THOROGOOD PROFESSIONAL INSIGHTS
A SPECIALLY COMMISSIONED REPORT
TENDERING AND NEGOTIATING MoD CONTRACTS Tim R Boyce
THOROGOOD PROFESSIONAL INSIGHTS
A SPECIALLY COMMISSIONED REPORT
TENDERING AND NEGOTIATING MoD CONTRACTS Tim R Boyce
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Understanding SMART Procurement in the MoD
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Tim Boyce
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About the Author Tim Boyce began his career in the Ministry of Defence holding executive positions in contracts, contracts policy and finance. His industrial career began at Plessey in 1980 after which he enjoyed appointments with Siemens, British Aerospace and more recently as commercial director at BAE SYSTEMS. His functional responsibilities have included contracts, commercial, procurement, estimating, legal, project accounting and the implementation of the European Business Excellence Model. He is a member of the Chartered Institute of Purchasing and Supply (CIPS). His committee work includes the CIPS National Contracts Management Committee, the CBI Contracts Panel, the CBI Defence Procurement Panel and the CBI/MoD working groups on partnering and incentive contracting. He was the CBI observer at the HM Treasury Central Unit on the Purchasing working group on incentivising industry. In 1997 he was invited by the Director General of the CBI to join the CBI Public Private Partnership Forum. He has lectured widely in the UK and in the US. His published work includes: •
Successful Contract Administration (Hawksmere)
•
Successful Contract Negotiation (Hawksmere)
•
Commercial Risk Management (Hawksmere)
•
Tendering for MoD Contracts (Hawksmere)
•
Negotiating with the MoD (Hawksmere)
•
Understanding SMART Procurement in the Ministry of Defence (Hawksmere)
•
The Commercial Engineer’s Desktop Guide (Hawksmere)
•
UK Government Procurement and Contracts (Longman 1989). (Contributing author)
THOROGOOD PROFESSIONAL INSIGHTS
Contents
1
INTRODUCTION
1
First principles..................................................................................................2 The procurers ..................................................................................................4 Integrated Project Teams (IPT)........................................................................5 Internal customers ...........................................................................................7 Project life cycle ...............................................................................................9 Our friends in industry ..................................................................................12
2
COMPETITIVE TENDERING: THE PRE-BID PHASE
14
Getting ready ..................................................................................................15 To ‘team’ or not to ‘team’...............................................................................15 MoD policy ......................................................................................................16 Main contractors, prime contractors and prime systems integrators .....17 Teams and independents ...............................................................................19 Team management .........................................................................................20 The official Invitation to Tender (ITT)...........................................................21 Price ................................................................................................................21 Acceptance of portion of tender...................................................................22 Tenders for selected articles .........................................................................22 Alternative conditions ...................................................................................23 Drawings .........................................................................................................24 The Montreal Protocol ...................................................................................25 Dangerous articles and substances ..............................................................26 Submission of tenders ...................................................................................26 Tender results..................................................................................................27 The tenderer’s Certificate of Tender.............................................................27 Special Notices and Instructions (SNI) to tenderers .................................28 Bidders’ conference .......................................................................................29 Raising questions ...........................................................................................30
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COMPETITIVE TENDERING: THE POST-BID PHASE
32
Impartiality......................................................................................................33 Commercial confidentiality ...........................................................................33 Tender validity ................................................................................................36 Decision times ................................................................................................37 The MoD Tender Board .................................................................................38 Suspiciously low prices..................................................................................39 Best and Final Offers (BAFO) .......................................................................39 Decision process.............................................................................................41 Understanding ................................................................................................42 Assessment .....................................................................................................43 Adjudication....................................................................................................43 The meaning of cost, risk time and performance .......................................50 Best overall Value for Money (VFM) ............................................................53 Industrial implications of tender decisions ................................................55 Industrial Participation (IP) ..........................................................................56 Final decision-making....................................................................................57 The decision ....................................................................................................58 Debriefs ...........................................................................................................59 Contract changes ...........................................................................................60
4
PRINCIPLES AND PROCESSES OF NEGOTIATION 68 The authority...................................................................................................69 The commercial branch and the IPT ............................................................69 Contractual delegation ..................................................................................71 Formal and informal negotiations................................................................74 The commercial branch .................................................................................74 Principles of conduct .....................................................................................76 Principles of behaviour..................................................................................78 Planning and preparation..............................................................................80 Analysis ...........................................................................................................81 General tactics ...............................................................................................83 MoD tactics .....................................................................................................86 Approaches for the contractor .....................................................................88
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CONTRACTUAL NEGOTIATIONS
93
Taut contracts .................................................................................................94 Custom and practice ......................................................................................95 Foci of negotiation .........................................................................................96 Terms and conditions ....................................................................................96 Price ................................................................................................................98 Payment .......................................................................................................100 Timescales ....................................................................................................102 Specification .................................................................................................104 Acceptance ..................................................................................................105 Intellectual Property Rights (IPR) ..............................................................108 Liabilities ......................................................................................................110 Variations and claims ..................................................................................111 Subcontractors ............................................................................................115
6
NON-COMPETITIVE BUSINESS
116
The absence of competition ........................................................................117 Non-competitive tendering .........................................................................120 Tender evaluation .........................................................................................120 Fair and reasonable prices ..........................................................................121 Principles and process .................................................................................122 The shift of bargaining power ....................................................................124
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Abbreviations BAFO
Best and Final Offer
CDL
Chief of Defence Logistics
CDP
Chief of Defence Procurement
COEIA
Combined Operational Effectiveness and Investment Appraisal
CP:CE
Cost of Production to Capital Employed
CSA
Customer Supplier Agreement
DCO
Defence Commercial Organisation
DEFCON
Defence Contract Condition
DEFFORM Defence Form DERA
Defence Evaluation and Research Agency
DLO
Defence Logistics Organisation
DPA
Defence Procurement Agency
DRA
Defence Research Agency
DTI
Department of Trade and Industry
ECC
Equipment Capability Customer
GAC
Government Accounting Conventions
GCHQ
Government Communications Headquarters
HMG
Her Majesty’s Government
IP
Industrial Participation
IPR
Intellectual Property Rights
IPT
Integrated Project Team
ISD
In-Service Date
IT
Information Technology
ITT
Invitation to Tender
MoD
Ministry of Defence
NAO
National Audit Office
NAPNOC
No Acceptable Price No Contract
OTS
Off-The-Shelf
PE
Procurement Executive
THOROGOOD PROFESSIONAL INSIGHTS
ROC
Revise or Confirm
SNI
Special Notices and Instructions
SPI
Smart Procurement Initiative
SRD
System Requirement Document
Ts&Cs
Terms and Conditions
URD
User Requirement Document
VFM
Value for Money
VOP
Variation of Price
This Report has been prepared in good faith and is believed to be accurate at the date of publication. However, no liability is accepted by the Author for errors or omissions or for the reader acting upon any advice or information given herein.
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List of Figures Page Figure 1
IPT Membership
6
Figure 2
SPI Project Life Cycle
9
Figure 3
Downey Project Life Cycle
10
Figure 4
Main Contractor Role
17
Figure 5
Prime Contractor Role
17
Figure 6
Prime System Integrator Role
18
Figure 7
Competition Decision Process
41
Figure 8
Acquisition Cost Definitions
51
Figure 9
Commercial Adjudication Considerations
54
Figure 10
Incremental Acquisition Diagram
61
Figure 11
Scope of Main Phase Contract
62
Figure 12
Categories of Change
64
Figure 13
Programme and Commercial Interests
70
Figure 14
Commercial Function Hierarchy
76
Figure 15
Stages of Negotiation
89
Figure 16
Acceptance Process
107
Figure 17
Types of Claim
113
Figure 18
Non-Competitive Pricing Arrangements
121
THOROGOOD PROFESSIONAL INSIGHTS
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Section 1 Introduction First principles ............................................................................................2 The procurers .............................................................................................4 Integrated Project Teams (IPT) ..................................................................5 Internal customers......................................................................................7 Project life cycle .........................................................................................9 Our friends in industry.............................................................................12
Section 1 Introduction
First principles ‘How do warp engines work?’ Gene Rodenbury was once asked. His reply, a succinct ‘very well thank you’. The question ‘how does UK defence procurement work?’ could not be met with the same answer, but both questions share the same characteristic – that not all is what is seems! Firstly, it can be said that defence procurement is very expensive, strategically important to UK interests and of great commercial importance to many companies in the UK and overseas. The total annual defence budget stands at around £22B with some £8B - £10B spent on the procurement of equipment and the acquisition of services. Excluding small value purchases at the local level, MoD places more than 45,000 new contracts each year. At any one time there are over 100,000 live contracts. If local purchases were included these latter two figures would increase by an order of magnitude. Defence procurement equips the armed forces, which allows Britain to protect its territory and interests, to participate in international operations such as peace keeping and, arguably, to punch above its weight on the world stage. Over 6,000 companies receive contracts from MoD each year. By value the preponderance of contracts are placed with a small number of large companies. BAE SYSTEMS, Vickers, GKN and Rolls Royce are amongst the British recipients. MoD also makes very significant purchases from the USA and from the rest of Europe. Profits in government defence contracts are not necessarily exciting, but the orders, cash flow and (limited) profits can to some extent be relied upon for those companies who can establish themselves in the market. UK defence contracts can be a useful platform for sales to overseas nations. This tells us something about the what, the why and the who. But what of the how? Since 1996 MoD has been introducing reforms to defence procurement methods under what it calls the SMART Procurement Initiative (SPI). Sadly, for many decades, procurement of major defence equipment and systems has been characterised by substantial over-runs in cost and timescale and significant under achievement in terms of the performance of these equipments and systems. This phenomenon of relative failure has been recognised by successive governments, government departments (especially the Treasury) and public bodies such as the National Audit Office and the Public Accounts Committee. A concerted effort was made by MoD from about 1983 to put matters right, but the emphasis was unbalanced. The view then
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was that MoD placed soft contracts and too frequently let contractors off the hook for messing things up. The remedy was to ‘push the pendulum hard over’ with the introduction of tougher contracts, a tougher attitude (towards industry) and much more aggressive procurement policies. After more than a decade, it was realised that matters had not really improved and that industry had been highly alienated by the underlying assumption that all the ills were on the industry side and by the day-to-day conflict with procurement officials. One of the potential strengths of the SPI is that it recognises that change on the MoD side is also necessary. The SPI changes strategy (more flexibility and openness), processes (streamlining, introduction of integrated project teams, incentives) and organisation (clarifying the internal customer and altering the procurement organisation). This three-pronged change strategy will be familiar to many on the industry side, but to MoD and its officials, the change is unfamiliar and extremely challenging. However, two things will always remain the same. By and large, all MoD contracts are placed following tendering in one form or another. Since all MoD purchases come from the public purse, nothing is bought unless it has been provided for in the supply estimates approved annually by Parliament and endorsed by internalto-MoD committee procedures. The purchase may require individual approval if of a very large scale or may be approved as part of a blanket arrangement if of small scale. The Treasury, the Public Accounts Committee and the National Audit Office all take an interest in the proper conduct by the MoD of its purchasing activity. For these reasons, MoD does not ‘just buy things’. Tendering is an essential step in the process of meeting the required standards of public procurement. Furthermore, most contracts result from a period of negotiation and in any event matters requiring negotiation (such as disputes, claims and changes) can crop up during the course of any contract. This Report aims to draw out the main principles, processes and procedures involved in tendering and negotiating MoD contracts. The main emphasis will be upon tendering for ‘equipment’ and related services. In this sense ‘equipment’ includes both systems and individual products. Collectively MoD refers to these as ‘articles’ because this is the phraseology used in the MoD standard conditions of contract. It is also to be noted that it is MoD policy to make use of open competition in the placing of contracts. However the word ‘tendering’ is not used exclusively in the context of competition. Generally speaking it means the making of proposals to MoD, whether or not in competition, which are intended to induce MoD to place a contract. The context of this analysis of tendering and negotiating is SMART Procurement. Since this is a relatively new regime, the commentary will also note some of the pitfalls, opportunities and consequences of the new approach.
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The procurers The SPI aims to solve the traditional problems of defence procurement – costs exceeding budget, timescales exceeding targets and performance not coming up to scratch. The headline grabbing cases where individual projects or the equipment programme as a whole are overspent by hundreds of millions of pounds or where delays run into years inevitably attract all the attention and somehow give the impression that all MoD purchases have such problems. This is simply not the case. The vast majority of defence contracts are of relatively low value (less than £1M) and are delivered on time, to budget and to specification. It is the handful of major projects that at any one time are likely each to have one, two or all three of these problems. Whilst many of the SPI features (for example, a clearer internal customer role) are intended to bring about improved efficiency everywhere, the real target of the SPI is to eradicate the problems of major projects. Thus, whilst the detailed procedures and mechanics (described in later chapters) of tendering and negotiating MoD contracts are virtually the same for all MoD purchases, the overview of the SPI given in this chapter largely addresses major projects procurement. It is important to realise that the SPI embraces a conceptual shift in the role of the MoD procurers. Many decades ago the MoD (in different incarnations) produced defence equipment. In the organisational change of the early seventies MoD became the procurer (not producer) of defence equipment. That is to say that MoD decided what products to buy, bought them and issued them to the Forces. The focus of the SPI is no longer the procurement of equipment, but the acquisition of military capability. With this, the role of MoD purchasing has changed. The old Procurement Executive (PE) has become the Defence Procurement Agency (DPA). No longer an executive arm having the major role in procurement, it is now an agency (in effect) of the MoD internal military customer procuring equipment on its instructions. This appears to be a huge shift in thinking. Where once the military user stated his operational requirement and the PE decided how the requirement could be met by procurement, the idea now is that the military user decides what he wants and tells the DPA to buy it. The genuine executive authority has moved away from the PE with its civilian, rule bound culture to the military with its more dynamic ‘get on with it’ culture. The shift is not absolute because, as will be seen, closer, integrated team working is the order of the day. It is of interest to note this conceptual shift, albeit that in practice some projects will proceed along these new lines while others will get stuck as the old guard in the PE resist the change. However, such resistance will eventually be flushed through provided that the right level of political and senior MoD management support maintains the SPI impetus.
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It must be said that, despite the fundamental and potentially far-reaching changes of the SPI the basics of tendering and negotiating are likely to remain pretty constant. The purpose of this chapter is therefore only to overview the SPI context within which tendering and negotiating take place.
To whom and with whom do tendering and negotiating take place? Whilst the structure of the MoD organisation in total can seem bewildering, for these purposes the answer to the forgoing question is straightforward. The Chief of Defence Procurement (CDP) and the Chief of Defence Logistics (CDL) are the executives whose organisations have the authority to invite formal tenders, negotiate contracts and place orders. CDP runs the DPA and CDL runs the Defence Logistics Organisation (DLO). On the face of it the DPA replaced the old PE and the DLO replaced the previous three, service centric logistics outfits (Quartermaster General, Air Member for Logistics and Chief Fleet Support). However. the new DPA/DLO construction provides a more joined-up approach. Where previously the PE washed its hands of a project once some key event had occurred (for example the completion of the major procurement contracts; the achievement of the In-Service Date; the achievement of ‘Q-readiness’) and then left the logistic support to the relevant service organisation, the present idea is based on a whole life approach. As will shortly be seen, this involves the establishment of project specific integrated project teams (IPTs) that deal with the full lifecycle of a project. The IPT moves from the DPA to the DLO as the project progresses and as the focus changes from acquisition to in-service support. So the procurers are the DPA and the DLO in the strict sense of their having the authority to solicit tenders and to place contracts. Procurement is enacted through IPTs. In addition to DPA and CDL, other MoD or government agencies have authority to invite tenders and place defence contracts. Examples are the Defence Research Agency (DRA) and the Government Communications Headquarters (GCHQ).
Integrated Project Teams (IPT) The old MoD PE ran project management teams for years. These teams were built around PE owned technical, project management, financial management and administrative resources. In the later years of the PE these teams even included the contracts function, which traditionally had resisted team membership on the grounds that management independence was essential to its role – procurement policy and contractual ethicacy sometimes appearing at odds with the demands of the local project desires. However, these teams did not really embrace the myriad other MoD
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functions that are involved in the equipping of the forces with capability. The muchloved ‘User’ and the mysterious ‘Centre’ hardly featured. The PE professed to champion the User’s cause and explained delay and inefficiency by reference to the machinations of the Centre, but it hardly represented joined up acquisition. The new IPTs bring all the core functions together under the management of an ‘effective and empowered’ (MoD’s words) leader. The IPT leader leads the team throughout the project’s life cycle from concept to disposal. However, it seems that the number of people and functions who have a say in a project has not diminished at all. To be fair, MoD’s SPI aims seem to be limited to improving efficiency and streamlining processes – not reducing functions or numbers in any major way. One inevitable result of this is that even the largest of projects does not need all possible interested functions to be permanently represented within the IPT. Even if the need was there, it could not be met without an increase in the number of MoD administrators. Thus the SPI concludes that even an IPT in joined up procurement may have core and non-core members. The non-core members are referred to as associate and attached members. Figure 1 shows the typical composition of the three categories.
CORE MEMBERS
ASSOCIATE MEMBERS
ATTACHED MEMBERS
1. Programme management 2. Requirements management
1. Scientific staff 2. Specialist procurement services 3. Private finance/publicprivate partnership experts 4. Service users 5. Service trainers 6. Safety specialists 7. Defence Export Services Organisation 8. DTI
1. Technical scrutineers 2. Capability resources scrutineers 3. MoD HQ scrutineers
3. Risk management 4. 5. 6. 7.
Engineering Technical Quality Reliability
8. Integrated logistics support 9. Commercial management 10. Finance management 11. Secretariat 12. Industrial
Figure 1: IPT Membership
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It is (fortunately) not the task of this Report to explain what all these IPT functions do, even less so to justify why there are so many functions. It is sufficient to say that the core team represents a much expanded skill set when compared with the old PE project management teams; that crucially the fighting user is represented in the core team by the full time presence of the requirements manager; that the range of skills in the associated and attached members provides the core team with everything it needs to manage the procurement and to manage the MoD machinery (these are not at all the same thing). It will be noted that the core team includes industrial representation. There is as yet no uniform understanding of what this means. In some projects the meaning is limited to the hiring of resources from industry in order to help the MoD IPT manage the project prime contractor across the traditional contract interface. In some projects it is held that the IPT must be a combined MoD/prime contractor team. The decision for each project as to the role of the prime contractor in the IPT depends upon two things. Firstly there is the simple impracticality of fully embracing contractor staff when the project is in its competition phase. Once this phase is over, the second consideration comes into play. It is understood that whilst the clarity and sanctity of contractual relationships must be preserved, there is no doctrinal inhibition to an IPT genuinely being a combined MoD/contractor team. For the forward looking people there is no conflict in aligning MoD objectives (timely delivery within budget, to specification) with the prime contractor’s objectives (business continuity, profit and cash) and a combined team working for the good of all will succeed.
Internal customers The ‘MoD internal customer’ has been mentioned, but without any explanation of its identity or meaning. Part of the SPI establishes the principle of a quasi-contractual relationship between an internal customer and an internal supplier. The IPT is the internal supplier and the internal customer is exactly that – the recipient and beneficiary of the project that is to be delivered by the IPT. Industry certainly welcomed this new idea, partly because the MoD internal customer was previously not identified. Whilst the formal interface between the MoD and a contractor would be the commercial branch and the project management team, it was never clear as to what was happening behind that interface. Some MoD folk took the view that that was none of the contractor’s business anyway, but industry always hated the struggle involved in understanding the customer’s needs, if the word customer meant more (which it certainly did) than just the people representing
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the contractual interface. In any event, the plain truth is that the lack of a clearly defined internal customer baffled many in the MoD anyway. But bafflement did not matter. Procurement was about procedure, not delivery! So the SPI fixes that.
Who is the internal customer? In fact there are two internal customers – ‘customer 1’ and ‘customer 2’. Customer 1 is called the Equipment Capability Customer (ECC) and is part of MoD headquarters. The ECC is organised around operational capabilities (for example: strategic deployment, strike, manoeuvre, information superiority). The role of the ECC is to: •
Develop a balanced and affordable equipment programme
•
Seek approvals for individual projects
•
Provide funding to individual projects
•
Provide direction to individual projects
•
Define requirements.
Customer 2 is the operational user of the capability. The role of Customer 2 is to: •
Guide the ECC on components of capability
•
Represent front line and training commands
•
Represent the user’s wishes
•
Define IPT outputs
•
Monitor delivery of IPT outputs during in-service phase.
As can be seen, the role of both customers in informing, empowering and monitoring the IPT is essential. This is so important that the relationship between the customer and the IPT is captured in a Customer Supplier Agreement (CSA). The aim of the CSA is to establish the quasi-contractual relationship and as such to set down in contractual style what the IPT has to deliver. One key part of this is the User Requirement Document (URD). The URD states the capability requirement since it is capability (not equipment as such) that the IPT delivers to the customer. The IPT transforms the URD into a System Requirements Document (SRD). The URD forms part of the CSA. The SRD then forms part of the ITT or contract with industry. There is thus a natural equivalent function between the two requirements documents. The quasi-contractual nature of the CSA and the contract with industry mean that both documents demand the greatest care in preparation.
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Project life cycle The SPI project life cycle has the phases shown in figure 2.
Concept
Assessment
Demonstration
Manufacture
In-service
Disposal
Figure 2: SPI Project Life Cycle
The essential content of each stage is as follows: CONCEPT
1.
Produce URD.
2.
Form embryonic IPT.
3.
Involve industry.
4.
Identify technology and procurement options.
5.
Obtain funding and agree plan for the Assessment phase.
ASSESSMENT
1.
Produce SRD.
2.
Establish full IPT.
3.
Identify the most cost-effective technical and procurement solution.
4.
Develop SRD.
5.
Reduce risk.
6.
Agree funding and plan for subsequent phases.
7.
Obtain funding for all subsequent phases.
DEMONSTRATION
1.
Progressively eliminate development risk in order to fix performance targets for manufacture.
2.
Place contract(s) to meet the SRD.
3.
Demonstrate ability to produce integrated capability.
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MANUFACTURE
1.
Deliver the solution to the military requirement within the time and cost limits.
2.
Complete system development and production.
3.
Conduct system acceptance to confirm that the system satisfies the SRD.
4.
Transfer line management of IPT to DLO.
5.
Transfer customer function to customer 2.
IN-SERVICE
1.
Confirm that the military capability provided by the system is available for operational use.
2.
Declare the In-Service Date (ISD).
3.
Provide effective support to the front line.
4.
Carry out any agreed upgrades or improvements, refits or acquisition increments.
DISPOSAL
1.
Carry out plans for efficient, effective and safe disposal of the equipment.
The SPI includes the streamlining of financial approvals for projects. Under SPI there are only two project approval stages. These are called the ‘initial gate’ and the ‘main gate’. Initial gate happens at the end of the concept phase and main gate happens at the end of assessment. Prior to the SPI, each project may have been back to committees for endorsement and money many times over. The SPI approach is simpler but much tougher. At the end of assessment, the whole of the remaining project financial demands must be known and known with a high degree of certainty. The difficulties that this approach carries are illuminated by a look back to the previous ‘Downey’ project cycle shown in figure 3.
