;
(b)the POCO adjustment is the amount so agreed.
(4) Where paragraph (1) does not apply to a qualifying defence contract, the POCO adjustment is zero.
(5) “Group sub-contract” means a contract—
(a)the price payable under which includes an amount of profit;
(b)which is made between the primary contractor and any person associated with the primary contractor;
(c)the value of which is no less than £100,000;
(d)the award of which was not the result of a competitive process (as defined in regulation 59 or 60); and
(e)where the goods, works or services to be provided under the contract are necessary to enable the performance of the qualifying defence contract.
(6) “Further group sub-contract” means a contract—
(a)the price payable under which includes an amount of profit;
(b)which is made between two or more persons, each of which is associated with the primary contractor or a group sub-contractor;
(c)the value of which is no less than £100,000;
(d)the award of which was not the result of a competitive process (as defined in regulation 59 or 60); and
(e)where the goods, works or services to be provided under the contract are necessary to enable the performance of a group sub-contract or further group sub-contract.
(7) The attributable profit is—
(a)where all of the output of a group sub-contract or further group sub-contract is necessary to enable the performance of the qualifying defence contract, all the profit element in the price payable under that group sub-contract or further group sub-contract;
(b)where only part of the output of a group sub-contract or further group sub-contract is necessary to enable the performance of the qualifying defence contract, that part of the profit element in the price payable under that group sub-contract or further group sub-contract which relates to the output necessary for that performance.
(8) Attributable profit does not include—
(a)any capital servicing adjustment made under step 6 of regulation 11;
(b)any profit which is received by a person which is not associated with the primary contractor.
(9) In determining the value of a contract for the purposes of sub-paragraph (5)(c) or (6)(c) (as the case may be), paragraphs (5) to (12) of regulation 5 do not apply.
(10) In this regulation, “group sub-contractor” means a person with which the primary contractor makes a group sub-contract.