UK defence procurement set to change

When we talk about defence procurement, we mean defence and security contracts, which are public contracts.

Defence procurement reform has been a major issue on the House of Commons agenda for some time. There has been a debate in the House of Commons on the difficulties of defence procurement due to the reliance on a domestic industrial base and single source suppliers, and lengthy and complex projects with escalating costs and delays. More recently, the Labour Party manifesto stated: “We will prioritise British business for defence investment and reform procurement to reduce waste” and in the King’s Speech the new government announced the Strategic Defence Review.

Defence procurement is currently primarily regulated by the Defence and Security Public Contracts Regulations 2011 (DSPCR) and the Defence Reform Act 2014. This will change when the Procurement Act 2023 comes into force in October 2024. This Act is expected to have a significant impact on the way defence and security contracts are awarded and managed in the future.

What is the justification for the bill?

DSPCRs are based on an EU directive. After Brexit, the UK had the option to opt out of EU legislation, which provided an opportunity to reform the UK procurement system.

The Public Procurement Act consolidates the current UK public procurement rules into one Act. The stated purpose of the changes was to increase flexibility for contracting authorities and increase transparency.

Previously, defence and security contracts were regulated by the DSPCR. These contracts will now be covered by the Act in a similar way to other purchases made by public sector bodies for contracts for goods, works and services. The rationale for this change is to reduce the overall amount of procurement legislation and simplify the rules for contracting authorities.

The Public Procurement Act reflects the position of the DSPCR but introduces new terminology and concepts. The guidance issued by the Cabinet of Ministers states that while the Act will regulate defence and security contracts in the same way as other public contracts, the Act allows for certain exemptions and flexibility due to the nature of defence contracts.

What changes does the act introduce?

The Public Procurement Act will introduce the following changes to public procurement in the field of defence:

• A wider range of – The scope of what is considered a “defense and security contract” is broader than under the DSPCR. The Act provides an umbrella term to include goods, services or work that are otherwise essential to the operational capability, effectiveness, readiness, safety or security of the armed forces. This broad scope is likely to introduce additional contracts into the defense procurement system.
• National security exception – The Act includes a national security exception which is wider than the one currently included in the DSPCR. A procuring entity has the right to decide whether it is in the interests of national security to exclude a contract. Home Office guidance indicates that the Act does not define national security in order to maintain flexibility. It provides an example of a contract that is too sensitive to advertise or where the interests of UK national security mean that a UK supplier must perform the contract.
• Central exclusion list – The Act provides for the creation and maintenance of a centralized exclusion list. This is a completely new concept that is intended to provide additional protection against awarding public contracts to inappropriate suppliers. Suppliers who are listed on the exclusion list on the basis of the mandatory exclusion ground must be considered as excluded suppliers for the purpose of the contract. A supplier who is excluded from a defense and security contract on national security grounds may still be considered for other public contracts.
• Exclusion of suppliers from the procurement process – The Act provides for a wide range of mandatory and discretionary grounds for excluding suppliers from public procurement. The discretionary ground applies where the supplier or a connected person poses a risk to UK national security. There is also a mandatory ground where the supplier is on a central exclusion list.
• Poor results in the past – Concerns have been raised about the failure to take into account previous poor performance by suppliers when awarding defence contracts. The Act introduces a ground for exclusion which applies where a supplier has failed to perform the contract to the satisfaction of the authority, has been given a reasonable opportunity to improve performance and has failed to do so.
• KPIs – Key Performance Indicators or KPIs are a measure against which a supplier’s performance can be assessed over the life of a contract. The Act states that where the value of a contract exceeds £5 million, at least 3 KPIs must be published via a Contract Performance Notice. The Act requires the contracting authority to assess the supplier’s performance against the KPIs at least annually and on termination of the contract and to publish information on the outcome. This is intended to provide a mechanism to ensure that the contracting authority continually monitors the supplier’s performance, perhaps reflecting previous issues with long-term and complex projects.
• Right to terminate for national security reasons – The Act introduces a new mechanism enabling the termination of a contract in the event of a change in circumstances related to a threat to national security.
• Changes to the contract – The Public Procurement Act allows for greater flexibility in relation to modifications to defence and security contracts. Modifications to such contracts are permitted so that the contracting authority can take advantage of technological advances or mitigate any negative effects of such advances. Such contracts may also be modified to ensure that there is no interruption in the provision of services or supplies under the contract.
• Changes in public procurement procedures – DSPCR allows for 4 different public procurement procedures. The Act will replace them with only 2 competitive tender procedures: an open procedure and a competitive flexible procedure.
• Competitive Tendering vs. Direct Award – In principle, contracting authorities awarding defence and security contracts must use the same procurement procedures as other contracting authorities. The Act will allow a contracting authority to award a defence and security contract directly in three specified circumstances. This includes a contract for the provision of air or sea transport services to the armed forces or security services if they are deployed outside the UK/or are due to be deployed there. Direct award is also permitted where it is necessary to enhance or maintain an operational capability.
• Reform of the Single Source Contract Regulations – These provisions apply where a defence contract is awarded above £5 million without any competition. Single-source procurement is very common under MOD contracts, in circumstances where there is only one viable contractor available to perform the contract. The Act enables changes to the single-source contract provisions through amendments to the Defence Reform Act 2014. The changes include a power to clarify that certain inter-governmental single-source contracts with a significant defence element will be subject to the Defence Reform Act regime, providing a value for money guarantee for the majority of defence expenditure from a single source.

Will all defence and security contracts be regulated by law?

The scope of what is considered a “defense and security contract” is defined in the Public Procurement Act.

The Act also sets the thresholds above which the regime in the Act applies. For defence and security contracts, this is £429,809 for goods and services and £5,372,609 for works and concessions. These thresholds will be updated before the Act comes into force.

There are a number of specific exclusions for defence and security contracts. These include defence and security contracts between governments and where international agreements and arrangements are in place. There is also an exclusion for national security.

Key Dates

The Bill received Royal Assent on 26 October 2023. The corresponding public procurement regulations, which set out the details of the new public procurement regime, were tabled in Parliament on 24 March 2024. Both pieces of legislation will come into force on 28 October 2024.

The DSPCR Regulation will remain in force until the Act comes into force, after which it will be repealed.