Feasibility study
Project definition
Development
Manufacture
Support
Disposal
Figure 3: Downey Project Life Cycle
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At first sight the two life cycles do not look so very different. However, there is an important difference in so far as the commercial risk which contractors must take when tendering and negotiating contracts with the MoD. The Downey cycle was predicated on an assumption that the project would need a development phase to carry forward the project specific research work carried out as part of the feasibility and project definition stages. This assumption was necessary because of the practice from the early sixties of designing defence systems and equipment largely from scratch. The advantage was that the user had reasonable surety that projects would aim to achieve his precise requirements. The disadvantages were the high cost of bespoke development and the delays that resulted from the underestimation of technical difficulties and development timescales. Over ten years ago, the MoD adopted a policy of seeking to make the maximum possible use of Off-TheShelf (OTS) technology in an attempt to avoid these problems. In 1988 the Jordan, Lee and Cawsey report built on this policy by proposing an alternative project life cycle that diminished development but introduced a key stage of ‘product demonstration’. The laudable aim was to ensure that major project financial commitments were not made until working hardware had been seen and tested. In principle this was a marked improvement on the Downey cycle where too frequently major commitments were made on the strength of paper only – reports from feasibility, project definition and early development stages which were unduly optimistic about eventual costs, timescales and performance. The difficulty with the Jordan, Lee and Cawsey proposal was that it was over-optimistic about the viability of OTS technology, leading to levels of bespoke design and development not significantly less than before. In conjunction with the white heat of MoD competition policy, the burden of private venture development (e.g. to produce bespoke product demonstrations prior to selection) on companies increased dramatically at a time when defence expenditure was beginning to fall in real terms and when competition from foreign sources was increasing. The SPI cycle retains the Jordan, Lee and Cawsey preference for ‘demonstration’ over an overt reference to ‘development’, as though to maintain the fiction that minimum development is attainable on major projects. Nevertheless the SPI cycle acknowledges that demonstration at least deals with the progressive elimination of development risk. However, as described, the relationship between main gate approval and the demonstration/manufacture stage seems to have a weakness that may be ameliorated by two principles that are not, to the Author’s mind, made sufficiently explicit. The weakness can be seen in the high expectations about the quality of cost, time and performance figures at the end of Assessment, in preparation for main gate approval. The problem is that high quality figures must be available before development has taken place and, in many cases, before a contractor has been selected. The limitations on the quality of the information seem obvious. The first
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1 INTRODUCTION
amelioration is the stated intent to encourage a greater proportion of project expenditure in the concept and assessment phases. This at least holds out the prospect of informed data being submitted at main gate. The second amelioration is the implication that cost, time and performance trade-offs must be permitted to continue post main gate, provided that the project is eventually delivered within the overall performance, cost and time envelope.
Our friends in industry The relationship between MoD and its contractors might be summarised thus: symbiotic in the sixties, cosy in the seventies, antagonistic in the eighties and despairing in the nineties. For the new decade the watchword is partnering. The SPI places the importance of good working relationships at the heart of the new approach. Gone are the days of mutual suspicion and disrespect, MoD accusations of shoddy work and over-charging, industry accusations of commercial naivety and disregard for industrial infrastructure. Cooperation, openness and joint working are the new mantra. But how does this change the sharp end of defence contracting – tendering and negotiating contracts? The answer is that there is no answer. MoD (and industry, desperately so) wants the advantages of partnering, but at the same time it does not want partnership (which is real sharing of risk), it does want taut, tough contracts, it intends to maintain its reliance on legal remedies, it expects increasing rights in contractors’ intellectual property, it cannot offer favourable payment terms, it demands liquidated damages and other penalty arrangements, it expects contractors to carry all development risk (cost and time) under firm price contracts. It expects to use competition to drive profit as well as cost down, it uses competition to force contractors to almost fight to the death, it uses competition to try to buy what it cannot afford, it has little regard for UK design and manufacturing capability and capacity. It says that provided it has these rights and freedoms it is open to partnering based relationships. If there is one major challenge that the SPI has left unanswered it is the question of reconciling these diametrically opposed themes. Of course not all IPTs have this dilemma. There is some evidence that in some parts of the MoD organisation (notably the DLO rather than the DPA) grasping a more balanced approach has already brought mutual success, but the problem for many is that this list of MoD behaviours seems to represent the policy line (but not necessarily the philosophy of the SPI), and of course there remain many civil servants for whom sticking to policy is much the preferred behaviour regardless of the real added value. Hence this Report takes as its base the presumption that IPTs will, on the formal axis of tendering and negotiating, tend towards the more traditional, robust of MoD policies.
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1 INTRODUCTION
This chapter is but a very brief overview of the SPI, used as a lead into detailed treatment of tendering and negotiating. Further information on the SPI is available on the MoD website, from the MoD booklet The Acquisition Handbook and from the Hawksmere Report Understanding SMART Procurement in the Ministry of Defence (ISBN 1-85418-164-5).
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Section 2 Competitive tendering: the pre-bid phase Getting ready.............................................................................................15 To ‘team’ or not to ‘team’ .........................................................................15 MoD policy ................................................................................................16 Main contractors, prime contractors and prime systems integrators ..................................................................................17 Teams and independents .........................................................................19 Team management....................................................................................20 The official Invitation to Tender (ITT) .....................................................21 Price ...........................................................................................................21 Acceptance of portion of tender .............................................................22 Tenders for selected articles ...................................................................22 Alternative conditions ..............................................................................23 Drawings ...................................................................................................24 The Montreal Protocol .............................................................................25 Dangerous articles and substances ........................................................26 Submission of tenders..............................................................................26 Tender results ............................................................................................27 The tenderer’s Certificate of Tender .......................................................27 Special Notices and Instructions (SNI) to tenderers ............................28 Bidders’ conference..................................................................................29 Raising questions......................................................................................30
Section 2 Competitive tendering: the pre-bid phase
Getting ready The prime assumption in tendering for MoD contracts is that the tendering will be on a competitive basis. This chapter will look at the nature of the MoD Invitation to Tender (ITT) and the implications that flow from it. But in most cases the first question that a company needs to address is whether to bid alone or whether to work with other companies in one capacity or another. Since timescales normally demand that the company has its commercial strategy in this respect in place, before the ITT is received this chapter will first look at this issue taking it in large part from the MoD’s perspective.
To ‘team’ or not to ‘team’ In issuing the ITT it can be assumed that MoD will have done some degree of checking to establish whether the proposed companies are suitably qualified. This may be no more than confirming what goods and services the companies provide by taking a look at the DTI register. On the other hand MoD may have gone through a preliminary round of asking for expressions of interest. Equally, the decision to invite particular firms may be simply based upon the previous experience of the relevant commercial branch or IPT. In any event, there is the de facto assumption that the companies invited are each capable of successfully bidding and implicitly therefore that each possesses the skills and capacity to perform the contract. Whilst there are a high proportion (by number, not value) of MoD tenders where all the bidders are able to do the work in-house there are many procurements where no single company would have the resources to undertake the entire contract by themselves nor the desire to single handedly carry all the risk.
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MoD policy Very large projects require the drawing together of vast resources and disparate skills and technologies. It had once been MoD procurement strategy, in such circumstances, to break the project into a number of discrete but very large component parts and to place contracts with several companies with MoD then taking the responsibility for putting the parts together. Thus once a new destroyer would have been procured by MoD running separate competitions for the shipbuilding, engines, weapons, navigation aids, radar, communications and other major elements. It was thus that MoD took the risk of the ‘kit of parts’ being capable of assembly into the end object. MoD was consequently responsible for any delays and cost over-runs, particular where the ‘parts’ were not physically deliverable to MoD but between the contractors, each of whom had its own programme. Changing MoD policy has seen a shift towards placing this ‘integration’ responsibility and hence the risk with industry via single competitions, leading to the award of one very large contract. Although the SPI is based upon the contractor delivering a system that meets the SRD to the IPT and the IPT then delivering capability to the customer that meets the URD, it is always tempting for procurement officials to try to place the responsibility for delivering capability on the contractor. Except in the most major of projects this is simply not right or fair. Capability really comes from the combination of equipment, training, logistics support plus service personnel, facilities and intelligence. There are as yet no contracts that could truly put the full burden of the provision of all these things upon a private company, although contracts that, for example, are for the supply and operation of tank transporters get somewhat close to this MoD ideal.
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Main contractors, prime contractors and prime systems integrators Although MoD generally prefers to refer to the company selected as ‘the Contractor’ whether the contract is worth £100,000 or £1000,000,000 the role in which MoD sees the Contractor varies depending upon the particular procurement strategy. Although the expressions do vary, MoD generally distinguishes between ‘Main Contractor’, ‘Prime Contractor’ and ‘Prime Systems Integrator’. The differences can be seen in figures 4, 5 and 6 where the company in question is Integrated Defence Systems Limited (IDSL)1:
MoD
IDSL carries out most of the work itself
Subcontractor A
Subcontractor B
Subcontractor C Figure 4: Main Contractor Role
MoD
IDSL manages the overall programme (including the integration task)
IDSL division
Subcontractor B
Subcontractor C Figure 5: Prime Contractor Role
1 An imaginary company. Any similarity to any real company is accidental.
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MoD
IDSL manages the overall programme (including the integration task)
Subcontractor A
Subcontractor B
Subcontractor C
Figure 6: Prime System Integrator Role
As main contractor IDSL undertakes most of the work in-house, albeit that subcontractors may be necessary to provide skills or capacity not available directly to IDSL. As prime contractor IDSL sees an increasing focus on the roles of manager and integrator although he may still undertake a good proportion of the work himself, but (as frequently happens) that work is done by a division (or other company in the group) of IDSL most probably treated, as far as is practically possible, as just another subcontractor. As prime systems integrator IDSL’s only roles are to manage the programme and integrate the work of external subcontractors many of whom may in effect be ‘sub-prime contractors’, that is they themselves may have the prime contractor role for a major subsystem for the overall system to be integrated by IDSL. Whether main contractor, prime contractor or system integrator, MoD’s main interest is in having a single body carry all the programme management and integration responsibility. The attraction for MoD in the progression through main contractor to prime contractor to prime systems integrator is that the independence and impartiality of the company is heightened. As main contractor or prime contractor MoD is concerned that the company suffers ‘artificial’ pressure to put work into itself or into other of its divisions. Thus MoD must closely scrutinise its operation to ensure that the company does not yield to this pressure. Where the company acts as prime systems integrator MoD considers that the company will select subcontractors (who by definition are all external to the company) purely on value-for-money grounds. With the company in this capacity it would almost be true to say that MoD has ‘out-sourced’ its own function as a procurer. For the industry side, whilst the role of prime systems integrator has the ‘selling value’ of independence and impartiality, it also has the distinct disadvantage of very great risk. Possibly 90% of the value of the contract will be with subcontractors, whilst the overall contract margin and
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any risk allowance or contingency may be quite low. Success for the prime systems integrator will depend on extremely strong management skills, very high technical skills all combined with the necessary commercial arrangements with subcontractors designed to ensure that success for each subcontractor is linked to the success of the head contract with MoD.
Teams and independents In drawing up an ITT for a large project MoD may or may not choose to specify precisely the terms of reference for the potential contractor and hence whether a main contractor, prime contractor or prime systems integrator role is envisaged. In any event if individual companies do not possess all the necessary skills or capacity in-house, or if the cost of bidding is prohibitive for single companies, or if any investment requirements are prohibitive for single companies or if individual companies consider that competitive advantage may be achieved by joining forces with other companies then the ‘bidding community’ must decide how to organise itself in order to bid effectively. Such organisation tends to fall into two patterns: Teams:
Where companies agree to work in a team usually appointing one team member to act as main or prime contractor, the others as subcontractors
Independents:
Where one company intends to act in the prime contractor or prime systems integrator type roles maintaining the maximum degree of subcontract competition albeit possibly working more closely with potential ‘preferred’ subcontractors.
Teams usually commit their arrangements to writing in a teaming agreement. These can take some time to conclude as the participants attempt to formulate adequate and mutually satisfactory arrangements for allocating work and responsibilities. Investment responsibilities, provisions governing IPR, the method of working as between the chosen prime contractor and the other team members and many other matters can prove more time consuming than might seem likely at first sight. The benefits are that a team is likely to be stronger than an ‘independent’ and each team member enjoys the security of knowing that he is guaranteed a slice of the action, if the team wins. An independent enjoys much greater freedom of action, not being bound to take decisions through the team each time something important has to be resolved. He also has much greater bargaining power with potential subcontractors once he has won the competition.
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Anti-competitive practices If working in a team, the companies must take care that their arrangements, whether expressly stated to be on an exclusive basis (the usual pre-requisite for each team member regarding the others, if not for himself!) or whether they act as though they are exclusive, are established so as to be compliant with relevant UK and EU anti-competitive law and regulation.
Team management One of the difficulties of working in a team where the elected prime contractor is not naturally the dominant partner is that the team leader will encounter difficulty in managing the team. This will be particularly true where the ‘partners’ are all to contribute more-or-less equally to the provision of resources (finance, personnel, work, data). That is to say, all will want ‘equal votes’ rendering the nominal prime contractor effectively powerless. This will cause aggravation for the prime contractor as he will be carrying the full risk in contract performance to MoD but, under normal prime contractor/subcontractor relationships, will not necessarily be able to entirely spread the risk around the full team. The ultimate solution is for the team members to establish a joint venture company to act as the prime contractor. Thus they can make whatever arrangements they like within their joint venture agreement to legislate for the appropriate balance of voting rights, conduct of the business, negotiation of the contract with MoD and management of the relationship with MoD. Naturally enough, MoD expects its contractor, whether main contractor, prime contractor, prime systems integrator or joint venture company in one of those roles, to have the ability to exercise complete management control of the programme including tight control of subcontractors, the ready willingness to accept all risk and the financial substance to back up his position as owner of the project risk! Therefore, at the bidding stage MoD will take a close interest in the contractual, business and management arrangements between the prime contractor and his teammates and/or subcontractors. The dichotomy is that on the one hand MoD likes to see a complete and well thought through commercial approach and technical/programme approach which, for the purposes of a good tender assessment score on programme timescale risk, should be based upon a mature plan for the disposition of work within the prime contractor’s own organisation and to subcontractors, and yet on the other hand MoD likes to see the expectation of the maximum possible use of future competition at the subcontract level. Here again is a central dilemma of the SPI. For the IPT to maximise the gains of genuine
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integrated team working, the IPT ought to involve not only the MoD side but also the industry side in the most major way possible. Ideally this would include prime contractor and subcontractor staff. And yet desires for the constancy of competition at all levels throughout the project life cycle and the desire by each organisation in the supply chain (from MoD downwards) to be seen to be managing its suppliers act as major inhibitors to team working.
The official Invitation to Tender (ITT) The majority of MoD invitations to tender (ITTs) are issued under cover of an official ITT proforma usually in the form of DEFFORM 47. DEFFORM 47 is one of a large number of pre-printed standard forms in use by the MoD. DEFFORM 47 constitutes ‘The Official ITT’ and it also provides ‘The Tenderer’s Certificate of Tender’. The ITT includes some useful general information but also covers certain essential points for companies to note. The most important of these are covered below.
Price The ITT stipulates that prices must be formulated strictly in accordance with the draft contract (which will be enclosed with the ITT). This means that tenderers are required to submit firm, fixed or other variety of price that may be described in the draft contract. Attention is also drawn to the provisions of Form GC/VAT Value Added Tax, ‘guidance to contractors for Government Contracts for Stores Purchases’. The main point here is that tenderers are to tender prices that are given in VAT exclusive terms. The contractual arrangements are such that the contractor adds VAT when he submits invoices to the MoD. The underlying reason is one purely of administrative ease. If contract prices were shown to include VAT then tens of thousands of contracts would require amendment whenever the rate of VAT changed. Confusion can however arise because contract prices are the only component of the MoD financial process that is handled on a VAT exclusive basis. Budgeting, forecasting and project approvals are all handled on a VAT inclusive basis. MoD generally seeks to have prices quoted on a firm basis, which means that they are not subject to variation for changes in general economic conditions. However, because MoD’s goal is for value for money (VFM), it is willing to consider fixed prices (being prices subject to variation due to changes in general economic conditions) if the tenderer’s allowance for inflation is demonstrably higher than that which MoD would itself make.
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MoD prefers also to have all prices quoted in Sterling but will consider Sterling prices that are subject to variation for changes in exchange rates, again, if the allowance for exchange rate fluctuation that the tenderer would allow is greater than MoD’s view of what is necessary. MoD may consider prices other than in Sterling if the cost to MoD of MoD procuring foreign currency is less than the tenderer needs. The adoption of the Euro by twelve of the EU member states in 2002 has not very much altered the matter of defence contract currency. Not only is there the question of the Sterling/Euro exchange rate, but also MoD places significant contracts in Sweden (which has not so far adopted the Euro) and with a significant number of countries outside of the EU, particularly the US. In addition many defence contractors buy materials from outside of the UK, place major subcontracts outside of the UK or are indeed themselves domiciled outside of the UK.
Acceptance of portion of tender The ITT indicates that MoD reserves the right to accept a proportion of the tender only, unless the tenderer stipulates otherwise. This is to allow MoD to accept the lowest item prices from each tender received so as to get overall the cheapest deal. This could be disastrous for the tenderer who has spread any non-recurring costs across several items or who has priced certain items very attractively so as to impress MoD. Thus it is most important for tenderers to respond to this part of the ITT with a positive statement indicating if partial acceptance is acceptable to him or not. On major systems procurement this is unlikely to be of concern, because MoD will want to place the entire risk with just one contractor.
Tenders for selected articles Almost as a natural corollary of the MoD’s wish to be entitled to accept only a part of a company’s tender, so the tenderers are afforded the opportunity to tender for part only of the requirement. This point can be easy to overlook and result in companies electing not to bid on grounds of being unable to meet all the requirements. This is a lost opportunity not only for the company in question but also for MoD. Again, this is not likely to be a major problem on large systems procurement.
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Alternative conditions Like many procurement organisations (whether public or private) MoD ITTs include words to the effect that tenders are invited on the basis of prospective contract terms and conditions (Ts&Cs) as included (as a draft contract) with the ITT and that MoD does not undertake to consider bids submitted subject to any other Ts&Cs. Such Ts&Cs will include a mixture of standard MoD or HMG Ts&Cs and those particular to the job in question. The only standard exception to this general rule is that companies are free to draw to MoD’s attention any common understandings that are operative between the company and MoD with regard to the acceptability or interpretation of particular standard Ts&Cs. A number of considerations arise in connection with this general rule. For example, MoD normally expects to have to negotiate the Ts&Cs. Provided the company takes a reasonable position, the submission of comments on the Ts&Cs or the proffering of alternatives does not usually, in itself, automatically rule out the tender or count against the tenderer in any significant way. However, MoD does demand that contracts are negotiated subject essentially to MoD’s own Ts&Cs. Thus if a tenderer rejects out of hand the entirety of MoD draft Ts&Cs and offers his own as an alternative, this is likely to cause a certain amount of disaffection (at the very least there is more work for the civil servants to do) unless there are extremely good reasons (for example if the product offered is genuinely proprietary and OTS). On balance, therefore, companies should not worry too much about not confirming 100% compliance with MoD draft Ts&Cs subject to two extremely important points. Firstly, it must be remembered that MoD tender adjudication is based upon the search for Value for Money (VFM). Thus to the extent that differing Ts&Cs may represent variations in the VFM assessment there is potentially a crucial impact on the adjudication. A good example would be a company tendering fixed prices (i.e. those set at an economics base date with arrangements for price variation according to changes in economic conditions) where the ITT calls for firm prices (i.e. those prices which are not subject to change for variation in economic conditions). This naturally and quite properly has the effect of inviting MoD to consider whether the company offering fixed prices is better VFM than one offering firm prices (since it is all a question of which side to the potential bargain is carrying the inflation risk). In practice it would be as well for the company intending to offer fixed prices to ask MoD in advance of tender submission if such an offer would be considered (assuming that the option of fixed rather than firm prices is not already included in the ITT). In this example MoD is likely to answer in the affirmative but with the proviso that bids will be assessed on overall VFM. At least then, everyone knows where they stand.
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The second important point is somewhat more tricky. It is conceivable that since all Ts&Cs are simply a collection of arrangements whereby advantage, risk and liability lie with one side or the other it must be possible to impute to every term and condition an equivalent or notional monetary value. Thus MoD could impute into a counter set of Ts&Cs (or into individual ones) monetary value which, if those Ts&Cs are to MoD disadvantage as compared with those proffered by MoD, could be added to the cost of a tenderer’s bid. Since this would not necessarily be with the tenderer’s knowledge there is potentially more disadvantage to him in counter proposing Ts&Cs than would at first be thought. As regards Ts&Cs, the ITT announces that it is assumed that the tenderer will already have in his possession those pre-printed standard conditions of contract that are to be incorporated by reference only in the draft contract. It is as well for the prospective tenderers to thoroughly check that they hold all the reference documents, taking particular care with respect to the DEFCON series of standard contract conditions. This is because these conditions are ‘issue sensitive’ with the edition date being the identifier. There can be quite significant alterations between successive versions and the unwary may be caught out by not checking the specified edition of each reference version.
Drawings The ITT draws the tenderers’ attention to the fact that drawings and any other such material issued by MoD with the ITT is and remains the property of MoD. In this context it is not necessarily the IPR that are owned by MoD but the physical property of the paperwork, computer discs and other material. Such property remains with MoD and the losing tenderers are required to return the material to MoD following receipt of notice of the outcome of the tender. The winner may retain the material if needed for performance of the contract, the terms of which then govern the use of the material. It is frequently the case that the IPR in such material is not the property of MoD but is the property of third parties, frequently other contractors who have been required (under the terms of other contracts) to provide the material to MoD for the purposes of competitive tendering. Such contracts will have been quite specific about the (limited) rights that MoD has to use the information for tendering purposes. Given the perfectly proper concerns of the IPR owner regarding the use to which his information is to be put, the ITT places certain vital restrictions on the recipient.
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These are: •
The recipient must not allow the material to be seen by unauthorised persons (this is an undefined term but can be taken to mean that only those persons who have a need to have access for tendering purposes are suitably qualified and then only if they are not debarred under any relevant security regulations).
•
The recipient must only use the material for the purposes of tendering. This is an essential (if not completely watertight) safeguard for the IPR owner who is frequently a competitor (either in the case to hand or in general) of the recipient and is rightly concerned about the possibility of his information being misappropriated for other purposes.
•
Any need on the part of the recipient for additional copies must be referred to the commercial branch.
•
The material may not be copied without the specific written authority of the IPR owner.
The third and fourth points are clearly designed to re-enforce the second point. Whilst respecting the IPR owner’s rights is of absolute importance these restrictions can be a nuisance for the tenderers. Frequently they need to copy this material, or extracts therefrom, to their potential subcontractors or teaming partners. Both the final two restrictions will impede this happening. Just asking the commercial branch for more copies and waiting for them to be provided will inevitably take time. This is particularly so because commercial branch may be obliged anyway to refer to the IPR owner for permission. In seeking out and applying directly to the IPR owner, the tenderer is bound also to lose time, especially if the owner has commercial reasons for being unhelpful or obstructive. Perhaps needless to say, one of the very first things that the recipient of such information should do upon receiving the ITT is to apply immediately to MoD for further copies and permission to distribute them as necessary to third parties.
