Press Release - Ministry of Defence: Non-Competitive
Procurement in the Ministry of Defence
2 November 2001
Competition helps provide value for money and the Ministry of
Defence (MOD) uses non-competitive procurement only where there are
compelling reasons. It may not always be practicable or sensible to
use competitive procurement, however, and over the last five years
one quarter of the annual £9 billion defence equipment and services
budget has been spent non-competitively. Once the decision to
procure non-competitively has been taken, the Government Profit
Formula agreement between Government and the Confederation of
British Industry and the process of "No Acceptable Price, No
Contract", introduced in 1992, are the two principal processes the
MOD uses to negotiate its non-competitive contracts and achieve
value for money. Since 1999, it has also been implementing Smart
Acquisition to improve value for money in all its procurement.
On the framework within which non-competitive contracts are
let:
- Existing agreements and policies are clearly defined in working
level guidance, which is generally seen by the department’s staff
as effective. The guidance is, however, dispersed among various
publications and is not always up-to-date. The MOD should
conduct a review of its existing guidance on non-competitive
procurement to ensure that it is both accessible and
up-to-date.
- Smart Acquisition is an important step in developing closer,
and better working relationships with industry and the MOD has
recently agreed codes of practice with industry to encourage such
relationships.
- Partnering is an important feature of Smart Acquisition and is
leading to further changes in the MOD’s working relationships with
industry. Partnering covers a range of practices designed to
promote more co-operation between contracting parties and offers
benefits such as encouraging innovation, reducing costs and
improving incentivisation of performance. The MOD should
review whether there is scope to extend the application of
partnering across more non-competitive contracts.
On the processes which the MOD follows in conducting
non-competitive procurements:
- The work of the Directorate of Pricing has led to some
significant reductions in prices on non-competitive contracts.
- In line with commonly recognised best practice, the MOD uses
"Should Cost" data to determine a price that closely reflects
market conditions. When it faces problems deriving full "Should
Cost" data the Ministry has used innovative methods to develop
credible alternative estimates of what the equipment or service
should cost.
- Risk registers were compiled on 40 percent of contracts
surveyed, including nine of the ten largest. Only a small number of
the risk registers addressed the potential risk arising from the
non-competitive nature of the contract and, reflecting the timing
of the issue of the relevant guidance, there were few risk
registers compiled jointly with industry. All
non-competitive contracts worth £1 million or more should have
joint risk registers which should include an assessment of risks
due to the absence of competition.
- MOD guidance stresses the use of sub-contract competition
wherever it makes sense and one quarter of the contracts surveyed
included competed sub-contracts. Where prime contractors establish
longer-term and more open relationships with key suppliers, the MOD
is likely to benefit by having better insight of the work done by
sub-contractors than is always the case now. The MOD should
ensure that it has visibility of how the contractor manages its
sub-contracts.
On the outcomes of the MOD’s performance measures on the extent
of non-competitive procurement:
- In the last four years, the MOD has successfully met or
exceeded its performance measure of pricing at the outset 90% by
value of its non-competitive contracts and has negotiated some
significant reductions in price, although this has sometimes meant
that contracts have been placed later than planned. There
needs to be greater realism regarding the timescales set for
negotiating non-competitive prices.
- Two thirds of the non-competitive contracts surveyed were
completed on time, although outturn costs on recently completed
contracts were, on average, 3.5 percent below the original
estimate, but there were wider variations on individual cases.
- The MOD holds a range of data on its non-competitive
procurement, though the data is not always brought together in a
single point of reference. It uses this data to monitor the
achievement of its performance measure to compete 75 per cent of
contracts by value. The MOD should manage and understand
its business by always focusing on value for money and should again
review the need to have a performance measure for the amount of
procurement it competes.
Sir John said today:
"Non-competitive contracting forms a significant part of
the Ministry of Defence’s procurement. Smart Acquisition practices
such as partnering are being applied to non-competitive procurement
and I am pleased to be able to make positive recommendations to
further improve the existing processes."
Notes for Editors
The framework within which the MOD undertakes its
non-competitive procurement comprises:
- The 1968 Agreement between the Government and the
Confederation of British Industry provides that
non-competitive procurement should be based on the Profit Formula
(which determines the rate of profit contractors should earn on
non-competitive contracts), Equality of Information at the time of
pricing, and Post-Costing (to determine whether there was Equality
of Information and inform future pricing).
- The No Acceptable Price No Contract (NAPNOC)
policy which applies to all non-competitive contracts and
amendments worth £1 million or more and provides an incentive to
efficient contractor performance and to enhance the competitiveness
of suppliers. It has two objectives: to price the contract before
work commences and to ensure that the price closely reflects that
which would prevail under market conditions (known as "Should
Cost"). Introduced in1992, NAPNOC has been applied to some 1,850
contracts with a total value of £25 billion.
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Press Notice 50/01
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