The Ministry of Defence has announced new rules to speed up defence procurement and reward risk-taking that delivers results.
The changes to the Single Source Contract Regulations, introduced by ministers in parliament today, will tie the amount of profit companies can make from a contract to delivering on time.
Maximum incentive payments for suppliers will increase from 2% to 10% of costs, but only when suppliers hit agreed performance targets, giving the MoD the ability to reward suppliers who get equipment into service faster.
Meanwhile, profit floors on lower-risk contracts will be reduced, so suppliers could earn less unless they improve performance.
The MoD said the new rules will motivate suppliers to "take on the risk-bearing work" last year’s Defence Industrial Strategy committed to encouraging. The strategy said procurement systems "must no longer prioritise risk reduction and consensus decision-making over productivity and innovation at the pace of technological change".
Further rule-changes announced today include an innovation uplift to reward suppliers, particularly smaller businesses and new entrants to defence, who invest their own money in developing new products without a guaranteed government contract.
The department will also increase the threshold at which contracts come under the regulations from £5m to £25m, meaning nearly all small and medium-sized enterprises will no longer have to comply with the mandatory reporting regulations, while keeping 97% of single-source contracting value within the model.
The troubled Ajax armoured vehicle contract with General Dynamics is one of the symbols of the broken defence procurement system. The vehicles were originally supposed to enter service in 2017 but the programme has been beset by delays.
Defence procurement minister Luke Pollard said: “To deliver the warfighting readiness our country requires, we need procurement that delivers on time and on budget. We inherited a programme where 96% of our major defence projects had issues with delivery or cost. That is not acceptable.
“That’s why suppliers who deliver better outcomes and take on appropriate risk will be rewarded, but those who do not, will make less profit.
“That is how we make sure we get more equipment to the front line faster.”
To introduce the reforms, the government has today laid a statutory instrument to increase available incentive payments. A further statutory instrument, covering the profit floor changes, the innovation uplift and the increased threshold, will be introduced prior to the summer recess. The MoD said it will be consulting on these changes in the coming weeks.
National armaments director Rupert Pearce said the reforms will provide “better tools to reward innovation, incentivise delivery, and ensure that public money is spent where it generates real value”.
“We will work closely with industry and the Single Source Regulations Office to implement them effectively,” he added.