The Montreal Protocol HMG is a signatory to the Montreal Protocol on the control of substances that deplete the ozone layer. Accordingly MoD requires to know certain details about the use of the relevant substances by the tenderer in his products. The tenderer is required to provide the necessary information with his tender or otherwise to give a ‘nil return’. Use of the relevant substances does not necessarily rule out a particular tender.
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Dangerous articles and substances The tenderer is asked to provide details of dangerous articles and substances by completing form DEFCON 68 and returning it with his tender. Failure to provide DEFCON 68 duly completed may result in the tender not being considered.
Submission of tenders The issue of the ITT sets the clock running for the return of tenders by the due date and time. It is essential that the tender is returned by the due date and time otherwise the tender will be classified as ‘late’ which potentially eliminates the chance of the tender being opened and considered. Generally MoD policy is that late tenders will not be considered. This is a necessary principle if the conduct of public procurement is to be seen to be scrupulously fair, even though there is the possibility that the best tender may be ruled out for lateness even in the absence of any cause other than a genuine mistake. However the Author has heard MoD officials modify the policy to the effect that late tenders will not be considered unless there is significant advantage to MoD! Of course, the propriety of the situation is all in the eye of the beholder. Companies generally support an unequivocal MoD policy of no consideration for late tenders unless it is they who are late! There are two remedies for a company that believes itself unlikely to submit its bid on time. Firstly, it is possible to submit the essence of the tender by fax or telephone to the relevant commercial branch provided it is done by the due date and time. Clearly this is only of some use if the tender is a fairly straightforward matter where the essence is relatively easy to extract and summarise. Secondly, it is possible to ask (provided it is in writing) for an extension to the tender return date. MoD is usually prepared to consider this unless submission by the original deadline is crucial to an internal-to-MoD programme of events. However, any request to MoD to extend the return date must be made in plenty of time (ill defined but circumstance dependent) for bona fide reasons. Left until the last minute, the granting of an extension is likely to be held to be unfair to other tenders who in all probability are due to submit on time. If more than one tenderer asks for an extension then the probability of it being granted is much the greater. Traditionally the period of any extension is subject to some negotiation. Therefore if an extra two weeks is thought necessary it is as well to apply for four! All ITTs stipulate the arrangements and procedures for tender submission. A ‘return label’ is usually provided which must be affixed to the exterior of the package in order to be assured that the tender will be admitted by the Tender Board (see later topic).
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Major tenders involve the submission of documents which, when extra copies are taken into account (MoD might ask for ten copies of the technical proposal and four copies of the commercial proposal), can amount to several hundred kilograms of paper. Increasingly MoD will ask for the tender to be submitted on computer disc, usually in a prescribed language and format. This not only reduces the physical bulk and cost of the tender but facilitates analysis. Arrangements nevertheless need to be agreed with MoD to protect the tender in this medium. For reasons of certainty and auditability one copy of the tender must still be submitted on paper.
Tender results The ITT proudly declares that ‘no useful purpose is served by enquiring the results of competitive tendering. Tenderers are notified as early as possible’. Whilst this declaration undoubtedly reflects official policy, the practice, as with many such matters, is not necessarily in line with policy. Most companies follow up the submission of their tenders with informal enquiries as to progress in adjudication and indications as to a decision. Much can be read into the odd comment or tone of the MoD’s response. However, the vast majority of MoD officials do take the policy seriously and it is only on the rarest of occasions that anything worthwhile is learned. But not to contact the customer at this crucial stage seems to border on the negligent. So just about everybody does it.
The tenderer’s Certificate of Tender The second part of the DEFFORM 47 proforma is for the tenderer to fill in and sign as his official tender. It calls for the provision of some straightforward information (for example the total value of tender and the place of manufacture) and for the election of applicable law (English or Scots) for the potential contract. For the purposes of this Report the only significant matter worthy of note is that the certificate indicates the tenderer’s willingness to tender on the basis of the MoD’s draft contract and that the proffering of any alternative Ts&Cs or any general reservations printed on the tenderer’s documents are of no effect. Thus for the company willing to tender only on the basis of alternative Ts&Cs it is important to overwrite the relevant portion of the tender certificate or otherwise to make the basis of his tender perfectly clear.
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Special Notices and Instructions (SNI) to tenderers The foregoing material pretty much covers the routine information concerned with an ITT to tender. On major procurements there are usually also unique demands set down in a part of the ITT known as Special Notices & Instructions (SNI). The SNI, as their name suggests, provides general guidance on several possible matters. Typically the format of the required tender response is specified. If the tender is required to be split into a number of volumes, this will be described. Most importantly the SNI may demand certain information that is required to be delivered with the tender to assist MoD in tender assessment. This information may include the following: •
The structure of the company and the relationship between divisions of the company. The aim is to show how the division bidding for the contract fits into the corporate structure.
•
The management structure of the company and its group. The aim is to reveal where management responsibility and decision-making authority lies.
•
Confirmation that a tender bond will be provided.
•
Confirmation that the tenderer, if selected, will provide MoD with a parent company guarantee or a bond or guarantee from a bank or other third party.
•
Details of how prices are to be broken down to assist MoD in its investment appraisal and in making a comparison with other bids.
•
Evidence to support any claims that may be made by tenderers regarding equipment performance.
•
Evidence as to any claims of accreditation to ISO standards and similar.
•
Plans for the conduct and performance of the contract. Typically these might include management plan, risk management plan, programme plan, development plan and production plan.
These plans and other data demanded by MoD at the tendering stage can be very important in MoD’s assessment of the tenderer’s potential capability to undertake the work. The SNI may also be used to advise tenderers that MoD has retained external commercial assistance to help in the evaluation of bids. Arrangements will be given by which tenderers may seek confidentiality agreements with the relevant external assistance contractors.
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Bidders’ conference For major tenders MoD may choose to call a bidders’ conference. The conference may be held during the period allowed for tender preparation, which permits the tenderers to have read and formed a preliminary view about the ITT before the conference. Equally likely is that the conference will be called to coincide with the launch of the ITT which may be formally issued at the end of the conference. The purpose is primarily to allow the MoD IPT to stand up and present the ITT in order to ensure that there is a preliminary level of common understanding amongst MoD and the potential tenderers. The usual format is for MoD to present the ITT in fairly obvious sections – operational, technical, programme, commercial and the required format/content of responses to the ITT. A question and answer session is usually allowed involving some process whereby questions and answers are recorded in writing and then copies distributed to all present. MoD takes great care in this process to ensure that the questions are reasonably limited to points of clarification only. This being to ensure that there is no unintentional modification of the ITT, tenderers being expected to respond formally to the full requirement given in the ITT. There is on balance relatively little merit in attending the bidders conference. Undoubtedly there is advantage in hearing the MoD presentation and it can be to the good to be seen at the conference. There is also the chance to assess (how reliably is questionable) the seriousness of other potential bidders by the number and level of their attendees. The ‘open’ nature of the bidders’ conference tends also to act as an inhibitor on the asking of questions by tenderers for reasons of commercial sensitivity. Everyone is afraid of revealing his or her position and intentions. Companies tend to want to keep their thoughts to themselves and raise issues with MoD at another time. For this reason, MoD sometimes feels that industry has been unenthusiastic and disinterested, although the reticence must be considered normal and quite understandable. As with written questions submitted during tender preparation it takes some nerve to play ‘spoof’ by submitting dummy questions intended only to mislead the opposition. Perhaps the most added value of a bidders’ conference is the hidden benefit that comes from the MoD having to know the ITT so well that it is possible to stand up and present it. The preparation for this is the best means for inconsistencies and ambiguities in the ITT to be flushed out and thus corrected before the ITT is formally issued.
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Raising questions In all but the simplest of cases, analysis of the ITT will raise questions in the mind of the tenderer. The questions will have arisen for a number of different reasons: •
Missing information, for example where the ITT refers to a document which is supposed to be incorporated within the ITT, but is simply missing.
•
Simple errors in the ITT, for example where there is conflict between one or more statements apparently covering the same point.
•
Lack of clarity in the ITT, for example where a technical requirement is stated in ambiguous or unclear terms.
•
Strange requirements, for example where a requirement is stated perfectly clearly but the tenderer, perhaps through background knowledge, does not believe that the requirement is genuine.
•
Missing requirements, for example where it is clear to the tenderer that something obviously required (perhaps without which the subject of the ITT could not work at all) is not called for.
•
Acceptability of alternatives, for example where the tenderer can see a better way of achieving the end objective of the ITT, but in a way which is not strictly compliant he may wish to have MoD confirm that his alternative method would in principle be considered acceptable.
Missing information comes in two categories. Firstly, there will be information (for example copies of the standard conditions of contract) that is intentionally missing because MoD assumes it will already be in the hands of the tenderer. Secondly, there may be documents unique to the ITT which should have been physically included but which have been accidentally omitted. In the first case the onus is on the tenderer to check that he does hold the relevant documents and if not to apply for them straightaway. Special documents may be more difficult to obtain. Many ITTs include references not only to documents which convey requirements for the tenderer to bid against, but also to documents which should be read by way of forming background understanding. Both categories of document may be physically included or may be available on request, usually to an address given in the SNI. If the tenderer needs to get hold of these documents, whether omitted intentionally or accidentally from the ITT, he should apply for them immediately upon receipt of the ITT. If the documents are referred to, whether as sources of background reading or as statements of requirements, it must be assumed that MoD included them with the express aim of the tenderers taking them into account. Not then to do so exposes the tenderer, at best, to the risk of MoD not believing that he took the ITT seriously enough or, at worst, to the risk that he missed something important, accidentally leaving his bid not compliant or leaving it without adequate coverage of the associated costs within his price.
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With the exception of documents that MoD assumes are already routinely in the possession of the tenderers, other documents referred to but missing will be passed to all tenderers by MoD upon it being queried with MoD as to why particular documents should not have been included. If appropriate (for example where MoD takes a significant amount of time to issue missing documents) tenderers should consider asking MoD for an extension to the tender return date. As far as all other types of question to MoD are concerned at this stage in the process there are a number of rules that MoD generally applies, as follows: •
MoD will only answer questions which are put in writing.
•
MoD will only answer in writing.
•
All questions and answers will be copied to all tenderers simultaneously.
•
If a tenderer asks for a question to be considered and answered on a confidential basis, MoD may do so provided it believes that the tenderer in question will not derive a special advantage.
Thus for the tenderers there is always the concern that the manner in which a question might be put and its answer may reveal something of their thinking to the advantage of other tenderers. Indeed there may be more for a tenderer to gain from simply reading the questions and answers generated elsewhere than in raising his own questions. For those who like to play ‘spoof’ there is always the opportunity to raise questions that are intended for no other purpose than to confuse, worry or otherwise disadvantage the opposition. For example a tenderer who believes that his competitor may be planning to offer MoD something non-compliant (the character of which he is able to guess) in the hope that it may be acceptable can raise a question with MoD along the lines of ‘would MoD please confirm that a pink widget would meet the requirement’ hoping that MoD will answer in the negative, thus eliminating that competitor. The two risks with this game are of course that MoD may answer affirmatively thus spiking the questioner’s own guns or if the answer is indeed in the negative, it may give the competitor sufficient time to change tack and come up with something compliant and attractive. To play this particular game of ‘spoof’ the tenderer needs to have the brain of a chess grand master and the cunning of George Smiley!
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Section 3 Competitive tendering: The post-bid phase Impartiality ................................................................................................33 Commercial confidentiality......................................................................33 Tender validity...........................................................................................36 Decision times ..........................................................................................37 The MoD Tender Board............................................................................38 Suspiciously low prices ............................................................................39 Best and Final Offers (BAFO)..................................................................39 Decision process .......................................................................................41 Understanding ..........................................................................................42 Assessment................................................................................................43 Adjudication ..............................................................................................43 The meaning of cost, risk time and performance .................................50 Best overall VFM ......................................................................................53 Industrial implications of tender decisions ...........................................55 Industrial Participation (IP) .....................................................................56 Final decision-making ..............................................................................57 The decision...............................................................................................58 Debriefs......................................................................................................59 Contract changes......................................................................................60
Section 3 Competitive tendering: The post-bid phase
Impartiality Government policy requires that all defence procurement decisions be made on an impartial basis. The guiding rule is that companies will be treated equally in a fair and consistent manner. It has to be said that some companies have experienced situations in which they feel the exact opposite is true. For example, it has been suggested that MoD will run a competition where it already knows who the supplier will be. The competition is run because competition is expected and because it can apply pressure to the ‘chosen’ contractor’s price. The other ‘stalking horses’ may feel entitled to be aggrieved. MoD will argue that if competition is feasible then the winner will be selected on the basis of the best VFM – even if the previous, ostensible front-runner loses out. As will shortly be seen, the best VFM basis for selection can be fraught with difficulty, leading companies to feel that all was not quite right. Whether or not MoD achieves complete impartiality all the time is a matter of opinion, but the real point is that there is no formal appeal procedure for the aggrieved. The normal practice is to send a letter of complaint or to seek a meeting. This is always done at senior level. There are virtually no cases where a decision has been overturned on the basis of an appeal. Other tactics such as seeking to engage the interest of the public or the press usually lead nowhere. The only lesson is that as much intelligence as possible about the posture of the MoD and the other bidders must be gleaned before a decision to bid is made in the first place.
Commercial confidentiality It has long been a matter of policy for the MoD that all dealings with commercial organisations are conducted on a commercially confidential basis. The policy, the practice and implied fetters of confidence on the MoD and its employees all serve to protect a company’s private information. Indeed, as a general principle, this respect for the confidentiality of private information is so profound that MoD and
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industry have in the past never considered it necessary to include in defence contracts any express conditions binding MoD to hold private information on a confidential basis 2. In contract there are express restrictions (both as regards commercial confidentiality and national security) on the company’s freedom to disclose information that has been imparted to it in connection with the contract, but (with one or two exceptions) there are usually none on MoD. Of course the question of confidentiality is particularly acute when companies are tendering in a competitive environment. In the normal course of events commercial security is protected by the following measures: •
Tenders are submitted in sealed packages to the Tender Board (see the later topic for an explanation of the constitution and function of the Tender Board) which has the exclusive duty of opening tenders.
•
Tenderers are asked to submit their bids in a specified number of copies so that further copying within MoD is unnecessary.
•
Tender information which is most sensitive (usually including prices) is confined to a separate, special volume (normally referred to as the ‘commercial volume’) of the tender, for which a lesser number of copies is demanded.
•
The commercial volume is kept separate (usually in the custody of the commercial branch) from the other volumes and access is very restricted.
There are however, three areas of risk to commercial security. Firstly there is the increasing use by MoD of outside contractors operating in support roles to the Crown servants. This may either be in the capacity of making-up-the numbers in the procurement branch, due to headcount restrictions on Crown servants, or it may be in the capacity of arms-length contractors performing functions such as technical assessment or performance modelling where, again, the need may be due to lack of Crown servants or the possession of skills no longer available within MoD. Either way the implication is that tenderers’ information will be made available to personnel who are other than Crown servants. The normal ‘safeguards’ in these circumstances are as follows: •
Tenderers are normally advised pre-tender that support contractors will be used by MoD.
•
Support contractors are required to enter into confidentiality agreements with those tenderers who so desire.
2 This situation is being remedied as part of the present general revision that is taking place to the MoD standard conditions of contact
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•
The staff of support contractors may be required to enter into confidentiality agreements with those tenderers who so desire.
•
Support contractors (and possibly their staff) may be invited to accept obligations not to compete against the tenderers in the relevant business area for a period of time (albeit that such arrangements must be carefully constructed so as to ensure that relevant anti-competition laws and regulations are complied with).
Although these protection measures may seem academic and perhaps unnecessary it is essential that care is taken to ensure that proper safeguards are in place and well policed. There have been occasions where the MoD has, after the contract has been awarded and has been running for some time, seen the use of support contractors (retained from the tendering period or selected subsequently) as being naturally extendible so as to establish an expert competitor against the main contractor. Clearly this is quite inappropriate since such a second source could only become effective by making use of information to which he, in his support contractor role, has had access but for which the necessary and relevant rights were not granted him by the main contractor. The second area of risk is where MoD staff, guided by what they may genuinely believe to be motives of public interest, directly or indirectly reveal features of one company’s tender to other tenderer’s so as to promote an ‘improved competition’. This practice is quite against official MoD policy but it would be naive to pretend that it does not happen. Of course, tenderers can actually lend encouragement to such a practice provided of course that each individually believes it is only happening to his advantage! On balance it would not be in the long-term interests of the MoD or of the taxpayer for such impropriety in public procurement to occur. The final concern has arisen especially where MoD is conducting competitions for the outsourcing of services, in particular where private finance is involved. The concern is to do with what MoD refers to as ‘innovative’ bids. In this business area MoD has little experience (compared with the procurement of fighting equipment where at the fundamental level the procurement methods and processes have been tried and tested over a period of decades) and for which the policy is to encourage industry to apply its imagination to the (frequently) unique situations surrounding MoD’s requirements and thus to come up with so called innovative solutions. The problem for MoD (as MoD sees it) in the pursuit of VFM is that if one company comes up with a particular innovative solution there must be the possibility that other tenderers might be able to offer the same innovative solution (albeit that they did not think of it) but at a lower price. For MoD the solution to this problem is quite straightforward. The policy is to release the innovative solution of one bidder
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to others to retest the market place! It is quite beyond any industry commentator to understand how such a policy can be thought to be proper. The obvious flaw that companies will not invest their intellectual efforts without appropriate respect for the value of that investment (and consequently with appropriate protection) seems to escape MoD. Thus it is not uncommon to see ITTs that include provisions to the effect that the mere submission of an innovative bid is deemed to convey to MoD the irrevocable, free right to make the solution available to other bidders and to make use of the solution in any contract (i.e. whether with the ‘innovator’ or otherwise) placed as a result of the tender. The absurdity that MoD will not protect ‘innovative bids’ but will (under the conventional rules) protect what are, by implication, non-innovative bids does not seem to strike MoD. The only safeguard for tenderers is to ensure that all bids (since there is no adequate definition to distinguish between innovative and non-innovative bids) are clearly and boldly marked to show that they are submitted in confidence and that permission is not given for disclosure to third parties.
Tender validity The ITT will have specified the period for which tenderers are requested to make their tenders valid for acceptance. For a simple tender this may typically be a ninety-day period. For a major tender the validity period may be as much as twelve or eighteen months. This is simply to allow for the full MoD adjudication and decision procedures to run their natural course. Unfortunately, in many tenders there seems to be an unwritten law to the effect that no matter how long a tender validity period that MoD may specify it will not be long enough and MoD will have to seek a time extension. The usual approach is for MoD to ask tenderers to extend the validity of their tenders. At other times the request may be phrased as a request for tenderers to revise or confirm their tenders for a longer validity period. No matter the nature of the request, the tenderers are of course perfectly entitled to submit a revised offer (whether as to just price or other factors as well). It is a brave tenderer who dares move his price either up or down. If his ‘intelligence’ tells him that he was close to losing he can venture all in offering a reduction for a longer validity. If his ‘intelligence’ tells him that his offer was not only the lowest but lowest by a long way, then he may dare to increase his price. In most cases the temptation is to ignore intelligence and simply extend just so as to stay in the game.
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Decision times It is a matter of policy that MoD will make up its mind and award a contract as quickly as possible. This benefits the MoD and in particular the service user, since early decisions must reduce the time from contract award to delivery of the goods into the hands of the service user. It should also benefit the tenderers. The losers find out their disappointment at the earliest time and can hence cut their losses and move on to other things. The sooner the winner knows the sooner he can confirm jobs, supplier orders, engage factory set up and other key activities. Costs to all concerned are minimised and most importantly the losers are not kept hanging on in vain hope whilst at the same time not being able to pursue other opportunities. However, as is not infrequently the case, policy and practice can diverge. For simple tenders, a decision can be made in days or a small number of weeks from tender submission, but for major tenders events and MoD procedures almost always intervene to cause delay. The following are examples of administrative delays: •
The tender evaluation and adjudication process takes longer than expected.
•
Internal MoD procedures become log jammed as successive ‘approvers’ raise questions of the IPT, although the SPI approval process goes a long way to reduce this particular problem – if the winning bid is compliant on time and performance and within the budget set at main gate then the approval to place the contract should be straightforward.
•
Government inter-departmental clearances take longer than allowed for. In particular, the Treasury has a key role in clearing major procurement decisions and as the ultimate protectors of the public purse queries and delays seem almost unavoidable – again the SPI process should alleviate this problem.
•
Novel tenders can throw the whole process into turmoil.
•
Political considerations intervene to cause delay as industrial implications are considered.
Nevertheless, it is policy to advise the outcome of tendering at the earliest possible moment. The procedure is that the winner will be advised concurrently with notice to the losers. This is a reasonable approach given that if losers were told in advance of the winner, they might be tempted to throw in a last ditch, unsolicited improved offer. Whilst the chance of MoD suddenly overturning its decision in favour of such a revised offer is extremely low, there have been cases where the tactic at least serves to inject uncertainty into MoD minds. If this is just sufficient to cause MoD to think again and perhaps to decide to go for a further round of tendering then, from the
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ostensible loser’s point of view, he has bought himself the chance to fight another day. This tactic is so much less likely to succeed if the winner has been advised and indeed if the winner has been advised by virtue of his tender having been accepted.
The MoD Tender Board All tenders must be submitted to the appropriate MoD Tender Board. The Tender Board has no role whatsoever in the assessment or adjudication of tenders. Its sole functions are to receive and open the tenders and then to make official record of which companies tendered, the prices and any manuscript changes that may have been made to the tender documentation. The Tender Board usually comprises a chairman (commonly a representative from the commercial branch), a member (sometimes from commercial branch) and a secretary. It meets in closed session at the appointed hour and conducts its business with the utmost degree of probity. When the session is ended, the documents are passed out to the relevant commercial branch in order that the decision-making process can be commenced. If the tenders are physically bulky, arrangements may be made for the non-commercial volumes to be sent direct to the staff dealing with the particular tender. Commercial or price volumes are received by the Tender Board. The official record of the Tender Board then stands as the evidence of tenders received in the event of query, challenge or complaint later. Such query, challenge or complaint can only relate to what was received, not to any subsequent assessment or adjudication. The text will shortly examine MoD tender evaluation and decision-making processes. Before doing so it is necessary to cover two points of principle regarding ‘suspiciously low prices’ and the use of best and final offers (BAFO).
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Suspiciously low prices MoD will normally take a special interest in prices that seem exceptionally low in comparison with the prices submitted by other tenderers. On the basis that MoD would not take unfair advantage of a genuine mistake by a tenderer (both on grounds of the possible legal consequences under the law relating to mistake, but due also, hopefully, to a fundamental ethic of public procurement that suppliers should not be forced knowingly by MoD to make a loss) MoD will normally treat very low prices with some caution. If a mistake is believed to be the root cause, MoD will invite all bidders to revise or confirm their offers, allowing that this will be enough of a clue to the exceptionally low bidder that he may have something wrong. However, it should also be borne in mind that in a fiercely competitive situation, a bidder may deliberately offer an artificially low price in order to ‘buy his way’ into the project. If the decision by that bidder is for that, or similar, reason of conscious design and MoD believes this to be the case, then MoD, quite rightly, would consider itself under no obligation to query the price, unless, of course, MoD held the view that other tenderers could be pushed into equal or even lower prices, in which case MoD may chose to call for a BAFO.
