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.