Defence companies face fresh scrutiny over contract charges and profits

National security means Britain's nuclear submarines have only one contractor and one buyer Photo: BAE Systems

13 Sep 2015 By Alan Tovey, Industry Editor

New defence contracts watchdog to bring 'fundamental' revamp to profits made by industry and costs passed on to Ministry of Defence

A new watchdog is poised to crack down on defence procurement and stop the practice of “padding” government supply contracts.

The Single Source Regulations Office set up last year, is launching a fundamental review of rules on how much profit companies can make, in the first shake-up of defence procurement in almost 50 years.

Padding is when a supplier bills for items such as entertainment and marketing costs.

The SSRO sits between industry and MoD and examines the £8bn-plus spent a year on contracts where there is only one supplier and one buyer because of issues such as national security or troops on operations urgently needing equipment.

It has the power to examine all new contracts valued at £5m or more and claw back charges it rules unjustified.

“Historically it would have been acceptable for contractors to charge entertaining and marketing costs,” said Jeremy Newman, SSRO chairman. “Our view is if there is only one buyer and one seller there isn’t any entertaining and marketing needed, so we said, ‘Sorry folks, you can’t charge that’.”

Other areas where costs have been eliminated is “reworking”.

“If work has to be done again because of a change of specification as technology advances, that’s allowable,” he added. “For example, the technology on a submarine is out of date before you’ve put the wiring in. But charging for reworking because of faulty workmanship is not acceptable – why should the taxpayers pay for a company’s screw-up?”

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