Best and Final Offers (BAFO) It had once been the case that MoD considered that a properly constituted competitive tendering exercise would produce from each of the tenderers his best offer. The conventional wisdom held that a ‘one shot’ competition is bound, by definition, to generate the best offer as any ‘holding back’ by a tenderer would have him run the risk of losing to the company prepared to go for the kill at the first attempt. Thus, a competition could be expected to be decided upon the result of single round tendering. This was a situation that suited all concerned. Decision times were kept to a minimum, tenderers bidding costs were kept to a minimum and the contract could be placed at the minimum elapse of time from submission of tenders. The project could be got underway at the earliest moment and the scope for dispute as to the outcome of the competition was also minimised. In the 1980s MoD discovered that normal commercial practice can permit multiple rounds of tendering. Initially MoD considered that this practice would help resolve tenders that were too close to call. The principle being that in calling for best and final offers the tenderers would be afforded the opportunity to offer a better deal. That is to say, the aim was not to force down prices, but rather to allow the tenderers, if they so chose, to offer a better price in return for something. For example the
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opportunity would be allowed for a better price against a reduced scope of work or more favourable contract conditions. Whilst this concept could actually make the decision more difficult to make on the basis that new deals might be less comparable than the initial offers, the principle was nevertheless equitably based – something for something. More recently a far more worrying policy has emerged from MoD regarding the use of BAFOs. This is the idea that where tenders are in all other respects virtually identical, offers being separated only by prices which are very close, then a BAFO round should be used to force a better separation on price alone and thus to make the final decision more obvious. In support of this policy MoD holds it to be fair that each tenderer be advised as to the order of ranking of his price and the approximate movement that he would have to make in order to put himself into the most favourable position. This policy is ill founded (some might say reprehensible) for a number of reasons: •
Competition policy surely demands that if all other things are equal then price alone must be the discriminator in the making of a decision, no matter how small the difference between the lowest and the next lowest offer might be.
•
If all tenderers are put under pressure to reduce their prices under such a policy, then the cheapest bidder in the first round (who may well have put forward his best price at that stage) who is thus the ostensible winner, may very well be unable to lower his price and thus be defeated by the ostensible loser who takes more of a gamble at the second round.
•
To advise tenderers the degree to which they might reduce their prices in order to improve their competitiveness must border on the improper disclosure by MoD of information from other bidders submitted to it in strict confidence.
•
If only a small margin on price separates the tenderers, a BAFO round conducted under this policy may very well force prices down, but it may result in there still being a small difference in price between the tenderers (albeit that the pecking order may have changed in the process). Thus the BAFO process must surely be repeated until all but one tenderer has dropped out, he being left in the race but quite possibly with a price that represents a commercially very poor position for him.
•
Ultimately the whole process could deteriorate until all that is left is effectively little more than a Dutch auction.
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It is very difficult to conclude that the policy is not one designed to help resolve a close tender, but is intended to force prices to the absolute bear minimum regardless of the legitimate commercial aspirations of the tenderers. It is not suggested that such practice is widespread but where it occurs it can hardly be considered to be a responsible practice for a British public purchasing authority. On a relatively minor, perhaps linguistic, point, the one item of good news of an MoD BAFO is that the ‘F’ stands for ‘Final’. Strictly this means that MoD can only have one round of BAFO tendering! To get around this, MoD may well give the procedure another name such as the seeking of Revise or Confirm (ROC) offers. Thus a tenderer may be asked to produce ROC1, ROC2, and ROC3 ad infinitum.
Decision process The route leading to a final decision to place a contract with one of the tenderers can be summarised as shown in figure 7.
UNDERSTANDING
ASSESSMENT
ADJUDICATION
DECISION-MAKING
Figure 7: Competition Decision Process
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Understanding MoD’s first task is to understand the tenders as they have been submitted. No matter how well the tenderers believe they have constructed their tenders, in many situations, particularly where there is great technical complexity, their material will indeed be less than 100% clear to MoD (just as the ITT may have been similarly unclear to the tenderers in the first place). Where this is the case there are two primary methods by which greater understanding can be achieved. Firstly, MoD may put written questions to the tenderers. Oral enquiries are not permitted unless they are immediately followed up with a written request. Answers must also be in writing. Strictly speaking, MoD’s action is limited to asking questions of pure clarification only. Questions are not to be constructed so as to lead the tenderer (or in any event to afford him the opportunity) to, in effect, modify his tender. For example, if it is already perfectly clear that a tender is not compliant in some key technical area, that non-compliance must stand (whether or not MoD believes that the tenderer is aware of the non-compliance). A question must not be phrased so as to encourage the tenderer to correct this non-compliance. So much for the rules. The practice may safely be left to the reader’s imagination! Secondly, the tenderers may be afforded the chance to formally present their tenders to an MoD audience. This is a golden opportunity for the tenderers to really ‘sell’ their offer to MoD. Here is both an opportunity and a hazard. The selling opportunity should not be underestimated. The hazard is that the tenderer will obviously present his proposal in the best possible light, emphasising the strong points and skating over or ignoring the weaknesses. Of course MoD is perfectly entitled to rely upon representations made by the tenderer at such a presentation (unless it is obvious that any claims are mere ‘puffery’). Indeed if such representations are decisive in MoD’s decision to award the contract to a particular company, then the company must expect to be held to those representations. Thus it is important for the company to be clear in its own mind as to whether it is happy to be so bound and if not then to make it clear to MoD that any conflict between the presentation and the detailed written tender is to be resolved in favour of the latter. Similar caution should be exercised with regard to answers given to MoD’s questions, whether posed at the presentation or separately as described above.
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Assessment Having understood what is being offered, MoD’s next task is to assess each offer against the full requirements of the ITT. An assessment team may be established the principle tasks of which will be to make an objective assessment of the following main elements: •
Technical compliance with the specification(s).
•
Delivery offer.
•
Programme risk analysis.
•
Commercial response.
•
Management and organisational proposals.
The purpose is not to arrive at a decision but simply to compare the requirement with each offer. In this task the MoD procurement team may be assisted by expert staff from other wings of the MoD. Additionally, MoD may retain the services of outside companies to provide expert scientific and technical advice as well as project management services.
Adjudication All MoD tenders are adjudicated on a VFM basis. VFM can be considered as being the tender that, in MoD eyes, represents the best combination of cost, risk, time and performance. MoD has a number of techniques for adjudicating, so as to produce a best VFM decision. These are as follows: •
Cheapest wins.
•
Cheapest compliant wins.
•
Highest scorer, on an adjudication scheme not disclosed to tenderers, wins.
•
Best VFM, against a set of evaluation criteria (with no weightings) disclosed to tenderers, wins.
•
Best VFM, against a set of evaluation criteria (with weightings) disclosed to tenderers, wins.
•
Best overall VFM.
These alternative techniques are not the subject of any published policy nor is it necessarily the case that MoD would agree that this is the standard ‘toolset’. They simply represent the Author’s observations as to the methods that MoD uses. What
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is a matter of declared policy is that evaluation criteria will be disclosed to tenderers wherever possible and that weighting between the criteria will also be given if possible. As will be seen this is somewhat more difficult than it sounds. Each of the observed techniques demands individual examination.
Cheapest wins By number, a very high proportion of MoD ITTs are adjudicated very simply on the basis of the cheapest offer. The ITT is drawn up on the most straightforward manner specifying the product in general terms (for example, light bulbs, tungsten, bayonet fit, clear glass 100w), giving the quantity (5000 off), required delivery (delivery six weeks from receipt of order) and contract Ts&Cs (for example, DEFCON112LB). For such a requirement it is unlikely that delivery as specified is essential, tenderers are unlikely to object to the Ts&Cs and thus the cheapest offer will be chosen, provided only that the tenderer does not have a poor delivery/quality track record with MoD and provided that the prices are bona fide. In such situations price is implicitly the adjudication criterion that carries 99% of the ‘points’ and the cheapest thus, by definition, scores the highest VFM ‘score’. There is, on the face of it, nothing much wrong with this and tenderers would, perhaps, not assume that much else but price will count even in a VFM environment. The one weakness is that, in the absence of the ITT indicating that only price is important (which omission would not be untypical) tenderers may believe that offering delivery as specified is essential and thus, if necessary, price for the additional costs of achieving delivery earlier than their normal lead time. There are a number of ways of determining if delivery as specified is essential or not. An examination of the Ts&Cs may reveal MoD thinking in so far as MoD would usually include the infamous ‘time is the essence of the contract’ phrase in the draft contract if delivery as specified is really important. This is not conclusive of course as at best it would only indicate if delivery on time is to be made fundamental to the contract as opposed to fundamental to the tender adjudication, which is the first hurdle to cross! Alternatively, previous experience of the particular MoD IPT or commercial branch may provide an indication. Alternatively the tenderer can always just ask. The answer, even in the simple example given, may not be unequivocal, but there is no harm in asking. Just to show that ‘cheapest wins’ is not always the simple principle that it appears to be, consider again the ITT for light bulbs and the tenderer who offers the cheapest price with delivery as specified, but with opaque rather than clear glass. It may be that clear glass is essential in which case he loses or maybe it does not matter in which case he wins! Thus it can be seen that even in the simplest of examples it is difficult to avoid at least three (cost, time and performance) of the VFM criteria.
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In such examples the message actually remains the same – cheapest wins – but perhaps the point is well made that it is always worth asking MoD what the adjudication criteria are to be. Without pre-empting the succeeding material, it should be noted that there are concerns that despite the disclosure of more sophisticated adjudication schemes the ‘cheapest wins’ criterion is actually the only one that really counts even in the most complex of tendering. It must be said that cheapness has a very powerful appeal particularly for a public purchasing function such as MoD. It has two very great attractions. Firstly, choosing the cheapest has the apparent effect of minimising the cost to the public purse. Secondly, opting for the cheapest results in a decision that is much easier to defend (to public audit authorities and to disgruntled losers of the competition). After all, what higher purpose can competitive tendering have than to result in selection of the lowest offer? How much more difficult to explain why the cheapest was rejected. Even for the most complex requirements, there is nothing wrong with MoD choosing the cheapest bid if it is in all other respects also acceptable. The concern arises where it is believed that cheapness is post facto allowed to over-ride other considerations, particularly where adjudication criteria are given. It is probably fair to say that for some years these concerns had some foundation in fact. In more recent times, as MoD has become more confident in its ability to make genuine, complex and supportable, VFM adjudication, the concerns are possibly less well founded.
Cheapest compliant wins A relatively simple way of moving to a somewhat more sophisticated system than ‘cheapest wins’ is to adopt a ‘cheapest compliant wins’ approach. In this, tenderers are required to submit their technical proposals for the contract entirely separately from their price offers. In this context ‘technical proposals’ would normally include delivery requirements. The technical proposals are opened and stringently assessed for absolute compliance with the technical requirements of the ITT. Technical proposals are then declared quite simply as ‘compliant’ or ‘not compliant’. Tenders that are technically not compliant are completely and irrevocably discarded. The price offers for the technically compliant (but not those relating to the technically non-compliant) are then and only then opened. The cheapest is declared the winner. This is essentially the basis of defence procurements under the so-called ‘NATO rules’ 3 and MoD will sometimes follow such principles for purely domestic procurements. The advantages are that the approach is simple in concept, simple to operate
3
A system of conducting competitive defence procurement agreed between the
NATO nations that operate wherever the procurement is to be funded by NATO.
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and is and can be seen to be scrupulously fair, provided that the technical assessment is carried out objectively, accurately and without bias. The disadvantage is that the system is so absolutely prescriptive that it may rule out the bid which actually represents the best VFM, a saving grace being that if the best VFM bid is ruled out because it is technically not compliant then nobody ever knows what VFM opportunity has been lost! Indeed the underlying flaw (which MoD has not been slow to notice) with ‘cheapest compliant wins’ is that it relies upon all the tenderers playing the game. That is, each must accurately read the ITT and respond precisely with a single technical solution that is compliant. The rules then operate and a winner can quickly be found. Tenderers who offer options, who phrase their technical offerings in a manner which is deliberately vague or ambiguous and who allude to package deals that can only be assessed when the price envelopes are opened are all, strictly speaking, not playing the game. In this they aim to defeat the simplicity of the ‘cheapest compliant wins’ principle and instead hope to win the VFM test, in the full knowledge that the two doctrines are in practice not synonymous. Of course MoD in not being slow to notice this flaw, perceives not disadvantage in the lack of integrity of the purported tender adjudication scheme, but advantage in that the VFM cry allows it to pursue a tender which, on the face of it, has been presented outside the rules. Thus the post hoc application of VFM becomes MoD’s trump card. Therefore, the tenderer who is the most able tactician wins. The MoD wins. The taxpayer wins. The losers lose, some to complain (usually to little or no effect), some to lick their wounds, some to wonder at the apparent random nature of MoD decision-making. How dare the Author imply criticism of the MoD tender adjudication process? The evidence that MoD itself perhaps considers the principle anomalous with the practice is possibly found in the use of a ‘get-out clause’ that sometimes accompanies ITTs which are constructed on the ‘cheapest compliant wins’ approach or indeed which accompanies any ITT where a system of adjudication based on rules is declared at the outset. The ‘get-out clause’ says something to the effect that ‘the MoD, whilst intending to adjudicate tenders according to the scheme set out in the ITT, reserves the right in pursuance of its search for the best VFM to make its final decision on another basis’!
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Highest scorer, on an adjudication scheme not disclosed to tenderers, wins As has been said, it is MoD policy to advise tenderers wherever possible as to the method to be used for assessing tenders and deciding a winner. The weaknesses of the ‘cheapest compliant wins’ approach have just been examined. It might be argued that a further weakness of that approach is that it is too simple. If only there was a proper statement of the relative significance of cost, time, risk and performance (or such other criteria the combination of which amounts to VFM) then perhaps tenderers would be better able to make their pitch at exactly the right point. For MoD there are two disadvantages of establishing such a scheme. The first disadvantage, of which more later, is that it is not necessarily easy to develop a suitable and robust scheme. The second is that the more prescriptive MoD is, the more tenderers will tailor their offers to score optimally against the scheme. Thus there is a real danger that the scheme by itself will force the tenders to look remarkably similar. Whilst some might say that this should make MoD’s job easier (all bids more or less the same, therefore pick the cheapest!) MoD has argued that it stifles the very innovation that is believed to be the true source of real VFM. The resolution of the first of the disadvantages is not to have a scheme at all. The resolution of the second is to have a scheme, but not to disclose it to tenderers. In both cases the tenderers are left with only half the story. They know the requirement from the ITT but they do not know how a decision will be made. Thus they are blind to the key sensitivities in the decision-making process. Whether this stimulates innovation or whether it produces a degree of nugatory work as some tenderers are bound through accident or poor judgement to aim at the wrong sensitivities is left for the reader to decide. It must also be observed that where MoD elects not to have an adjudication scheme at all, the short-term advantages (saves thinking effort and saves ITT preparation time) can become replaced by the disadvantage of having to develop a scheme after tenders are submitted. This can become necessary when the tenders are ‘apples and pears’ and thus too dissimilar to admit to ready comparison. Thus a scheme must be developed to objectively assess the comparative merits of each. The fact that the scheme must be developed after tenders are submitted and that it must be developed by those staff who will apply the scheme, then to make a recommendation as to the winner must inevitably cause some legitimate concern about the possibility of bias, whether unintentional or otherwise.
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MoD would no doubt argue that these concerns are more imagined than evidenced by fact and that it is not MoD’s job to mollycoddle Industry by making the task of responding to an ITT too straightforward. There may be some justice in such arguments, however the Author finds much merit in the simple line of questions: ‘Is it cheapest wins? If not is there an adjudication scheme? If so will you please release it to us with the ITT?’ If MoD confirms that there is to be a scheme then there should be no injunction upon or hesitation in releasing it to tenderers. They are then in full possession of all the relevant facts. It is for them to decide whether to slavishly follow what might appear, on the basis of the requirement in combination with the adjudication scheme, to be the obvious course of action or to divert into something more innovative. The decision to bid is theirs. The bid strategy is theirs to decide. The job and costs of bidding are theirs. The risk of winning or losing is theirs. On balance there is really no convincing argument for withholding details of the basis of adjudication.
Highest scorer, against a set of evaluation criteria (with no weightings) disclosed to tenderers, wins If MoD decides that it will reveal to tenderers an adjudication scheme then it must set about deciding what is and is not important. It must also decide how to take account of the most important matters in arriving at a decision. The simplest approach that MoD uses is to list the matters that will be taken into account in arriving at a decision. For the time being, the four key components (cost, risk, time and performance) of VFM will suffice to illustrate the problems of this approach. The ITT might say, for example, that ‘in addition to price, MoD will take into account the delivery offered by the tenderer’. This makes sense where MoD has only a target delivery time and price is the dominant consideration. The tenderer can hazard a guess at the relationship, but with two criteria only, a subjective statement by MoD such as this is relatively unhelpful as for the tenderer hazarding a guess as to the relationship of the two is indeed a hazard as regards his prospects of winning. At least dealing with two criteria only is easy to grasp as a concept. For further example, if cost and performance are now considered, MoD might say that the decision would be based upon a simple formula designed to award each tenderer a VFM quotient:
VFM Quotient =
Price Technical Compliance
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Where Technical Compliance is marked out of an overall available score in relation to all the features of the performance requirement and the bid having the lowest VFM Quotient wins. Assuming that it is possible to mark technical compliance in some sensible fashion, such a formula has at least the advantage of being deterministic. The principle is clear and each tenderer can see that the underlying rule is not ‘cheapest wins’! Here lies the flaw. By such a scheme, MoD is bound to select the tenderer with the lowest VFM quotient even though his price may be the highest. Best VFM is undeniably demonstrated but MoD may wish to go for the cheapest for reasons of affordability, as has already been mentioned. Yes, the whole VFM regime can seem like a lottery! Consider then how the situation becomes more complicated and obscure where MoD declares that ‘in addition to price, MoD will also take into account the tenderers proposed delivery, technical performance and the perceived risk in his programme’. No guidance is given on the relative importance of these to each other or in absolute terms, but MoD will consider that it has been helpful in indicating the intended basis of the adjudication. Clearly what is needed is a comprehensive and appropriately sophisticated adjudication scheme that is very well thought through, such that MoD will be happy with whatever outcome it produces and such that tenderers do indeed have all material facts available to them as they prepare their tenders.
Highest scorer, against a set of evaluation criteria (with weightings) disclosed to tenderers, wins Seizing then upon the importance of having and declaring a robust and scientifically sound method for assessing and adjudicating tenders, MoD may turn to expert help in drawing up such a method. Linking together several criteria, their relative weightings, and the interdependence of the criteria, establishing whether the relationships between criteria are linear or non-linear is by no means a straightforward task. The method that emerges from these deliberations can be in a daunting mathematical form. There are a number of drawbacks in attempting to utilise a comprehensive scheme that can only be expressed in mathematical form. Firstly, the scheme may take several months to develop, consume a vast amount of attention and time on the MoD side and cost a considerable amount of money to produce. These expenditures of time, money and effort could arguably be put to considerably better use. Secondly such schemes require an appreciation of mathematics probably beyond the many laymen involved (on both sides) during the tendering period. For such a key feature of the overall tender process to be understood by relatively few people can not be in the interests of the effective management of large scale tenders. Lastly and perhaps most importantly, the balances and sensitivities
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between the many criteria and other features of the scheme can be so complex as to actually put it beyond the reach of tenderers’ abilities to effectively assimilate and thus to construct their tenders to (apparent) optimum effect. This last point is particularly damning especially as this short progress through MoD’s options for an adjudication scheme has attempted to show that, beyond ‘cheapest wins’, the degree of useful information that MoD puts with the ITT can be singularly lacking. Before looking at the final decision-making process, cost, risk, time, performance and VFM require a somewhat closer examination.
The meaning of cost, risk time and performance In this Report the word ‘cost’ in its VFM context has been implicitly used to mean the prices which MoD will have to pay the winning tenderer. Whilst such prices are certainly included in the definition of cost, there are other elements that feature or indeed may dominate. The word ‘cost’ should really mean the total cost to the Exchequer consequent upon the selection of company A as the winning tenderer. This definition of cost would therefore be as shown in figure 8.
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Initial acquisition cost:
Prices to be paid to company A
+ + + +
Prices to be paid to other companies who will be awarded work in support of company A
Prices to be paid to companies providing support services to MoD
Prices to be paid to government agencies (e.g. DERA)
Costs of maintaining existing in-service equipment until the replacement is available for fielding
Fielding and support costs:
Costs of training service personnel
+ +
Cost of purchasing spares
Cost of establishing support infrastructure (e.g. base workshops)
Disposal costs:
The costs of eventual withdrawal from service and ultimate disposal.
Figure 8: Acquisition Cost Definitions
Thus it becomes easy to see that ‘cost’ alone is a very difficult parameter to feature in any adjudication scheme if it is to take account of so many variables, many of which are uncertain and for which it is therefore difficult to produce reliable financial figures. And yet the fate of tenderers’ aspirations hangs upon these imponderables! Risk in the VFM context means the risk to the tenderer’s programme being completed on time. The probability of success and failure is calculated mathematically and is based upon data (programme plans, networks, critical path analysis are examples) submitted by the tenderer. MoD may run its own mathematical model using this data, it may accept the results of the tenderer’s own modelling, it may use its own model based upon its own assumptions about the tenderer’s programme. It may
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do all of these. The end purpose is for MoD to have a reasonably reliable view of the likelihood of the tenderer meeting his delivery promise. There are differing views about the reliability of the mathematical models both because of the inherent uncertainty in much of the underlying data and also because there are different models which produce different results from the same set of data. However, setting these concerns aside for the purposes of examining the meaning of risk, the intimate linkage between risk and the tenderer’s delivery offer (referred to as ‘time’) can immediately be seen. MoD has rightly been concerned about the continuing tendency for larger scale defence projects to be delivered behind the schedule originally set. There are likely to be several possible explanations for this: •
Both sides genuinely under-estimating the complexity and hence the time needed to deliver the project.
•
Companies tendering, offering to meet the specified delivery in order to help win the business, but in the full knowledge that delay is almost certain.
•
MoD expressing delivery requirements which it believes probably unachievable but yielding to political pressure to be seen to be preserving the desired In-Service Date.
•
Combinations of these.
The purpose of risk analysis at the tender stage of a project is intended to flush out any unreality regarding time. So far, the words ‘technical’ and ‘performance’ have been used fairly interchangeably. Taking ‘performance’ as one of the four core VFM criteria, let it be considered that it means, as regards the equipment or system to be supplied under the potential contract, ‘what it does, how it does it and how well it does it’. Therefore the component parts of performance in an MoD ITT might include the following: •
The degree of compliance with any specification.
•
Reliability.
•
Durability.
•
Ease of use.
•
Ease of maintenance.
•
Scope for enhancement.
•
Ease of enhancement.
•
Resilience to countermeasures.
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Again it is easy to see that capturing the complexities of such intertwined characteristics in any form of assessment and adjudication scheme would be extremely demanding. Furthermore it is the case that all the four core elements of VFM are closely interlinked. For example, high performance might be offered at low cost (in those technologies where this is the natural trend) but if the solution is not yet developed the risk might be calculated as high, leading to possible delay and hence increasing run-on costs of the equipment in service. All things considered it is perhaps fair to say that MoD recognises the need to provide tenderers with as much useful information as possible and is frustrated in finding a sensible mathematical means of describing a robust, objective assessment and adjudication scheme, the main reason perhaps being that in practice the four core elements of VFM are too difficult to segregate and to reduce to simple rules for decision-making.
