My Lords, one of the flaws in the current Yellow Book framework is that it provides little transparency once on contract. A key objective of the new framework is that the MoD should be able to monitor the health of single-source contracts on an ongoing basis, receiving timely information so that it can take fast and effective action. This is very important. There have been too many examples in the past when the MoD has discovered cost or time overruns on single-source contracts far too late for remedial action to be taken. Receiving information throughout the course of a contract will give the MoD the opportunity to work with contractors to take early action to avoid or minimise the impact of issues as they arise. This clause is one of several that provide this transparency.
A supplier will always know more than the MoD about the issues affecting their delivery of a particular contract. Some of our suppliers share information on an open basis, alerting us as issues arise so that decisions can be taken on a joint understanding of the best information available at the time, but not all of our suppliers do this.
The standardised reports that will be required under Clause 24 will provide periodic snapshots of contract performance. However, for contracts below £50 million in value, a report may be received annually or still less frequently, and even for our largest contracts a standardised report is only required quarterly. These periods are appropriate for standardised reporting, but three months can be a long time in managing a contract, especially complex contracts worth many millions, or billions, of pounds.
Clause 26 therefore supplements the regular contract reporting, placing a duty on contractors to let the MoD know, in a timely fashion, of matters material to the contract. Putting the onus on the contractor in this way means that the new framework can be “lighter touch” than it would otherwise be if the only means by which alarm bells could be sounded on a project was through periodic reporting and the MoD’s monitoring powers.
Amendment 18R would make the Secretary of State subject to the same duty, providing notifications to the contractor. Clause 26 will place a duty upon a contractor to notify the Secretary of State when the contractor becomes aware of the occurrence, or likely occurrence, of “events”, “circumstances”, or “information” that are likely to have a material effect on a qualifying defence contract. Applying this same duty would require the Secretary of State to notify the contractor of events, circumstances or information that are likely to have a material effect on the contractor’s costs—the subject of amendment 18T—the contract price, or the contractor’s performance.
Let me first be clear that this does not concern changes to our contractual requirements. If the requirements of the MoD change, and this affects an existing contract, then we require a contract amendment to reflect those new requirements. This should be quite separate to the delivery of requirements already contracted for; if we wish to amend the contracted requirement, we will tell the contractor and begin the commercial process of amending the contract, and this is not a matter that requires legislation. The contractor is not forced to make the amendment, and they will charge us for any additional costs that might arise, or amend performance requirements if this is relevant. Until we seek a contract amendment, a contractor should be concerned with managing the existing contract.
For contracts which we are not in the process of amending, this duty would require the Secretary of State to assess the impact of events, circumstances and information across the department upon each contractor’s contracts. This is quite different from the duty placed upon a contractor when they are managing a contract in the normal course of business. It would require the Secretary of State to assess what might, or might not, affect a contractor’s cost or performance, to look beyond the contract and assess whether a contractor’s
activities are likely to be affected. This duty would be impossible for any Government to discharge.
We agree that when a contract is being priced, the duty to share information should be reciprocal. Both parties should share their assumptions to ensure that the price agreed for the contract is both fair and reasonable and value for money. However, once a contract has been entered into, it is the contractor who must manage the delivery of the contract, and who is responsible for the performance of its business and costs. It is not the responsibility of the Government to second guess what is likely to have an impact upon how a contractor achieves their contracted requirements. We do not accept that Clause 26 represents an equal duty when placed upon the Secretary of State compared to a contractor. It would be inappropriate to place this duty on the Government and impossible for a Government to fulfil.
Amendment 18S is the second in this group, and it seeks to qualify the duty to notify by adding the requirement that, for each of the three elements under subsection (1), the contractor believes in the existence of the effect or relevance. Each element requiring notification under subsection (1) is expressed as,
“likely to have a material effect”,
or,
“likely to be materially relevant”.
This means that a contractor need only notify the Secretary of State if two tests are met: first, that an effect or relevance is likely; and, secondly, that an effect or relevance is material. If a contractor considers that an effect or relevance is not likely or not material, then no notification is required.
The effect of this amendment would be to add a third test: that an effect must be likely, material, and believed to exist. We do not think that an effect could be considered both likely and material and yet at the same time not be believed to exist. To put it another way, if it were not believed to exist, how could it also be considered likely to have a material effect? Without embarking on a debate on the nature of belief, it is not clear what this third test adds.
Where there is a disagreement between a contractor and the Secretary of State over whether a contractor should have provided a notification under this duty, the Secretary of State may issue a compliance or penalty notice. Ultimately, it will be for the SSRO to determine whether a notification should have been provided and, in doing so, it will consider the two conditions of “likely” and “material”. We consider that the two conditions already required for there to be a duty to notify are sufficient and that the third test of belief proposed by this amendment is unnecessary.
Moving on to Amendment 18T, Clause 26 provides for three matters that are the subject of the duty to notify; these are listed in subsection (3). They are the costs under the contract, the total price payable under the contract, and the contractor’s performance of material obligations under the contract. This amendment seeks to remove the first of these matters—the costs of the contractor under the contract. The effect of this amendment requires some explanation as there is some overlap between the first two matters—the cost and the price payable under the contract. For cost-plus
and target-cost contracts, the costs incurred under the contract will directly affect the price payable under the contract, so there is a limited difference between the two matters for these contracts, which represent just under half of the single-source landscape. The rest are firm or fixed-price contracts under which the contractor’s costs may vary while the price payable may not. So it is firm and fixed-price contracts that would primarily be affected by this amendment.
The reason that we wish to be notified in relation to both costs and price under the contract is the same as the overall requirement for Clause 26—to ensure that the MoD receives timely warning of matters affecting contracts. If the costs of a firm or fixed-price contract are likely to materially change, this is still important management information for the MoD. It may indicate a significant risk to the project or signal future performance issues. Just because it may not affect the price payable does not mean that this is not important information. For example, a contractor could manage a contract for a year in between standardised reports being provided to the MoD. In that year, a significant risk could be recognised and material costs could be incurred in trying to manage the risk in the expectation that performance under the contract will not be affected. However, despite the additional costs incurred, it finally becomes apparent that performance is likely to be affected after all, at which point a notification would be required.
It is a characteristic of single-source procurement that there is only one supplier that can provide the capability we require. If the contract fails we lose the capability we need. This has led suppliers in the past to seek price increases even though we have agreed a fixed price. Where the cost increases are very large, this puts the MoD in a difficult position. Seeking to keep to the fixed price can lead a supplier into great financial difficulty, putting not only that contract but others with that supplier at risk. If the supplier fails, then we lose the capability we need. This is a real risk that has arisen in the past, and thus we need the same transparency over the costs of fixed-price contracts as we do for other contract types. We do not see a benefit to applying a different notification requirement to firm and fixed-price contracts, so that for these contracts notification is only required once performance is likely to be affected, while for other contracts notification would be required at the point that costs, and therefore price, are likely to be affected. This is not the early warning that this provision is intended to provide.
For all these reasons, I urge the noble Lord to withdraw the amendment.
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