Best overall Value for Money (VFM) So far it has been argued that the test for VFM rests upon the optimum combination of the core elements of cost, risk, time and performance. In practice MoD may have another set of possible adjudication criteria that may have a role in individual tenders. These, essentially commercial aspects could include the considerations shown in figure 9.
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CRITERION
REASONS FOR MoD INTEREST
Exploitability of product overseas
• Supports ‘UK Ltd’ • Improves balance of trade • May earn MoD commercial exploitation levy
Degree of compliance with MoD Ts&Cs
• Alternative Ts&Cs usually move more risk to MoD • Indicates future tone of dealings • Saves time in placing contract
Grant of IPR to MoD for downstream competition
• Complies with MoD policy • Perceived to offer later cost savings • Avoids a single contractor getting too tight a grip on the project
Willingness to offer firm prices
• Complies with MoD policy • Avoids MoD providing for inflation cost increases
Figure 9: Commercial Adjudication Considerations
It rapidly becomes impossible even to conceive a scheme that could possibly cope with cost, risk, time and performance (each with its own complexities) criteria and a series of important commercial considerations. This is particularly so since it is difficult in the final analysis to say what is more important than what. A high cost, early delivery bid may be far more attractive in the big picture than a low cost but one year later offer, if the high cost bid actually allows some other very high cost project to proceed apace and thus save money across the defence budget as a whole. It is difficult to put a monetary value on the grant of downstream IPR, which, if ever exercised, might save MoD £50M, but which if never needed is in effect worth nothing. It is difficult to measure the relative importance of potential commercial sales overseas (which might come to nothing) and the enhancability of the product in order to meet evolving needs that are unique to the British armed forces. A particular nonsense arises in the attempted application in a VFM environment of an adjudication scheme to the technical aspects of the ITT. For example, MoD may indicate that of, say, 1,000 technical features that the ITT specifies only 100 are mandatory (meaning that the tenderers must offer them). Thus in extremis in a ‘two-horse’ race the bidder offering 100% mandatory features and 0% non-mandatory features will win against the bidder who offers 99% of the mandatory features plus 100% of the non-mandatory features. This would be true even if the second of these bidders were to be £100M cheaper than his rival! Whilst it is conceivable
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that there may be one mandatory feature which is so essential that without it the project would simply not be viable at all, in most cases this would not be true and hence the marginal non-compliant but massively cheaper bid is clearly the overall best VFM, despite the rules. Thus the wheel turns full circle. For simple ITTs, ‘cheapest wins’ is the almost totally reliable rule. For complex ITTs there is an unequivocal and unavoidable case for establishing and publishing with the ITT clear adjudication criteria and weightings. Experience shows that achieving this in a VFM environment is difficult and sometimes impossible. What is there left for MoD to do? Little but stand by the general, if hopelessly vague, VFM concept and apply subjective judgement in arriving at a decision! This is perhaps a little harsh. In all cases MoD must be able to defend its decisions, but in highly competitive, high value competitions, particularly where there is international bidding, the MoD decision can expect to be subject to close and aggressive scrutiny. UK government departments, foreign governments and losing bidders can all put the pressure on. MoD must always be able to justify its decisions, sometimes even in Parliament and in the media. However, the skill in such matters courses through the veins of the civil servants and no matter the scrutiny, the decision is right because it is. The spirit of Sir Humphrey lives!
Industrial implications of tender decisions The MoD is a very major customer of British based industry. For the main defence companies the MoD can be the single most important customer, placing the most orders of the highest value. Indisputably therefore, MoD procurement decisions have a direct impact on the health of the defence industry. The defence industry remains a substantial employer in the UK and whether through private means or at MoD expense it conducts a significant proportion of the scientific and technological research that is carried on in Britain. Defence contracts means business and jobs for the defence companies but also for many thousands of subcontractors and suppliers. The spin off into local economies must also not be forgotten. MoD decisions on the award of contracts as to British or overseas companies have a direct effect on the economy at large and on the health of industry as a whole. Within the UK, a decision to award a major contract in one region may be to a devastating effect on another region that has lost out. However, defence policy has traditionally no official interest in the industrial implications of procurement decisions. This is not to say that individual ministers and other senior officials did not have a point of view on this serious issue. Nor is it to say that governments were not unconcerned about particular decisions. The point
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is simply this, defence policy was wholly concerned with VFM alone. The definition of this, as has been seen, does not extend to industrial implications. It is not VFM for ‘UK Ltd’, but, narrowly, VFM for the fighting user that was at the heart of policy. But growing concern about the long term viability of the defence industry has led to somewhat more joined up thinking within government in recent years, but MoD still clings to its denial of any responsibility for industrial aspects in its pursuit of VFM, arguing that it simply confuses what should be straightforward issues and introduces extra delay into the already lengthy decision-making time frames. Thus the counting of industrial matters in the decision-making process can still not be assured. This is unhelpful for all concerned. The British tenderer does not know for certain if this is a factor in his favour. The overseas tenderer does not know for certain if it is a factor to be weighed against him. It is conceivable that this very long running debate about the extent to which MoD should be interested in UK Ltd when making decisions is just about at the end of its shelf life. A combination of a willingness to place defence contracts for key technologies overseas, the very long in-service life to which the armed forces are forced (on economic grounds) to put their equipment and the MoD’s refusal to fund the maintenance of design and production facilities has meant that many once strong, indigenous industrial capabilities have withered or are withering. Radio communications, naval shipbuilding, helicopters and tanks are examples. There is as little chance of this decline being reversed as there is of coal or steel industries regaining their former glories.
Industrial Participation (IP) Notwithstanding apparent MoD distaste for industrial considerations, it does run a system of industrial participation (IP) whereby, for significant tenders (usually above £10M in value), overseas companies are required to make proposals for IP. The proposals are to indicate what measures the tenderer would propose, if selected, to ensure the involvement of British firms in the particular project or otherwise. The MoD rules for IP are essentially that the work offered for IP must be: •
on the particular project, or in any event,
•
defence related, or otherwise
•
of a comparable nature (e.g. high technology),
•
available in the short term,
•
relate to ‘new’ business,
•
be placed as a result of competitive tendering.
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Companies rightly take the demand for IP proposals very seriously. It might be argued that there is a twofold drawback in the MoD system. Firstly, the requirement that work is let competitively does not actually rule out the existing (i.e. overseas supplier) from bidding. Whilst the intent is that the competitions should be run between British firms only, the rules do not make this clear. Thus it would be possible for the overseas company tendering for the MoD contract to argue, after the contract has been awarded, that his IP ‘commitment’ was discharged by simply inviting British firms to compete, it then not being his fault if the work was all won by existing overseas suppliers. Secondly, and hence the reason for the word commitment in the previous sentence being in inverted comas, MoD generally places no contractual obligation on the overseas company to achieve the level of IP that he may have indicated in his tender. Thus there is no penalty for failure and therefore no burning need to live up to whatever promises may have been made earlier. All things considered, it would be fair to say that the whole question of industrial considerations and IP remains far from exact in so far as the influence on tendering for MoD contracts is concerned.
Final decision-making So the MoD machinery has undertaken a process of understanding, assessment and adjudication. The impact of industrial consequences may have been weighed in the balance. Tenderers may have been forced through one or more rounds of BAFO. A final recommendation can thus be presented and any other organs of government that may have a say, most notably the Treasury, will have had their chance. Running in parallel with the conduct of the external interface between MoD and industry will be the MoD internal Combined Operational Effectiveness and Investment Appraisal (COEIA) process. This process is, in summary, a method by which MoD seeks to ensure that the chosen solution represents the best of all the options for the way ahead. That is, whilst the process of tender adjudication aims to select the offer that represents the greatest VFM, COEIA allows MoD to examine (or re-examine) a wider range of options including ‘do nothing’ (that is, abandon the procurement and continue with the existing capability). The COEIA is an essential component in a dossier system of seeking main gate approval. Eventually papers will be signed, approvals will be given and permission is conveyed to the commercial branch to proceed to place the contract.
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The decision When MoD has arrived at a decision it must decide what to do next. It will attempt to prevent the decision leaking out, even to the winner, as this might damage MoD’s position. Frequently a decision is arrived at in advance of the conclusion of all contract negotiations. Whilst it is strongly preferred that final decisions are not made in advance of the potential contract being fully agreed, the MoD approval process sometimes has to run in parallel with the process of contract negotiations. Thus a decision may emerge (perhaps more accurately a decision in principle only) before those negotiations are at an end. Thus MoD then becomes faced with a dilemma. On the one hand it does not wish to cause tenderers to incur unnecessary or nugatory costs. There is therefore pressure to announce the decision and thus let the losers off the hook so that they may be free to pursue other business opportunities. From a moral point of view, MoD agrees that the losers should not be kept in the dark for a moment longer than is necessary. On the other hand to announce a winner before contract negotiations are complete exposes MoD to two main risks. Firstly, the negotiations may ultimately and irrevocably breakdown, but so long after the decision was revealed that it is no longer viable for MoD to approach the second place tenderer or to reopen the competition. Secondly, a premature announcement appears to significantly weaken MoD’s negotiation position with the winner. To unnecessarily move the bargaining advantage to the tenderer is clearly imprudent for MoD at this stage. Clearly from the industry viewpoint, MoD must have the courage to make an early announcement (if it really is the case that a final decision has been reached and thus the losers have nothing further to gain in remaining in the competition) and to have faith in their own ability to negotiate fairly and effectively with the winner. However, they may be occasions where MoD will delay making the announcement and press ahead with parallel contract negotiations with two, three or perhaps even four tenderers even though only one is in the frame for contract award. The purpose clearly is to keep the competitive pressure upon the undisclosed winner until the last possible minute. However, the purely artificial maintenance of the competition is patently unfair to the losers. Companies should thus keep it in mind that they may be held in competition for much longer than is necessary simply to provide MoD with stalking horses with which to shadow the winner during the period of final negotiations. When the decision finally emerges into the cold light of day MoD may write to the winner accepting the tender (as may have been modified during tender assessment and subsequent negotiations) or it may assemble all the relevant paperwork into a form which allows MoD to make a formal offer of contract to the tenderer and inviting his acceptance. Alternatively, MoD and the company in question may work together to draw up a final and complete draft contract, which might then be jointly signed at some form of ceremony.
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Debriefs In any competition the tenderers usually become highly motivated and very committed to the cause of winning. The shock of losing can indeed be a shock. The immediate aftermath of the shock of losing is a very keen desire to learn what went wrong, not only from an earnest curiosity but also from the point of view of wishing to learn from experience so as to be better placed to win the next competition. MoD is sensitive to these needs and of course it has the ulterior motive of wishing to ‘improve’ the competition next time for its own gain. Thus the policy is to debrief those tenderers who seek an audience. Although such debriefs are to the potential future benefit of MoD, it can nevertheless be a chore for the MoD commercial branch staff (theirs being the primary responsibility for formal debriefs) who have plenty of other things to do, not the least of which is getting on to place the contract with the winning contractor. The responsibility therefore lies with the tenderer to press for a debrief, one will not be volunteered by MoD without there being a suitable request. It is as well to seek a meeting as much more can be gleaned from a faceto-face discussion than from a letter (which will be very succinct and of little help) or a telephone call. In the debrief MoD is permitted to indicate where a tenderer’s offer lay in overall ranking, the areas (particularly in the technical dimension) in which his offer was perceived as weak and a general indication of how far out was his price offer. The worth of the information gained will be highly variable from case to case and in any event the time gap between comparable tenders may render any information learned of little real value. In some ways the greatest merit may be in impressing the MoD with the companies keen interest in its business and its wish to be seen to be seeking to learn from the experience. Perhaps not surprisingly, it is usually assumed that it is the losing tenderers who will be interested in seeking a debrief, but there can be equal if not greater advantage to the winner in seeking a review. In a complex tender each tenderer may have developed a win strategy that has several distinct strands to it. To the extent that time, effort and cost will have been expended on all of the strands, it would be illuminating for the winner to know if all this expenditure was worthwhile. If, in the final analysis, only one strand was decisive, then, in comparable conditions in the future, the company would possibly have much to gain in following a more cost effective win strategy in the future. Whether winner or loser, the truism that all intelligence is useful intelligence must hold good. Debriefs are thus always worthwhile in some measure.
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Contract changes Given the scope of this Report it may be assumed that discussion of what happens after the contract has been tendered, won and negotiated would be inappropriate. The subject of what happens after contract let – contract performance, contract management, project management, customer care and subcontract management – would be worthy of a book in its own right. But many companies will make an initial decision to bid partly in the expectation of the further business that the initial tender success could bring. For many, the follow on work or contract growth is very much part of the risk/reward analysis in deciding to make the bid investment and to take the risk in the first contract. It is therefore appropriate to look at this aspect – the likelihood of post contract changes and MoD’s position on it. MoD procurement has always been based on a simple four-step process. Step 1 is the expression of a service need. Pre SPI this was the ‘staff target’; post SPI this is the ‘capability requirement’. Step 2 is the formulation of the need as the basis for procurement. Pre SPI this was the ‘staff requirement’; post SPI this is the ‘user requirement document’. Step 3 is representation of the need in terms suitable for contract action. Pre SPI this was the ‘specification’, post SPI this the ‘system requirement document’. Step 4 both pre and post SPI is the performance of the contract leading to the introduction of the system into service. In practice this four-step process is not in the least bit simple. Finalisation and agreement of the key documents, securing adequate funds, the slow speed of the process, running and deciding competitions, placing several interdependent contracts with different contractors for elements of the overall system or capability and a host of other reasons make for difficulty and complexity. SPI will eventually ameliorate some of these issues, but not all. But in essence the four steps are there. From the industry perspective, the four steps can be reduced to just two: place contract, deliver contract. Underlying this even simpler expression of the process is the assumption that the contract stays the same from start to finish. Traditionally this has rarely been the case. Contract ‘changes’ have been a feature of procurement for decades. MoD intensely dislikes contract changes. This is because change can represent potentially unbudgeted extra costs and can be seen by the MoD as an undesirable opportunity for contractors to wriggle out of their original obligations! Also, under SPI, change can be seen as a failure to have got things right in the first place.
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So where does change sit in the SPI era? The SPI project lifecycle shown earlier in figure 2 contains no overt stage for change. To be fair, even the old Downey cycle did not overtly expect change, but sure enough over a long period of time all major contracts were subject to change, a situation that many people took to be simply custom and practice. For the reasons mentioned, MoD today still does not like change, although something akin to it does appear in the SPI under the concept of ‘Incremental Acquisition’. This can best be illustrated as shown in figure 10.
Concept
Assessment
Demonstration
Finalise Baseline Capability
Define 1st Increment
Define 2nd Increment
Implement Baseline capability
Implement 1st Increment
Implement 2nd Increment
Initial Operational capability (Equipment In-Service) Full Operational Capability Figure 10: Incremental Acquisition Diagram Incremental Acquisition allows for capability to be delivered (by the IPT to the Customer) incrementally. This is for risk reduction reasons or to allow for relevant technology (primarily IT and software) to be released at the moment of optimum maturity (there is a trade-off against proving and training needs in terms of timing). At first glance this might appear to allow for something along the lines of traditional contract changes – one contract change for each increment would be a possibility. However, extreme caution is needed here. Main Gate project approval occurs between the Assessment and Demonstration Phases. At this absolutely crucial moment the full capability must be established and the overall project cost must be fixed within narrow limits. Before considering the implications of this, it is helpful to overlay (within the dotted lines) the possible scope of the main phase contract onto the project lifecycle as shown in figure 11.
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Concept
Assessment
Demonstration
Manufacture
In-service
Disposal
Figure 11: Scope of Main Phase Contract
Thus for a new system the scope of the contract could include all of: 1.
Development,
2.
Demonstration,
3.
Test,
4.
Trials,
5.
Production,
6.
Delivery,
7.
Installation,
8.
Commissioning,
9.
Handover,
10. Training, 11. Technical support, 12. Supply of spares and 13. The provision of repair facilities. This scope must represent full capability, even if delivered in increments from a volumetric, functional or performance perspective. The advantage to MoD is that competitive pressure is maximised on the greatest possible scope, even if the capability is to be acquired incrementally so as to lower MoD risk. The danger for the tenderers and for the winning contractor is the degree of risk (cost, timescale and technical performance) that must be taken at the bidding stage. The bidding stage may occur prior to Assessment or perhaps during Assessment. For major contracts the risk can be very considerable, even if the rewards for the winning contractor seem great.
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By having one super competition, MoD not only secures the benefit of maximum competitive pressure (remember competition is good even if prices are higher because of risk contingency cost allowances), but MoD also avoids the interruption to the delivery process occasioned by the stop-start of multiple competitive stages; MoD can develop a genuine partnership relationship with the contractor by working with him over an extended period and MoD may be able to avoid some of the traditional problems over intellectual property rights. So, is this single, super competition with no changes (other than pre-determined pre-priced increments) the exclusive strategy? The answer is no. MoD is more pragmatic (when it suits) and sees advantages in more flexible strategies. The super competition has, to MoD, the disadvantage of ‘supplier lock-in’ denying it the potential benefits of downstream innovation from other sources and denying it the chance to financially again from improving efficiency on the industry side. Also, despite the preference (or policy) of the SPI it does seem unlikely that MoD can completely avoid allowing some contract changes that permit the introduction of at least minor improvements, particularly those that arise from in-service use. So, in practice MoD will acquire capability with super competitions, with multiple competitions and in each case with or without post contract changes that may or may not be pre-priced. With this in mind it is time to look at the categories of change as shown in figure 12.
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CATEGORY
COVERS
PURPOSE
EXAMPLE
PROBABILITY*
ENABLED BY
IMPLEMENTED BY
Options
Extras foreseen To take Capability at the advantage of Increments tendering stage initial tendering especially if competitive
High
Contractual provisions in initial contract
Letter or contract amendment exercising option
Variations
Technical changes arising during the work
To give MoD Change to Very High the unilateral external system right to demand interface changes post contract
Standard contract condition permitting MoD to alter specification
Change note
‘Real’ follow-on
Extras desired or necessitated as a consequence of having the new equipment
To realise the benefits of MoD investment in the initial procurement
Further tendering (competitive if possible)
New contract or renegotiation of existing contract
Combat losses
Medium
*of the work being placed with the original contractor
Figure 12: Categories of Change
Contract options can only be used to cover a situation where it is possible to foresee at the tender stage that the contract may require to be extended (or perhaps ‘expanded’ is a better word). The sort of extension that may be foreseen could include capability increments as just discussed, but it could also cover the following: •
An extension of the contract duration – for example, where the contract is for the provision of a service (e.g. annual repair services, provision of a test facility) the initial contract period of, say, 24 months, may require extension.
•
The supply of additional quantities of the same articles.
•
The supply of articles not ordered initially.
•
The provision of a service that logically does not commence until the supply phase of the contract finishes.
There can be several reasons regarding the need for contract extensions. Possibly MoD may want to conduct the tendering on the basis of its maximum requirements, but in the knowledge that it is unlikely that the available budget can accommodate the full requirements. On this basis MoD may then have to leave some items to be ordered later when the budget does permit. Similarly the MoD procurement staff may deem it prudent to ask tenderers to include proposals for articles or facilities which are not yet approved for procurement action, but for which logic dictates
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that a demand will arise in the foreseeable future. Thus this early action may save time and money later by avoiding repeating the tendering process. It is for reasons such as these that MoD may reserve the right to accept only part of a contractor’s tender. In theory SPI eliminates these uncertainties of initially inadequate budgets or doubts over final quantities or the need to plan for downstream services (in this latter case particularly if the scope of the main phase contract is as shown in figure 12), but in the real world such contingencies can never be completely ruled out. Where such possible future requirements can be foreseen, MoD prefers to deal with them as options, which are built into the contract from the outset. In a competitive tendering situation, this is clearly better from MoD’s perspective as the fixing of both price and delivery time frame can be seen to have been achieved under the full weight of competitive pressure. The inclusion of options in contract can have very significant benefits for both sides, not the least of which is that when the time comes for the additional work to be ordered, the process can be simple and swift. A brief letter from MoD to the contractor formally exercising the option is all that is needed to get things underway, provided that MoD does so proceed within any stated validity period for the exercise of the options. As far as variations are concerned almost all MoD contracts include a condition that gives MoD the right to change the specification of the goods to be supplied. The intention is to allow MoD the ability to require the introduction of modifications into the nature of the work during the course of contract performance. In this context the word ‘specification’ is intended to mean strictly the technical definition of the work. It is not intended to be drawn so widely as to embrace the quantity/ volume of work to be done or the time frame in which it is to be done. For such changes of specification the contractor is entitled to a revision to the contract price(s) and the time allowed for performance. If the provision were to allow MoD to unilaterally modify the quantity/volume or time frame it could be that MoD could so alter the contract as to render it unrecognisable from its initial form. For this reason any such fundamental change would require a basic re-negotiation of the contract (perhaps drawing into question MoD’s contractor selection and the very decision to proceed to contract in the first place). A change to the specification permits MoD to require a change in the technical direction of the contract for the following reasons: •
A change in desired capability resulting from a re-assessment of the military threat.
•
Experience gained from the testing or in the use of the system.
•
Realisation that the system as specified will not, after all, make the expected contribution to the desired capability.
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The first and second of these points amounts to no more than a pragmatic recognition that even the SPI process cannot guarantee complete certainty in the art of crystal ball gazing. The third point is potentially more difficult as examples of this category can lead to disputes between the MoD and the contractor as to the blame for the apparent inadequacy of the specification. Although it is the inclusion of the standard condition in contracts that allows MoD to prosecute the business of always ensuring that equipment to be delivered under its contracts will as far as possible be at a specification that will allow the desired capability to be met, it must be remembered that an evolving military picture is also an opportunity for contractors. A procurement process that does not preclude contract changes needed by the MoD must by definition also allow for the contractor to make unsolicited proposals for change. Thus the contractor must be on the look-out for opportunities to propose changes that of course will benefit him but that will also be attractive to the customer. Such changes could come from the realisation that emerging new technologies could, if incorporated in the solution, lead to: •
Greater operational effectiveness.
•
A reduction in the cost of operating the equipment.
•
A reduction in the cost of supporting the equipment.
•
Speedier delivery.
Making proposals for change that are beyond the trivial can be costly to prepare. The usually accepted convention with MoD is that MoD will pay for proposal preparation costs for all changes which it asks to be proposed, whether taken up or not, and for such of those initiated by the contractor as it chooses to take up. Both options and variations allow what might be referred to as perfectly natural possible additions to the basic contract. Many contractors will want to know what real chances there are for further but genuinely separate work to flow from the preliminary contract. Once having established himself successfully as the prime contractor or main contractor for the project the contractor may feel entitled to the automatic grant of all additional work, however it must be borne in mind that MoD’s wish is, in principle, diametrically opposed – the desire for further competition being uppermost in the corporate mind. There may be solid arguments for awarding the work to the sitting contractor. For example, speed with which he can proceed, the utilisation of background knowledge and his willingness/ability to carry risk which might land at MoD’s door if the work is awarded elsewhere. However, a final determinant may be the position regarding IPR. If the MoD has sufficient rights to mount a competition then the final decision as to award of the follow-on work lies with it. If the MoD is not so positioned then it is the contractor who has
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the final say, MoD’s options being to proceed with the contractor, not to proceed at all or to attempt to find a work-around that would allow competition without there being need to make any use of the contractor’s data. Perhaps needless to say, any company hoping to see its business grow in the exercise of options, the operation of the variations arrangements to the contract or the award of real follow on business must expect that MoD’s judgement as to whether to proceed will depend upon the contractor’s performance under the initial contract.
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Section 4 Principles and processes of negotiation The authority .............................................................................................69 The commercial branch and the IPT.......................................................69 Contractual delegation.............................................................................71 Formal and informal negotiations ..........................................................74 The commercial branch ...........................................................................74 Principles of conduct ................................................................................76 Principles of behaviour ............................................................................78 Planning and preparation ........................................................................80 Analysis......................................................................................................81 General tactics ..........................................................................................83 MoD tactics................................................................................................86 Approaches for the contractor ...............................................................88
Section 4 Principles and processes of negotiation
The authority Although it appears to be of academic interest only, the purist should note that defence contracts are made with the Secretary of State for Defence and not with the MoD. Whether the negotiations are with the DPA at Abbey Wood, the DLO or with one of the many other defence agencies (such as DERA) it is the relevant commercial branch that, by and large, has the exclusive legal authority to make contractual agreements that bind the State in law. Thus the objective is to negotiate and make contractual agreements with the relevant commercial branch.
The commercial branch and the IPT Under the SPI, the project commercial branch is an integral part of the IPT. The IPT is multi-disciplinary, but in many cases the IPT leader will continue to be someone of a programme management background. This is in some ways a throwback to the pre-SPI days of the ‘project office’ and indeed the role of the IPT leader is open to any function. However, the primary interests of the programme orientated IPT leader and the commercial branch are, respectively, ‘get the project delivered’ and ‘get the contract sorted’. This split is likely to remain. In practice programme management and commercial management work as a sort of dynamic duo, but the focus of each in a professional capacity shows the difference. To help illuminate the differences, the respective interests can be classified between overall interests, pre-contract interests and interests post contract award as shown in figure 13.
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PROGRAMME MANAGER
COMMERCIAL MANAGER
Overall interest
• To ensure that the URD is met on time and to budget
• To ensure that the procurement is executed consistent with MoD Value for Money policies
Pre-contract interest
• Specification (e.g. SRD)
• Choice of contractor
• Statement of Work
• Terms and conditions
• Quantities
• Price
• Delivery Schedules
• Payment terms
• Quality Plan
• IPR
• Project management Plan
• Liabilities
• Risk management Plan
• Indemnities
• Project Progress
• Place contract
• Specification changes
• Negotiate prices
• Delivery forecasts
• Negotiate changes
• Risk Management
• Negotiate claims
Interest post contract award
• Financial forecasts • Billing
Figure 13: Programme and Commercial Interests Needless to say, these two sets of interest are not mutually exclusive! The reader should not conclude that the programme manager is uninterested in the choice of contractor or that the commercial manager is uninterested in delivery forecasts or billing. Furthermore, whilst the commercial branch holds the formal authority to commit the MoD there are important areas where the programme manager is significantly empowered and indeed the role of the programme manager in informal negotiations is itself of vital importance.
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Contractual delegation In the pre-contract phase, the commercial branch and the programme manager work together within the IPT to execute the acquisition process with the overall aim of meeting the URD on time and to budget. To this extent, it would be reasonably accurate to say that each speaks with equal authority, certainly as regards their respective areas of interests. However, at the time when a decision is made to place a contract then all of the authority effectively coalesces upon the commercial branch that, at least in theory, must assure itself that every single detail of the contract is correct. However, as the project proceeds into its contractual phase, it would be impractical for the commercial branch to take all the executive decisions throughout the life of the contract. For this reason, authority may be delegated (under express terms of the contract) to the programme manager. In practice some duties may full to specific functions such as MoD quality assurance but for these purposes it is sufficient to refer to the delegation as being directed to the programme manager. The following are some examples of responsibilities that are commonly delegated.
Authority delegated under the contract EXAMPLE 1: APPROVAL OF DESIGNS AND DATA
The reviewing and approval of designs and documents would typically be delegated to the IPT. The type of responsibility tends to be seen as purely technical and the commercial branch would not normally become involved. However, whilst it can be said that the contract may convey this responsibility to the programme manager, it should be remembered that current procurement policy seeks to avoid the MoD approving designs for fear that in doing so, it may transfer some risk from the contractor to itself. EXAMPLE 2: ACCEPTANCE AND REJECTION
It is usually the programme manager who is charged with the responsibility for ensuring that the right goods are delivered. Thus it is the programme manager who will routinely exercise the right of rejection on behalf of MoD where goods do not conform to the requirements of the contract. Indeed, the right to accept or reject goods is frequently exercised by staff that may not realise the full contractual effect of their actions. For example, in a contract for the supply of goods, the contract conditions may provide that the goods are accepted upon expiry of 30 days from delivery, if not rejected within that period. In practice many goods are delivered to an MoD depot and the storeman signs to say that MoD has received the goods. On the one hand the delivery paperwork (commonly MoD Form 640) makes it clear that consignee signature does not convey acceptance, nevertheless, consignee signature may start the clock ticking as regards the expiry of any contractual period for rejection.
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EXAMPLE 3: CONCESSIONS AND PERMITS
Many MoD contracts contain provisions that contemplate that goods tendered for delivery will, in terms of specification, be less than that to which the MoD is entitled. For example, an MoD concession or production permit may permit the contractor to deliver goods that have been manufactured from components, not all of which meet the specifications stated in the drawings or bill of materials. The process of considering contractor applications for concession or production permit frequently rests with the programme manager. EXAMPLE 4: CHANGES TO SPECIFICATION
As has been seen, one of MoD’s standard contract conditions provides MoD the unilateral right to vary the specification of the work required. For companies who undertake bespoke design and development to meet MoD’s special requirements, the inclusion of this standard condition is not usually a cause for concern. For the company whose operation is entirely associated with the design and manufacture of proprietary goods this clause may be a source of concern since it implies that MoD will order a variant of a standard product. The handling and processing of special variants may be an administrative burden which the company would prefer to avoid. Nevertheless, it is usually the programme manager who has the lead in deciding and authorising changes, albeit that there will normally be express arrangements dealing with revisions to price and other key contract terms. EXAMPLE 5: APPROVAL OF PAYMENTS
Where the contract simply provides for payment on delivery against individual product prices stated in the contract, the actual claiming and making of such payments can be reduced to a matter of routine. However, wherever the contractual arrangement is more complicated than this (for example, where stage or milestone payments are to be made), it is the programme manager who is primarily concerned with the release of money to the contractor. This is because the authorisation of milestones for payment purposes is seen as a key part of the process by which the programme manager encourages the contractor to perform the contract on time and a key part of the process by which the programme manager monitors that progress. EXAMPLE 6: WARRANTY CLAIMS
If it is the programme manager who is primarily responsible for ensuring that the contract is performed on time and to specification and it is the programme manager who exercises the right to accept or reject the work of the contract then it logically flows from this that the programme manager is also responsible for pursuing the contractor for repair or replacement of defective goods, whether under warranty or otherwise.
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These examples are described just to illustrate the scope of the programme managers responsibilities. However, these responsibilities are discharged only to the extent that there are no commercial consequences. For example, changes to specification that involve a revision to the price will inevitably involve the commercial branch. Goods rejected by the programme manager or warranty claims made by the programme manager will only not involve the commercial branch if the contractor accepts the decision of the programme manager. Thus the contract terms may not only convey the appropriate authority to the programme manager but will usually legislate for the handling of any commercial issues that arise as a consequence. To complete the picture it is important to emphasise that there are categories of issues that are dealt with exclusively on the authority of the commercial branch. The principle examples of these are as follows:
Authority not delegated under the contract EXAMPLE 1: CONTRACTUAL ESSENTIALS
Modifications to any of the essential contractual features agreed at the outset are not usually handled by the programme manager. Price, fundamental payment terms, basic performance obligations all come within the remit of the commercial branch. However, within tightly defined restraints, the programme manager may be given contractual powers that relate to these basics. For example the programme manager may be given powers to authorise work up to some nominal value under a repair contract, but would not be given authority to finally settle prices. The programme manager may be allowed to authorise payment claims and to modify the description of payment milestones, but not to alter the underlying payment principles. The programme manager may be allowed to agree detailed delivery schedules with the contractor but only within an overall performance obligation established by the commercial branch. EXAMPLE 2: SETTLEMENT OF CLAIMS AND DISPUTES
Claims and disputes usually cost one of the contracting parties something. It may be money, something else of value or even the loss of some right or benefit. Therefore the proper handling of claims and disputes requires a proper interpretation of the contract, the relevant facts and applicable law. Thus such matters are always left to the commercial branch.
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EXAMPLE 3: AGREEMENT OF TERMS AND FEES FOR IPR
IPR is normally seen as a specialist subject. Although the commercial branch will possess sufficient knowledge to cover routine situations (for example, the selection of the relevant IPR contract conditions at the outset of drafting an ITT to tender or of a contract) most contentious issues (for example the alleged breach on an intellectual property right) and the negotiation of licence fees and royalties usually involve the MoD’s own experts (the Directorate of IPR). The interface between these experts and the procurement staff is the commercial branch. Since such matters generally do require an esoteric knowledge, the involvement of the programme manager is normally limited, for example, to stating the MoD’s needs for IPR in terms of the user requirements.
Formal and informal negotiations This Report adopts the assumption that companies interested in negotiating with MoD are primarily interested in negotiations that lead to a contract, or negotiations that lead to the resolution of a claim/dispute arising during the course of a contract. Thus it is appropriate to focus on the main issues surrounding such interests and to concentrate in particular on the handling of formal negotiations with the commercial branch. It has been noted that the programme manager may have formal authority to negotiate some matters delegated to him under the contract. Beyond that however, in the execution of an MoD contract it is the programme manager and the equivalent function on the contractor’s side that together provide the day-to-day buyer/seller interface. Hence the (sometimes daily) minor negotiations that need to take place to ensure the smooth running of the project are conducted between those bodies. This ‘oiling of the wheels’ is a normal part of MoD business albeit that both sides take risks in so far as such informal negations may later be found to prejudice the rights of one side in the event that a dispute arises.
The commercial branch Authority is delegated to commercial staff on an individual basis. This means that each individual will receive written powers in respect of his/her main duties (dispensing with competition/placing contracts/agreeing prices/settling claims). The powers are set purely on a financial basis with, for example, the power to place a competitive contract being set at a value which is much higher than the level at which claims can be settled. Delegation has regard to the grade of the person,
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his/her experience in the commercial function and the type of work being done by his/her branch. For example in one branch that deals with many low value contracts and relatively few higher value contracts, it may be that the commercial officer at assistant director level (see below) takes an interest in contracts of one million pounds value. In a branch dealing with a small number of high value systems contracts the assistant director may have little interest in contracts less than ten million pounds. A commercial officer at the grade of senior executive officer (see below) may have no delegated powers whatsoever for a period of time if he/she is new to the commercial role, whereas his/her immediate deputy may have significant delegated authority (signing powers) if he/she is a seasoned commercial officer and has been in the post for a period of time. The delegation of signing powers to an individual is reviewed from time to time and adjusted according to experience gained and according to performance. Like most commercial organisations, MoD policy is to delegate to the maximum possible extent so as to make the most effective use of its resources. However, when new policies come along – such as to make more use of competition – delegated powers are often curtailed as a means of ensuring that decisions (for example, to dispense with competition) that need to be made consistent with that new policy come under proper scrutiny. The effect of this is to force decisions ‘upwards’ which inevitably has the effect of slowing down the overall rate of decision-making. The really important thing in dealing with MoD is to try to determine what signing powers are held by the individuals with whom the company is dealing. This ensures that the company is addressing himself to the most appropriate person in the MoD. Strictly speaking, the level of delegated signing powers is not to be disclosed, however, a simple matter of observation will normally indicate where the authority lies. Naturally enough, MoD operates a set of internal controls to ensure that delegated powers are not open to abuse by its staff or indeed that the powers should not make the staff vulnerable to unscrupulous contractors. Although the commercial function is spread around a wide variety of MoD procurement functions with a mixture of different reporting lines, there is within MoD a conceptual structure known as the Defence Commercial Organisation (DCO). The DCO has a common set of positions, albeit that job titles may not be fully uniform. In broad terms the responsibilities of the various commercial levels are as shown in figure 14.
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POSITION
RESPONSIBILITIES
Commercial Director
Policy/international aspects/post costing/very high value contracts
Assistant Director
Complex disputes/higher value contracts/complex pricing
Senior Executive Officer
Disputes/medium value contracts/pricing
Higher Executive Officer
Medium value contracts/pricing
Executive Officer
Lower value contracts/routine pricing/contract administration
Figure 14: Commercial Function Hierarchy
Inevitably there will be some overlap between the positions above in terms of the responsibilities. As a general rule the highest commercial rank within an IPT is at the assistant director level. The assistant director reports directly to the IPT leader, but has a professional line to the local director (and he to one of a small number of principal directors). However, the intention is that the commercial officer within the IPT is (under the authority of the IPT leader) virtually autonomous. In practice, he/she will consult more senior commercial staff (including those in the policy function) either for straightforward advice or where political buy-in is needed on a more contentious issue. For the balance of this chapter the Report will concentrate upon the principles and processes involved in formal negotiations with the commercial branch.
Principles of conduct Some first principles can be used to characterise the conduct of the negotiators: •
At law, there is no general duty to disclose information which may be helpful to the other side.
•
There may be contractual duties to disclose information.
•
No coercion.
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No misrepresentation.
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No bribes, corrupt gifts or payments of commission.
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Promissory representations are binding in contract.
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The parties are free to use their bargaining power to their best advantage.
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As a first principle, it must be remembered that there is no duty to disclose information that may be helpful to the other side in a negotiation. For some people, this statement may come as something of a surprise, as there is an expectation that dealing with the government must carry with it some special duties in this regard. However, in this respect MoD is no different to any other body with which negotiations are to take place. Unfortunately, one cannot rely upon just a statement that is as simple as this. MoD is as protected as any other negotiating party would be as regards coercion and misrepresentation. Furthermore, it is important to remember that MoD is protected against the effect of bribery or the giving of corrupt gifts or payments to its personnel. Any of these acts would either prevent a contract being placed or could lead to the summary termination of an existing contract. Whilst on the subject of the legal considerations, within which one must always operate, a note should be made in passing of promissory representations. That is, if the contractor has made statements to MoD prior to a contract being entered into and these statements are intended to induce MoD to place a contract, or otherwise these statements are reasonably to be believed as representing the contractor’s intention, then MoD is entitled to consider such representations as binding by their being implied into the contract. If the contractor wishes to avoid being so bound it is important for him to ensure that the contract includes a complete agreement clause, which expressly excludes any prior statements or representations. So, as far as general duties are concerned the contractor is not obliged to disclose information to MoD that may be harmful to his negotiating position. However, it is the case that there may be contractual duties to disclose particular categories of information and such duties should not be ignored. For example, in a contract that includes the MoD standard condition number 43, there are express obligations to disclose information regarding contract costs. The foregoing responsibilities are mutual, with the MoD carrying equivalent responsibilities. Within these general rules, it should be clear that both parties are free to use their respective bargaining power to their best advantage. It must therefore be expected that MoD will take full commercial use of the very considerable bargaining power at their disposal, particularly with companies based in the UK that are dependant upon MoD business to a significant extent.
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Principles of behaviour If the contractor must exhibit certain conduct in its dealings with MoD, then it is equally important for the contractor’s representatives to behave in an appropriate manner. The MoD expects to deal with contractors and their representatives who are honest, of integrity and responsive. To act otherwise does not usually pay off. The importance of gaining the respect of the MoD negotiators cannot be overstated, but this does not mean that the contractor cannot be tough. The contractor expects high standards of his representatives. They should know more about the job than MoD, know the MoD terms and conditions of contract better than MoD, know the underlying legal principles better than MoD and know MoD policies and procedures inside and out. In dealing with MoD it never pays to forget that MoD is a government-purchasing department and in its dealings it represents the Crown. With this in mind, the guiding principle in terms of the behaviour of the contractor’s representatives must be one of displaying honesty, integrity and responsiveness. MoD is an expert and intelligent customer and it does not like to be treated otherwise. Contractors’ representatives who come across as Jack-the-lad or come across as people seeking to take advantage of MoD will not receive the proper treatment by Her Majesty’s staff. Attempting to pull the wool over MoD eyes or to trick MoD into a particular course of action may seem like a smart thing to do, but in the long run it will not pay off. Most companies doing MoD business seek to do so on a long-term basis and the importance of a mutually respectful relationship both between the bodies corporate and between the individual staffs cannot be overstated. It is an invaluable process to go through, to ensure that the contractor’s representatives do enjoy the respect of their opposite numbers on the MoD team and that accordingly the MoD staff will want to work with the contractor’s staff. This does not mean that the contractor cannot be tough only that it should pursue its interests based upon integrity and strength of argument. Many situations involve a process of the two sides thrashing out a difficult deal in trying circumstances. Provided only that the contractor’s representatives conduct themselves in such a way that comes across as honest and professional it can normally be assumed that the negotiation process will produce an acceptable result. In preparing for the negotiation with MoD it is generally good advice for the contractor to know more about the job in hand than the MoD staff. This is, of course, a fairly obvious statement, but it is pointed out as much for its disadvantage as its obvious advantages. The disadvantage is that MoD will seek to place contractual reliance upon the expertise of the contractor in the situation where the contractor holds himself
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out as an expert on the technology or product in question. Indeed, to the extent that the contractor wishes to display his superior knowledge, then this can be seen as arrogance by MoD and it is, therefore, negative behaviour to display. In a similar vein, it is essential that in negotiating the contractual aspects with MoD, that the contractor’s staff know the MoD terms and conditions better than the MoD staff. This is not necessarily so difficult to do as it sounds because MoD commercial branch staff change posts on a regular basis, whereas contractor commercial representatives usually remain in their posts comparatively longer and thus have an ability to build up a thorough expertise in MoD contractual matters. However, the guiding principal must be that the contractor’s staff should be reserved in displaying their expertise as otherwise this can generate a degree of reluctance on the part of the MoD commercial branch staff to deal with the contractor. Similarly, it is important for the contractor’s staff to understand all of the underlying legal principles in negotiating with MoD, in forming and then performing the resultant contract. This is not only important in order to combat any legalistic approach from MoD but in any event any staff making contracts on behalf of the company should know one end of a ‘nemo dat’ from the other! Again, this expert knowledge need not be over displayed in dealing with MoD staff. Finally, it must be remembered that MoD is governed by a myriad of policies and procedures and again it can be as well for the contractor to know these inside and out. The aim is purely to give an advantage in negotiating with MoD in so far as these can be offered up by the MoD staff as reasons not to do things. If the contractor can knock down the arguments by knowing the policies and procedures so much the better. Not all of these matters are in the public domain but enough can be learned of the private ones purely as a result of dealing with MoD on a regular basis. Nevertheless the guiding principle once again is to ensure that this expert knowledge is not over-displayed in the company of MoD staff. Also it is important to realise that an over familiarity with MoD policies and procedures can inadvertently put the contractor into a position of inappropriate sympathy with the MoD position as stated in negotiation. In summary, the objective should be to be more expert and better briefed than the MoD commercial staff and this advantageous position must be used to secure the best deal and not to attempt to demonstrate superiority over MoD staff. However, these words of advice should not be construed as indicating that the contractor will be dealing with MoD commercial branch staff that is inexpert and not qualified. Indeed, one must expect to come into contact with the most competent and professional of procurement representatives. Nevertheless, there is a negotiating advantage to be secured in being better briefed and more expert on the foregoing matters than the MoD negotiators.
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Planning and preparation In some ways the planning and preparation phase is the most important stage and its thoroughness will closely dictate the success or failure of the negotiation. Some useful guidelines are as follows: •
Negotiation is the end of a process, not the start.
•
All prior events are relevant.
•
Research and preparation is essential.
•
A preparatory meeting is very important.
•
Modelling, game planning and rehearsal are all important.
It may seem strange to say that the negotiation is the end of the process as it is often seen that the negotiation is the start of a process that brings a contract discussion or the resolution of a dispute to an end. However, a better way of looking at things is to consider that the negotiation, whether for the conclusion of a new contract or the settlement of a claim, is in an event that happens at the end of what is usually a long series of events. Many of these events will have happened prior to anyone realising that there would be a need for a negotiation at some stage. This means that it is very important right from the early stages of preparing a tender or right in the early stages of performing a contract to anticipate that there may yet be a need for negotiation some way downstream. That is, it is worthwhile always being the pessimist and assuming that things will go wrong and that there will be a need to negotiate something sometime later. This means that all prior events such as those that arise through the normal course of meetings and discussions are considered in the context of how they will later look if an issue arises which requires some negotiation. A general rule of negotiation, which is just as true for MoD business as in any other situation, is that the extent of research and, in particular, the preparation before the negotiation meeting is going to determine whether there is success or failure. Inevitably, it is the side that prepares better and more thoroughly who will usually prevail. The preparation comes into two main categories. Firstly, the subject itself must be thoroughly researched in terms of the prior events, discussions, minutes of meetings, correspondence and so on in order to determine where the strength of the arguments lie. Secondly, it is important to realise that the negotiation will be conducted not with some inanimate corporate body but with real people. Thus, it is important to consider the individual or individuals with whom the negotiations will be held; where they fit into the organisation; the authority each of them holds; their personal objectives in terms of the amount of time they are prepared to commit to the negotiation and the effect on them from a personal point of view that will be caused by the outcome of the negotiation.
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Because negotiation is a ‘people’ matter, there is always some scope for informal discussion prior to the formal negotiation, the better to determine the position of the other side and to check understanding of the issues which are to be dealt with. To be sure of success, there needs to be the very strongest of personal relationships between the MoD and the contractor’s negotiators. In this sense, the expression ‘personal relationships’ does not mean that the respective people must be friends on a private basis and indeed it must be recognised that MoD discourages the development of relationships between its staff and those of contractors in this way. However, it can do no harm at all, for either side, for their respective people to know each other well enough to be able to speak openly and to know where each is likely to be coming from in terms of the approach to the negotiation. As an essential part of the preparation, it is usually a sound idea for the contractor to hold a preparatory meeting amongst his negotiating team. The purpose of this is to ensure all of the participants know each other, their roles in the negotiation and the company’s objectives. A good preparatory meeting will be held at a time that is fairly near to the intended date of the meeting with MoD, so that minds will remain fresh as to the discussion in the preparatory meeting. However, the meeting must not be so close to the impending discussion with MoD that there is no time for the negotiators to acquire additional information, the need for which only emerges during the preparatory meeting. The preparatory phase should include a period of modelling the likely MoD approach to the meeting, determining the strengths and weaknesses of their arguments and testing out the strengths and weaknesses of the contractor’s material. In these situations, game planning is always a good idea and if the negotiation is to cover a very important matter or something of a very large scale, it is as well to rehearse the meeting with selected individuals acting out the likely roles of the MoD team.
Analysis As an essential part of the preparation an analysis should always be done of the company’s objectives and the likely MoD objectives in the negotiation. It is important to initially consider these as separate things to avoid the accidental assumption that MoD will wish to resolve the same set of issues or negotiate around the same set of principles as the company would wish. Indeed it is hardly likely that the MoD and company lists will be the same since each side will have ‘territory’ which it wishes to avoid and ‘territory’ on which it wishes to engage the other side. The good ‘territory’ for one side is by definition usually bad ‘territory’ for the other side. Part of the game plan for the meeting will have to be the extent to which MoD can be allowed into the company’s dangerous ‘territory’ and how to get the debate into the MoD’s dangerous ‘territory’.
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Having formulated the two lists it is important to categorise each of the company’s objectives as ‘must have’, ‘like to have’ and ‘bonuses’ and then to consider where each of these might lie within MoD’s ability to ‘concede easily’, to ‘concede under pressure’ and ‘won’t ever concede’. Similarly the company must categorise each of the MoD’s perceived wishes as ‘MoD must have’, ‘MoD would like’ and ‘MoD bonuses’ and then set these against its ability to ‘never concede’, ‘concede under pressure’ and ‘give aways’. This analysis serves as a powerful model in forecasting the likely difficulty to be encountered in the meeting and the probability of a successful outcome. If all the company’s ‘must have’ objectives are in the MoD ‘won’t ever concede’ category the chance of a successful outcome is not high! In such a situation the choice can then be made to postpone the meeting until new information emerges or the situation changes, or to proceed with the meeting knowing full well that there is unlikely to be an agreement. This latter approach at least has the advantage of allowing the negotiators the opportunity to test out the anticipated assumptions about MoD’s positions, to gather further information and to test the strengths and weaknesses of some of the planned arguments.
The meeting The location of the negotiation meeting can be quite important. Conventionally, MoD prefers to negotiate on home ground and, therefore, the contractor can expect to be called to MoD offices. Usually MoD will be represented by a minimum of two of its staff. It is relatively unusual for MoD to be willing to be represented by one person only. Thus, the contractor must decide whether he intends to match the MoD team person for person or to take more or less people. It is generally as well for the contractor to have a minimum of two negotiators with one who is clearly the lead negotiator. However, many more than this and it is likely that the meeting can become unwieldy. Negotiating with MoD is not normally something that happens quickly. Even the more relatively straightforward matters can take longer for a resolution to be reached than might be thought at first sight. Therefore, it is usually better to plan on a long day and an early start, if there is to be reasonable probability of reaching a conclusion. Of course, there is no guarantee that an agreement can be reached in a single meeting, even in a single day and the contractor must be realistic in his expectations. Finally, it is as well for an agenda to be used so as to structure the meeting and the agenda is best agreed in advance. There is little point in turning up for any negotiation expecting the MoD side to have a coincident view as to what is to be discussed and what agreements should be reached during the course of the meeting if that degree of preparation has not been done in the first place.
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General tactics At the essential level, negotiating with MoD can involve the same basic techniques as are used in any negotiation: •
Compromise.
•
Bargain.
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Logic.
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Emotion.
•
Threat.
Compromise is sometimes said to be the English disease – the idea that two protagonists will come to an accommodation at all costs rather than indulge in the unpleasantness of disagreement. Thus it is said that compromise has no place in negotiation if it is taken to mean a rush to partially concede to avoid bad feeling. This is perhaps overstating the position as, in most negotiations between two intelligent bodies, some degree of movement in the positions of both sides is likely to be necessary if an agreement is to be reached. The important point is that neither side should enter into the negotiation with nothing other than compromise in mind nor, in any event, should any compromise that may have been pre-planned be launched into the debate too early. This might thus characterise the use of compromise in negotiations with MoD. Neither side will want to see compromise as the solution to the problem but both expect that some degree of compromise might be necessary in the end. The archetypal example is in negotiating a price. If the contractor wants £1M and the commercial branch opens with an offer of £800K, both sides will want to avoid the simple and wholly inappropriate compromise of ‘splitting the difference’ and settling at £900K. However if only the price is to be agreed, in most cases it is easy to see that both sides may have to move their positions even if one is prepared to move more than the other. In these matters it is important for the contractor to be prepared to stick to his ground as some commercial branches, knowing that the eventual price agreement will be somewhere between the two opening offers, will simply open with a ludicrously low offer in the hope that it will have the effect of dragging the contractor’s position down much more than the contractor intended. The contractor should challenge this absurd practice just as the commercial branch will challenge the equivalent practice whereby the contractor opens his position with a ludicrously high figure. Negotiations with MoD are a serious and professional business and neither side should waste the other’s time with pointless games.
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In any negotiation it is better to bargain than to compromise. That is, trading down on one point so as to push the other side up on other points is an important technique. It is in the failing to do this effectively that many negotiations go wrong. For example, in negotiating a new contract the MoD commercial manager may call a meeting with the contractor to negotiate the outstanding points and he/she may well set an agenda for the meeting as follows: •
Agree statement of work.
•
Agree price.
•
Agree payment terms.
•
Agree terms and conditions.
Having an agenda is good discipline, but there is sometimes a tendency to then follow the agenda one item at a time as though the items are not connected. Clearly all are inter-related and one must have the ability to see the linkage so that bargaining across the open issues can be used to bring about an overall and complete agreement. Where the contractor has a lot of business with the MoD there is also scope to bargain across several different matters or across several different contracts. This is advantageous, as a general rule of negotiation must be that the greater number of parameters available for negotiation the greater the chance of an accommodation being reached. However, where this is relatively easy for the contractor to do, it can be more difficult for MoD. If the negotiation is to embrace matters associated with six different contracts then it is difficult for MoD to speak with a single voice unless all the contracts happen to have a common commercial branch and a common programme manager. If the contracts are spread around a number of different project areas then it can be quite impossible for MoD to organise itself for a single negotiation. In most negotiations with MoD the use of logic has a very big part to play. In large part, this is because of the ethical standards that MoD sets itself as a procurement agency which, in combination with the scrutiny of the National Audit Office, the Public Accounts Committee and the House of Commons Select Committee on Defence, means that MoD must do, and be seen to do, the ‘right thing’. This is important for contractors who can thus rely to a very significant extent upon a fair hearing with and fair dealing from MoD. This is one reason that thorough preparation is essential before any negotiation with MoD. If the contractor can set out an argument on a logical basis, which is better supported by background research and evidence than the MoD counter argument (which should have been identified and analysed in advance, of course), then he will have a strong chance of winning the day. This is of crucial significance because these pressures on the MoD negotiators can have the effect of the MoD making an agreement, which although logically correct and
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fair, is to its commercial disadvantage. In this regard it can be important to ensure that the negotiation is centred (as it properly should be anyway) upon the commercial branch as it is this branch that should be most acutely aware of the public purchaser’s duties as regards fair play and ethical standards. Indeed it has on occasion been alarming the extent to which these responsibilities have, intentionally or unintentionally, come under attack under the onslaught of MoD’s wish to be more commercial in its outlook, the creation of quasi-autonomous and quasicommercial agencies and the drift of executive power (which is definitely not policy) from the commercial branch to the programme manager. As a corporate, impersonal and ethics orientated public purchaser that makes its decisions wherever possible on the strength of logical argument, MoD has little room for emotion in its negotiations with contractors. However, at the personal level, the emotional dimension has a role to play. On the ‘aggressive’ side (shouting and thumping the table, for example) emotion, if used sparingly, has an important function in re-enforcing a particular point. Used frequently and the MoD will be unimpressed and will become reluctant to deal with a contractor whose representatives are unable to conduct themselves appropriately. On the ‘passive’ side (asking for help, seeking sympathy for example) emotion, again in small doses, can be of assistance. In all these matters, the personal relationship with the MoD staff is all-important as they must know the contractor’s staff well enough to appreciate when the emotional aspects are for real. Similarly the contractor’s representatives must be reasonably sensitive to the position of the MoD staff and, for example, to be prepared to sometimes give something in order to help build the relationship for future dealings. Finally, the use of threat in MoD negotiations must be considered. By and large the culture of dealing with the UK Government and MoD in particular is one that debars the use of threat by either side in most circumstances. That is to say, threat as no more than a negotiating device is most unlikely to be successful for the contractor or for MoD. Thus in the majority of cases the making of a threat must be taken to imply that the threat is real and that it will be carried out if the other side does not concede. Thus idle threats have no place in MoD negotiations. A serious threat must therefore be considered as an event outside the bounds of mere negotiation and must be dealt with accordingly. A variation on the theme of threat is bluff. Bluff is a much milder and benign tactic for putting the other side under pressure and as such it is much less a cause for concern on both sides. The best advice for the contractor’s negotiator is to use bluff sparingly as it tends to produce one of two reactions in MoD. Firstly, MoD may simply call the bluff and wait to see what happens. Frequently the time pressure to conclude the negotiation is more on the contractor than on the MoD and hence
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it is usually easier for MoD to play call-my-bluff than it is for the contractor. Secondly, without taking any specific action, MoD might just wait for the contractor to dare to proceed as though the bluff is in earnest. Again it is less painful for MoD to sit it out than it is for the contractor who may have manpower, costs and other resources hanging on the outcome of the negotiations.
MoD tactics If on the one hand it is safe to consider MoD as a fair playing, logical, decisionmaker when it comes to resolving issues in negotiation, it would on the other hand be foolish to assume that MoD will not use all the pressure points that it has in its armoury when negotiating with contractors. Examples of these are as follows: 1.
Competition.
2.
Delay.
3.
Payment.
4.
Crown rights/Not in the rules.
5.
Affordability.
6.
Bargaining power.
The most obvious pressure that MoD can bring to bear is the suggestion that if the contractor is unable to meet MoD’s wishes then MoD may have to consider reverting or resorting to competition. That is, in the situation where the contractor has been selected by MoD as a result of competition, but the contract has not yet been placed whilst negotiations continue, there is always the possibility that MoD could revert to the competition and select another tenderer if MoD considers that the ostensible winner is proving too intractable in negotiations. This possibility may be real (but of course its viability as a course of action diminishes the longer the negotiations continue as other tenderers ‘pack up and go home’) or it may be hinted at merely as a negotiating ploy. It is clearly for the tenderer to decide if it is a bluff or not. Conversely, in the situation where the contractor has been invited to negotiate a non-competitive contract then he feels that he has the upper hand in the negotiation. If he pushes this hand too far, MoD will indicate its preparedness to resort to competition. In some situations this will be a more feasible option for MoD than in others. For example, if the MoD relies upon the contractor’s IPR for the procurement and the MoD does not possess sufficient rights in the IPR to conduct a competition then the contractor is in a relatively strong position. Alternatively, if the MoD is able to go to other potential sources, even if this means a greater osten-
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sible risk to MoD, then MoD might consider doing so. Once again the contractor must decide if the competition option is just a tactic by MoD or whether it represents a genuine risk to his position. For the reasons already mentioned, time is usually a scarcer commodity for the contractor than it is for MoD. Thus MoD frequently enjoys a useful bargaining tool in so far as the hint of delay (to the award of contract, agreement of prices or settlement of the claim) can be used quite effectively to put the contractor under pressure to concede. Absurdly the reason for this sometimes seems to be that MoD personnel are more worried about the risk of placing a contract on the wrong terms (that is, as may later seem the case when the contract is reviewed by one of the public scrutiny bodies) than not placing a contract at all. From a negotiating stand point the worst thing that a contractor can do is to indicate that he needs a quick deal! MoD understands full well that one of the most important things to most businesses is sound cash flow. Thus the threat of non-payment in the event of a dispute regarding performance of a contract is one that MoD will happily use so as to be sure of ‘getting the contractor’s attention’. Similarly, and returning to the theme of time pressure, MoD can use the hint of delay to contract placement as a pressure point on the contractor if the contractor already has a lot of sunk cost tied up in the tendering process. An interesting argument that is sometimes used by commercial branches is one of ‘Crown Rights’. This expression is used to try to convince the contractor that he has no choice but to agree because of some special and mysterious powers that MoD is able to exercise on behalf of the Crown. This is just plain nonsense. In normal contractual negotiations, the MoD has no special position and it enjoys no privileges just because it represents the Crown. If this argument is ever used it should always be challenged on the basis of the commercial branch being asked to produce evidence (for example, a statutory instrument) of the alleged powers. In similar vein, commercial branch staff may say that they would like to help but they just cannot, since they are debarred from so doing under some MoD regulation or procedure. Whilst these are many and varied it should not be taken for granted that all procedural ‘get outs’ are genuine and even where they appear to be proffered in good faith it is still worth challenging the commercial branch to provide some visibility of the applicable rule or regulation. This is because there are sometimes lapses of memory over the detail of the rule or regulation or indeed perhaps some different interpretation might legitimately be put upon it. Whether in a competitive or non-competitive situation MoD has a strong negotiating line in arguing the affordability of the contractor’s proposals. That is to say, the contractor should always be wary of the ultimate MoD aim of ‘value for money’
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or, to put it crudely, the aim of getting ‘more for less’. Thus in competitive situations MoD can always seek to squeeze the price down more on spurious grounds of affordability or, in a non-competitive situation, to say that the application of MoD’s own rules for establishing a fair and reasonable price do not necessarily produce an affordable price! Inevitably in both cases the contractor must decide if there are genuinely budget problems or whether these are merely negotiating tactics. Finally, it must be assumed that MoD will use every ounce of its bargaining power to secure the best deal. For example, allusions to other potential contracts or to the settlement of outstanding issues on existing contracts may very well be used to bring pressure to bear upon the contractor. Despite the earlier comment that MoD finds it difficult to bargain across several contracts where these do not have a common commercial branch or programme manager, MoD can nevertheless so organise itself where the need arises to take into account (and to have the contractor take cognisance of this) the broad spectrum of that company’s business with MoD.
Approaches for the contractor If there are some general negotiating techniques that the contractor can expect to encounter from MoD then there must be some basic approaches that the contractor can adopt in his dealings with MoD. These include: •
Aiming for win/win.
•
Aiming high.
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Listening well.
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Breaking deadlock.
•
Following up.
Firstly the contractor should always aim to settle at a position where the MoD and the contractor can both feel that they have secured a valuable deal on the day. It is inevitable that the very process of negotiating can have the effect of making both sides feel as though they are in the midst of a battle. After all for a negotiation to be necessary at all it can be assumed that the two sides set out with essentially opposing positions. However, this must not be allowed to degenerate to a point where the contractor (or indeed the MoD) feels that the negotiation must produce a winner and a loser. It is perfectly possible for both sides to achieve a closing position that is acceptable to them without either being put into the position of loser.
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Nevertheless, a golden rule for the contractor is always to aim reasonably high in his initial expectations for the negotiation meeting. To give what might appear to be a silly example, the contractor should not normally quote a price of £500,000 hoping to ‘talk it up’ in negotiation to £750,000. Once a figure has been given, MoD will treat any attempt to increase it with the utmost suspicion. In any event if an early and low figure is given, even if it is proffered without prejudice on a budgetary basis only, this is likely to be the only amount that the MoD will have secured within the MoD budgeting process. Thus to leave it until fairly late to seek a higher figure is only to invite, at best, delay whilst MoD decides whether it wishes to go away and seek additional funding. Whether a question of price or otherwise it is thus important for the contractor to start with his highest reasonable expectation and then to move ‘down’ rather than expect MoD to be pushed in the opposite direction. All MoD negotiations follow the classic stages of negotiation shown in figure 15:
Opening
Testing
Moving
Agreeing
Recording
Setting out respective positions
Probing the strengths and weaknesses of each other’s arguments
Stepping gradually away from opening positions in attempts to find middle ground
Settling upon a set of balancing accommodations
Mutually recording the agreement in detail and unambiguously
Figure 15: Stages of Negotiation
Like it or not, these are the stages through which all negotiations go whether it is fully realised by the participants or not and there is little point in trying to rush! However as this process is played out it is most important for the contractor’s negotiator to listen extremely carefully to his opposite number in MoD and to be sensitive to the needs of MoD in describing why a particular deal is acceptable. This is far more important for the MoD side than it is for the contractor. Normally, provided only that the deal is legally made, it matters little to the contractor’s side as to how the deal was arrived at. For the MoD, with its burden of public accountability the ‘presentational’ aspects are very important and it is an unwise contractor who pays them no heed.
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Some MoD negotiations can be straightforward with the deal being done in the space of one meeting lasting a couple of hours only. Other negotiations will take much longer. For example, even following a competitive selection it may take MoD a year to negotiate a hundred million pound contract with the chosen contractor. This time will be consumed by the sheer scale of documents (technical and commercial) that will make up the contract agreement and which need to be at least reviewed (for accuracy, completeness and consistency) and in many cases negotiated. MoD will also use the time to attempt to improve value for money by pushing the potential contractor to give more for less. Over the period of extended negotiations the contractor must not lose his nerve and must remain consistent in his arguments. Changing the basis for an argument is one thing, but changing the argument is quite another. MoD will be alert for inconsistencies in the contractor’s position and will seek to exploit such a situation. Naturally enough the contractor must also be alert to inconsistencies in the MoD’s case and seek to make use of that situation. Even much smaller contracts, or perhaps relatively low value claims or disputes, can take several meetings to agree. This might be because of MoD budget problems, matters of principle or of law which MoD must consider at length (and for which advice might need to be sought from the MoD contracts policy or legal branches) or because the commercial branch must in any event consult with his programme manager or with his superiors. Of course delay might just be a negotiating tactic on the MoD side or indeed delay might be created by genuine deadlock between the negotiators. Whatever the reason for the hold-up the contractor can consider a number of options for speeding things up (assuming that quick progress is to his advantage, which may not always be the case).
Option 1: Strengthen the case For the contractor it is easy to do a deal on the spot if it is the right deal. For the MoD commercial manager, it is more difficult. He/she may feel that the deal is good, but he/she must be confident in his ability to ‘write it up on the file’ when he/she makes his formal record of the meeting. This is very important because such files are available for audit by the public bodies and a poor deal may result in criticism not only of the MoD but also of the individuals involved. Thus if the contractor can see that the commercial branch would benefit from having more paperwork evidence to back up the particular argument then the contractor should offer to produce that information in an appropriate form. For example, if the contractor is maintaining that such a deal has been done before but with a different commercial branch then he/she should be able to produce evidence of that. Whilst all agreements with MoD are without prejudice to any other, it does sometimes help to show that a deal done before can be considered again. Alternatively, if the
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argument is centred upon an interpretation of a complex set of MoD contract conditions and conventions (for example those relating to the contractor’s rights to multiple layers of profits on one set of costs) then it can be helpful for the contractor to offer to submit a written paper setting out the interpretation in detail so that the logical strength of the argument is plain to see.
Option 2: Elevate the negotiation It can be tempting for either side, in the event of deadlock, to offer (or threaten) to have the negotiation elevated to higher authority. This can be quite a tricky issue to handle. As a threat it is usually unhelpful, as both negotiators will ensure that their respective superiors are briefed to stick to the party line. In particular MoD staff do tend to close ranks if under attack. Even if not used as a threat both negotiators can feel affronted by the suggestion as it appears to imply that they were not competent to resolve matters and their personal involvement can generate feelings of ‘not wanting to let go’. On the other hand if one negotiator feels that he/she has talked himself into a position where he/she cannot concede a point that should be conceded he/she may see the face saving value in delegating that decision upwards! However, there are three distinct situations where the contractor should seriously consider raising the matter to a higher level on the MoD side. Firstly, this is where the commercial branch patently does not have the authority to settle, but is reluctant to acknowledge the fact. Secondly there is the situation where the commercial branch does not have the confidence, through lack of experience perhaps, to strike the deal. Finally there may be situations where at a more senior level on the MoD side there may be other factors (for example other negotiations on different subjects) that can legitimately be used to influence the decision on the case in hand. In seeking to elevate the debate on the MoD side (that is, as compared with both negotiators simply agreeing to get their respective superiors involved) the contractor must pay the utmost attention to the personal relationships involved. There must be a good relationship with the more senior MoD commercial branch staff so that such matters can be raised without causing alarm. There must also be every attempt to ensure that the MoD commercial manager who was unable to do the deal does not feel that this move in any way reflects upon his/her own capabilities. It must be seen as just a normal part of the process of reaching agreement. Of course there is no guarantee that elevating the negotiation will succeed but it should be considered as a possibility in appropriate cases.
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Option 3: Cooling off In some cases the MoD commercial manager may feel that the deal should be done, but he/she just needs more time to think about it. On occasions it can be appropriate for the contractor to try to hurry MoD into an agreement, but in many situations the hard nosed ‘pressure sell’ does not work and if the commercial branch plainly needs more time to consider the proposal there should be no inhibition in going along with this, provided a firm date is set for returning to the issue. More time may just allow the MoD commercial manager to think of more reasons as to why he/she does not like the deal, but this is a risk that sometimes it is necessary to take. Once the deal is done, the most essential follow up action is to secure a written record of the agreement. After protracted and complex negotiations, it is all too easy for there not to be a common understanding of the scope, extent and detail of what has been agreed. The problem of a lack of a complete and common understanding can be exacerbated both by the frailty of memory and the tendency for each side to rethink afterwards and then to put a different interpretation on what had been agreed. Since it is conventionally the MoD commercial branch that has the task of confirming the agreement in writing, it can be a worrying time for the contractor if he leaves the meeting with no more than a promise that the paperwork will follow in a few days time. Amongst other things this means that the contractor has lost control of the situation. This is an unforgivable situation in any negotiation.
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Section 5 Contractual negotiations Taut contracts ............................................................................................94 Custom and practice ................................................................................95 Foci of negotiation....................................................................................96 Terms and conditions ..............................................................................96 Price ...........................................................................................................98 Payment .................................................................................................100 Timescales ...............................................................................................102 Specification ...........................................................................................104 Acceptance ............................................................................................105 Intellectual Property Rights (IPR) .........................................................108 Liabilities .................................................................................................110 Variations and claims ............................................................................111 Subcontractors .......................................................................................115
Section 5 Contractual negotiations
Taut contracts MoD has a policy of only placing taut contracts. This is intended to mean that the contract should spell out clearly in unequivocal terms the precise responsibilities and liabilities that lie with the contractor. Provided that as much care and attention is given to setting out the precise responsibilities and liabilities of the MoD, no contractor should have any difficulty with this policy. From the MoD perspective, the purpose is to ensure that there is no possibility of the contractor avoiding his responsibilities to do the work of the contract or avoiding his attaching liabilities. In the case of doing the work, MoD fears for example that a contractor might know that a contract specification or statement of work is misleading or incomplete, but keeps quiet hoping to cleverly use it as a get-out later. But this can be a two-way concern. MoD also likes to avoid ‘over-prescription’ hoping for example that a lightweight specification may later work to its (MoD’s) own advantage by allowing the MoD to demand that the contractor meets implied requirements on the basis that the ‘contractor should have realised’! This is an example of what is sometimes known as ‘requirement creep’. The SPI does assume an honest and cooperative MoD/contractor relationship, but old suspicions and unfortunate practices will take time to completely die away. Thus a clear and explicit contract should not only alleviate MoD fears that contractors may attempt to avoid their obligations, but it also reduces the risk of customer driven requirement creep. But being clear on the responsibilities for doing the work is one thing – after all the genuinely co-operative MoD/contractor axis has the same, shared objective – but getting to a taut agreement on liabilities is quite another. In days gone by, some normal liabilities (for example delay damages) were not dealt with expressly in MoD contracts. Those that were covered (for example damage to government property) were not contentious. MoD contracts were drafted using government contracting conditions. Contractor liabilities received much more attention than MoD’s. Many contractors did not very much care, because if things went wrong, reasonable negotiations sorted matters out, almost regardless of what the contract said (this is an over simplification, but is essentially correct). Then MoD decided that the contract should be the vehicle for allocating all risks to the contractor and that commercial sanctions and legal recourse would be used as enforcement. The resultant long period of poor, antagonistic, non-trusting MoD/contractor relationships eventually forced
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a change in thinking. In 1996 the policy was modified to recognise that risks should be allocated (as between the MoD and the contractor) according to the party best placed to carry and mitigate each risk. This remains the policy under the SPI. However the practice in many quarters of MoD has little changed. Forcing all risk onto the contractor – particularly where the false pressure of competition can be used to this end – looks good and arguably appears to save MoD money. But it is not right.
Custom and practice The general rule in dealing with MoD is that individual agreements do not set precedents and are made without prejudice to other negotiations unless stated so in writing. This general rule does not necessarily stop either side from quoting specific prior agreements when it suits their case, but nevertheless the general rule is a useful one as it can allow one or both sides to make agreements in a particular set of circumstances which might be intolerable in the normal run of things. Many companies dealing with MoD develop long-term business relationships that condition the way in which matters are conducted between them. The advantage of always doing things a certain way is that both sides can feel comfortable and the conduct of business can be facilitated. However, this can be a problem for the MoD, which by-and-large likes to treat every contract as an individual transaction to be executed on a more-or-less arms length basis. The disadvantage for the contractor is that a change of staff on the MoD side (as happens regularly under MoD policies relating to career development and the avoidance of fraud) can have the effect of eliminating overnight an established way of working. Both sides should be aware that even if they both intend to operate on a simple transactional basis, their very conduct can create a deeper relationship.
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Foci of negotiation Given below is a list of the principle topic areas that will attract most attention during the negotiation of a new contract with MoD or that are most likely to create a need for some degree of negotiation during or after contract performance. •
Terms and conditions.
•
Price.
•
Payment.
•
Timescales.
•
Specification.
•
Acceptance.
•
Intellectual property rights.
•
Liabilities.
•
Variations and claims.
•
Subcontractors.
The text will examine each of these in turn.
Terms and conditions As a matter of policy MoD procures equipment and services using MoD’s own Ts&Cs (for convenience referred to as MoD contract conditions). This is a prudent approach for MoD and, as a public procurer, it is subject to audit (by the NAO for example) to show that it does comply with this intent. MoD contract conditions comprise a number of different sources. Certain of the conditions appear in pre-printed booklets and forms that are available to contractors on request. Others exist only as model forms of words that are internal to MoD and which only appear in a particular ITT or draft contract. Eventually, all MoD conditions of contract will appear in a single, unified form that will be generally available to all. It maybe thought that the MoD contract conditions are even-handed as between MoD and the contractor. This is simply not the case. For the most part, the conditions definitely favour the buyer and, therefore, in negotiating a contract with MoD, the contractor is well advised to pay close attention to the proposed conditions. This is for a number of reasons. Firstly, since the conditions favour the buyer, the
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contractor will be carrying various risks that need to be fully understood and covered in some way (for example with an appropriate allowance in the price) Secondly, although many consider the contract conditions as the ‘dull contractual bit, tucked away in a corner of the contract’, many of the contract conditions imply a cost in so far as they call for the contractor to do various things. These potential costs are quite often overlooked by contractors when they prepare their prices, whether in competition or otherwise. In general, it is MoD policy not to negotiate on their conditions of contract. This is because a contractor who wishes to negotiate them, is doing so only so as to improve his position and thus cause some detriment to MoD. Thus there will usually be quite a degree of resistance to negotiating the MoD contract conditions – whether the intent is amendment, deletion or substitution. However, the conditions must nevertheless be considered negotiable and the contractor should not be shy of proposing changes, nor should he be put off by assertions that the standard conditions are not negotiable or that no modifications are necessary because the conditions have been agreed by the trade associations. By and large MoD does expect to negotiate on the conditions. The only time when contractors should be extremely cautious is where, in a competitive tender, MoD can ascribe some (probably notional) value to the alternative condition(s) proposed and thus to take that value into account in assessing the total cost of tenders. The two main sources of terms and conditions are the ‘Standard Conditions of Government Stores Contracts’ and the ‘DEFCONs’ (DEFence CONditions). The former of these appears in a red booklet, April 1979 edition. The Standard Conditions of Government Stores Contracts, which are HMG wide, will eventually be completely superseded by replacement conditions in the DEFCONs that are exclusive to MoD. Progress in this replacement has been slow and patchy and after more than a decade some of the to-be-superseded conditions are still in use.
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Price The MoD overall objective is to achieve value for money. Inevitably, this means that MoD seeks to get the maximum possible specification for the minimum possible price. The effect of this is that MoD will continue to negotiate both in a competitive and non-competitive environment until it is satisfied that it has secured the most ‘bangs per buck’. One of the ways in which this policy can be seen to operate is under the heading of ‘affordability’. As this Report has already mentioned, once upon a time, MoD would take the view that a competition, if conducted properly, would inevitably result in each of the tenderers submitting its best possible price with the best offer it could make in terms of both specification and delivery in the first round of tendering. These days MoD works on the basis that tenderers do not necessarily table their best package at the first attempt. Thus MoD may use a BAFO round in an attempt, not to better distinguish between competing offers, but instead to ensure that the maximum possible value for money has been squeezed out of each of the tenderers. The affordability argument appears to help MoD in this pursuit in so far as it appears to justify the use of best and final offers. The affordability argument can also be used by MoD to good effect in the noncompetitive pricing arena. As will be seen later on in this Report, the non-competitive pricing regime is, from some perspectives, a largely mechanistic approach to establishing a fair and reasonable price in the absence of open competition. To the extent that the process is mechanistic then conventionally both MoD and contractor would rely upon the mechanism being operated and the resultant price being, by definition, considered fair, reasonable and affordable. These days, MoD will go through the process of operating the mechanism and then maintain that the resultant price, whilst ostensibly fair and reasonable under the operation of the mechanism, is nevertheless unaffordable. The contractor must decide whether this is a genuine budget problem for MoD or whether it is just a question of a negotiation tactic. If only a tactic, then the contractor must follow the line that says further reduction in price can only be offered as a result of reductions in the specification or scope of work. As far as terminology is concerned, it is important to be clear as to the distinction between firm prices and fixed prices. A firm price is one that does not vary for changes in economic conditions, although it may change for other reasons, for example, a change in the contract specification. In contrast a fixed price is a price the final value of which is fixed by reference to something that is moving, for example, an inflation index. Although these are now standard definitions in MoD contracting, there is still some variation from the standard. On occasions one can see the use of the expressions ‘firm and fixed prices’ or ‘fixed and firm prices’ which adds to any confusion. All things considered, the only safe thing to do is to ensure that at
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the time of quoting or drafting the contract, that there is a written definition of the expression which is being used in order to avoid misunderstanding or uncertainty on either or both sides. MoD prefers all contracts to be couched in firm price terms. This is consistent with the general policy of leaving all risk with the contractor and in this case, it has the effect of leaving with the contractor the risk of change to the estimated cost base of the contract, arising through fluctuations in the general economic conditions prevailing. However, to the extent that the effect of a firm price is simply to clarify that the risk of inflationary fluctuations in the cost base rests with the contractor, it should be understood that MoD is required to evaluate the value for money benefits of carrying some of that risk itself. In principle, therefore, MoD will call for prices both on a firm and on a fixed basis. In this way, MoD can see the amount of money that the contractor proposes to include in his firm price in respect of the inflation risk. If MoD believes that it could cover that risk at a lesser sum of money, then supposedly it will prefer a fixed price arrangement, that is, a contract in which the price is stated to be variable according to a variation of price (VOP) formula. There will inevitably be a fixed element of the formula, that is, a proportion of the contract price will not be variable for changes in economic conditions. This means that a proportion of the inflation risk remains with the contractor. MoD accepts that a risk allowance for this will be included in contractors’ prices, whether submitted in competition or submitted under the non-competitive regime. In the latter case provided the allowance can be shown to be reasonable MoD will admit such allowance in the contract prices. Industry has never liked the principle of a fixed element in a VOP formula as it seems to miss the point, which is that it is usually one side or the other who is the better able to cover this particular risk. Typically, MoD will expect the fixed element to be a minimum of 25%. There does not seem to be a logical reason for the risk to be shared between MoD and the contractor on the ratio of 75:25. MoD likes to think that the inclusion of a fixed element encourages contractors to participate in the overall management of the economy. However, inflationary forces in the economy are far more to do with the international scene and the government’s domestic policies and it is difficult to see how the inclusion of fixed elements in defence fixed price contracts is really going to make very much difference. From a negotiation standpoint it is important to realise that MoD will be most insistent upon the inclusion of a fixed element. Nevertheless, the contractor is free to argue for its complete removal or indeed for the inclusion of a fixed element that is less than 25%. Neither of these options is likely to be secured from MoD with anything other than the greatest of difficulty. In terms of the operation of these VOP schemes, there are two basic approaches. First is that there will be a once and for all adjustment to the contract price which will be made after the contract
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is finished and thus payment to the contractor in respect of VOP increases to the price will not occur until the work of the contract is at an end. Generally, a more satisfactory approach is for the VOP formula to be applied to stage payments to be made to the contractor under the contract so that the contractor is insulated from the inflationary effects on its cost base as the work of the contract proceeds. In these types of formula the indices for materials and labour will be those published by the Government. Commercially produced indices are not acceptable to MoD. The base date might be the date of quotation or the date of contract or some other suitable point in time. The period over which the material element of the contract and the period over which the labour element of the contract will be varied can be different. This reflects the assumption that, for example, in a manufacturing environment, material spend will occur earlier than deployment of effort in the factory. The proportionality between labour and material elements of the VOP formula should reasonably reflect the likely actual split between the two components.
Payment On many MoD contracts the negotiation of the contract payment scheme is of the utmost importance. Generally speaking, MoD prefers to pay nothing until the contract is fully performed. That is, that all the work of the contract has been delivered and accepted. For lower value and more straightforward contracts this simple arrangement probably suits both sides. However, in longer term or higher value contracts the contractor will, in most cases, seek some form of interim payment scheme in order to cover his cash flow needs. In MoD terms any contract that is greater than £1m in value or longer than 12 months in duration will usually qualify for interim payments. It is important to understand that MoD prefers to refer to interim payments as ‘payments on account’. By this it is meant that payments will be made prior to full contract performance on account of the contractor’s promise to entirely perform the contract. The intent behind this is that any interim payments that are made by MoD in expectation of the contract being fully completed will be fully recoverable by MoD in the event that the contractor fails to entirely perform the contract. This is intended to avoid the situation where contractors argue that the contract is constructed so as to be capable of partial performance whereby interim payments made and received by the contractor are not recoverable by MoD in any circumstance.
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As far as MoD is concerned, the making of interim payments is purely one of allowing some assistance to the contractor’s cash flow, not only to prevent him from hardship but much more importantly, to ensure that the MoD price does not need to include any sums by way of the cost of financing the work of the contract. Where MoD is prepared to make payment in advance of full contract performance, the essential rules can be summarised as follows: 1.
There shall be no down payments. MoD as a matter of principle will not make a cash payment with the award of contract.
2.
Any MoD payment scheme must be constructed so as to provide the contractor with neutral cash flow at best. This is to ensure that the contractor remains incentivised to complete the contract and not simply to take money from MoD.
3.
MoD will pay more to pay later, that is to say where an interim payment scheme would have MoD releasing cash to the contractor in advance of availability of that cash to MoD, then MoD has no choice but to pay the contractor later and thus to pay more. How much more MoD is prepared to pay, if any, is all a matter for negotiation and clearly the contractor’s success in this will depend on the relative bargaining positions of the parties.
4.
MoD will only pay on an interim basis moneys against successful achievement of milestones that are pre-determined and stated in the contract. Milestones must have two essential characteristics. Firstly, that each one of them represents substantial progress in the work and secondly, that the milestone is capable of sensible verification as to its completion or otherwise.
5.
Because MoD will make interim payments in most cases for no other reason than to secure a price advantage then it is not willing to pay such payments where the contractor is failing to perform. For these reasons MoD will normally seek a contractual right to withhold payments due or to recover payments already made whenever the MoD considers that the contractor is failing to make adequate progress in the work of the contract.
The biggest difficulties in negotiating milestone-based stage payment schemes with MoD are finding the right number, frequency and content of those milestones. The MoD preference in this regard does seem to vary from branch to branch. In some instances MoD is prepared to agree fortnightly payments for the achievement of relatively straightforward milestones. On other occasions MoD prefers to pay no more frequently than on a quarterly basis and then only against the successful achievement of milestones, the content of which is very substantial. The most important thing is to attempt to ensure that the contract captures a flavour of realism,
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that is to say it can be very difficult in a high value, long term complex contract to anticipate accurately at the outset, all of the events that are likely to happen over the contract period and thus in which order and at what frequency the milestones will be achieved. Thus it is important to build into the contract some flexibility to modify the scheme in the situation whereby if the contractor’s plans for execution of the contract have to be modified in such a way that they render one or more of the original milestones either entirely redundant or moved in time to a point which is out of synchronisation with other original milestones, then the scheme can be renegotiated to modify, remove or replace certain milestones to reflect the new contract plans. Provided this process is to be used for legitimate reasons and not, for example to allow the contractor to continue to be paid as though he were performing the contract properly when in fact he has run into serious problems of his own making, then the commercial branch in conjunction with the programme manager should be prepared to see that flexibility built into the contract. In summary, the contractor in negotiating a payment scheme with MoD should aim for the greatest level of simplicity. That is, a sensible minimum number of milestones occurring at sensible intervals and for which the detailed content is a sensible representation of that which can be reasonably ascertained as having been achieved in the performance of the contract.
Timescales The primary motive of MoD is to defend the realm. With this in mind, it would be easy to assume that a primary goal of MoD is to ensure that modern up-to-date equipment gets into the hands of the operational user at the earliest possible time. Indeed, the user for each of his procurements establishes an ‘in-service date’ (ISD). Without worrying about the detailed definition of this term the intent is fairly clear. That is the ISD is the point at which the user needs to have the equipment operationally available to him to fight a war, to take hostile action or to counter some threat. However, where the pressure from the user to ensure the earliest possible delivery comes into conflict with the MoD’s primary commercial goal of securing best value for money, then in many cases the latter objective will prevail. That is, contractors should not, in most cases, seek to rely upon operational urgency as the reason for which MoD will award the contract to that company without competition or indeed without serious negotiation. To put this another way, it has for a long time been MoD policy that the value for money goal is best served by the use of competitive procurement even if this causes a delay to the user’s preferred ISD. Thus, in negotiating with the MoD, contractors should always be wary of placing
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too much reliance upon what would otherwise appear to be the reasonable assumption that the equipment is required on an urgent basis, or if not on an urgent basis, then certainly by a specified moment in time. In terms of the contractor’s obligation to deliver on time it is true to say that MoD has not always put the necessary contractual and legal emphasis on its entitlement to receive delivery of the goods at the time specified in the contract. On the one hand, this is perfectly understandable as, given the primary goal of defending the realm, in many cases MoD objectives are best served in continuing with the contractor who is delivering late because cancelling and purchasing elsewhere would not produce a quicker result. However, from a legalistic point of view it is clearly a weakness of MoD if it does not exercise its contractual and legal rights in ensuring that the contractor delivers on time. The modern and more commercially orientated MoD has this latter point at the forefront of its mind and, as already mentioned, there is a policy of including liquidated damages provisions in all contracts over £1m in value. Now, the purist can argue that such a sweeping policy must, of itself, be fundamentally flawed when one considers the legal principles behind a liquidated damages provision. However, MoD believes that in common with many parts of industry, the use of liquidated damages provisions can in fact operate as an incentive on contractors to perform on time. Again, the purists can argue about the difference between incentivising and penalising time performance and the underlying principles of law as regards penalties. However, industry has no choice but to accept that MoD intends to make use of liquidated damages provision to improve its commercial position. The terms of the liquidated damages clause including the rate of accrual, the maximum liability and the means of paying any liquidated damages that actually arise are all matters for negotiation. The philosophy within MoD appears to be that the inclusion of a liquidated damages clause has the affect of conveying that time is of the essence of the performance of the contract. This is slightly peculiar in so far as the general law of the land assumes that in a business contract, time is usually of the essence of the contract, provided that there is a clear statement of when contractual performance is required and provided also that there is no statement to indicate that time is not of the essence of the contract. However, the construction that MoD puts on these matters has the effect that MoD will be prepared to consider, if pushed by the contractor, to include in the contract a force majeure or excusable delays clause. On the one hand, this is good news but on the other it is, of course, good commercial practice for any contractor when negotiating a contract with MoD, where there is some significant risk of performance being delayed for reasons outside of the contractors control, to include or to seek to include a force majeure clause in the contract.
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Where MoD can be persuaded to included such an arrangement it is normally on the basis that the relief provided by such a provision is available only where the contractor promptly notifies the MoD of any force majeure event, where the contractor mitigates the effect of the event and provided that the intervening event comes within the definition of force majeure events as stated in the contract. The MoD preferred list of force majeure events will normally include fire, flood, tempest, war, riot, insurrection and national strikes not under control of the contractor. However, MoD will sometimes include acts or omissions of the MoD as a force majeure event. At first sight this appears to be a benefit to the contractor. However, the construction of most force majeure clauses is to the effect that in the event of a delaying factor outside the contractor’s control, the contractor shall be granted more time to perform the contract, but not more money. If the contractor is delayed through reasons concerned with the acts or omissions of the MoD, then he must reasonably be entitled to not only more time, but more money as well. Therefore, it is good practice to avoid acts or omissions of the MoD from being included in a force majeure clause. It is much better to have a separate statement in the contract acknowledging fully and comprehensively that contract performance does depend upon the MoD carrying out certain acts and that failure in this regard will entitle the contractor to a contract revision providing for an equitable adjustment to the price, to the contract time frame for performance and indeed to any other affected provision of the contract.
Specification In all MoD contracts the requirement of the contract is specified in one manner or another. In the case of simple study contracts, a specification will be limited to a statement of the content and form of the output that is to be delivered at the end of the study. For a contract involving straightforward manufacture, the contract specification will be stated in terms of the drawings and manufacturing test requirements that the contractor is required to meet. When it comes to contracts involving design and development, the word ‘specification’ can take on a whole new meaning. Conventionally, MoD would specify the requirement of a design and development contract in terms of a formal specification stating the technical characteristics that the product being designed must meet. Whilst at first sight this may seem a sensible thing to do, MoD has realised that it puts a burden on itself in terms of specifying those technical requirements in such a way that if they are met then the operational user need will be satisfied. Thus in this manner, MoD holds to itself, quite unintentionally, some responsibility for the utility of the result of the contract.
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To avoid this responsibility, MoD will structure the specification in terms of not what the product is but what it is to do. Thus more of the burden of responsibility shifts to the contractor as under this concept it is he who must successfully design and develop something against a set of performance requirements, rather than purely technical requirements (and the text has already warned against MoD attempting to base the contract on the URD instead of the SRD). Of course, if MoD were to place a contract for design and development only, then even against a performance specification MoD remains obliged to accept the work of the contract before the integrity of the design has been tried fully in practice. In accepting the work of a design and development contract, MoD also runs the risk of carrying the risk as to the manufacturability of the design product. To avoid this risk, MoD prefers not to place contracts that are purely for design and development. Instead, it prefers to place contracts for the supply of a quantity of a product that meets a performance specification rather than one that has been built to meet a particular set of drawings. All things considered, contractors should play very close attention to the form and substance of the contract specification when negotiating an MoD contract.
Acceptance Acceptance has always been a crucial point in the execution on an MoD contract. And yet it is an expression that is frequently mis-used. The word ‘acceptance’ has two distinct uses, which may be related in some cases. Firstly, it is used to mean the decision by the armed forces to ‘accept the goods into service’. Roughly speaking this means that the appropriate military personnel confirm that they can fight a war with the equipment. There is more to this than meets the eye. To fight a war with the new equipment means that it must be capable of meeting the military threat for which it was designed; sufficient of it, in volume terms, must have been delivered to represent an adequate equipping of the relevant service units; sufficient spare parts must be available to keep the equipment operational; a logistics chain must be in place to maintain the equipment; the operational users must be trained in its use and in its maintenance. Secondly, it is used to mean the point at which ‘contractual acceptance’ has been achieved. This means that the MoD, as the customer from a legal point of view, has indicated that the work of the contract (for example, the supply of goods, the design of a system) has been properly and completely performed by the contractor. Contractual acceptance is of great significance for both sides. Once the work has been accepted the MoD right to reject the work (and thereby to indicate that the contract has not been performed) is forever extinguished. Thus the risk of
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contract termination for default is removed. Any ensuing problem with the work must be pursued by MoD against the contractor under an express or implied warranty only, which is a much less powerful position for MoD than in a situation where acceptance has not been granted and the remedy of termination remains. The difference in the two uses of the word ‘acceptance’ is quite dramatic. Although MoD may attempt to find a contractual relationship between acceptance-into-service and contractual-acceptance (for example by linking contractual acceptance of the equipment to its proven ‘availability’ in operational use, which is dependant upon an adequate supply of spares) the two should normally be considered as quite separate. With its commercial and legalistic orientation, MoD is much concerned with adequate treatment of contractual acceptance when negotiating contracts. The usual convention is that contractual acceptance occurs when the MoD ‘confirms acceptance in accordance with the procedure specified in the contract’ or otherwise upon the first to occur of: the MoD taking the equipment into use; MoD not having rejected the equipment within any period specified in the contract; the elapse of a reasonable time since delivery if no period for rejection is given in the contract. Other than where an acceptance procedure is included, a safe bet for the contractor is to ensure that the contract specifies a (short) period for the right of rejection since the contract is thus certain and, if the period is short, he is exposed for a brief time only. For this reason MoD prefers not to specify a period and in which event the other default positions (MoD taking into use and the elapse of a reasonable time) would come into play. However, they are unsatisfactory because they are intrinsically uncertain. For straightforward contracts (for example, the supply of low technology goods on a build-to-print basis) the simple approach of acceptance upon the expiry of a stated period from delivery is best. For anything more complicated (for example, the design and supply of a new sonar system) a detailed acceptance procedure is best. The drafting and negotiation of this is of crucial importance. This is because with complex systems, it is frequently impossible (for reasons of cost, time or physical constraints) for every aspect of the system to be stressed and tested at the contractor’s premises or in ‘field trials’. Therefore the acceptance procedure aims to stress a limited range of features in a restricted environment only. Once this procedure is successfully completed acceptance is granted and the risk in the performance of the system passes to MoD. For this reason MoD may seek to include in the acceptance procedure some measure of the full system’s performance in service. The extent (both scope and time) of the acceptance procedure is a matter for negotiation on a case-by-case basis. Contractors can expect it to receive close attention from MoD and they should pay it equal attention themselves.
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The SPI places great emphasis on the purpose and importance of acceptance. It addresses the question primarily from the point of view of acceptance by the user that the IPT has delivered equipment that offers the operational capability represented by the URD. Individual IPTs fully understand the linkage between contractual acceptance and acceptance by the user (in the person of Customer 2) and some will make attempts to completely merge contractual acceptance and user acceptance. The SPI anticipates ‘progressive acceptance’ in the sequence shown in figure 16.
URD & SRD Acceptance Criteria Fixed
Design Certification
System Acceptance
In-service Acceptance
Criteria agreed by all MoD stakeholders
IPT grants certificate
Acceptance given against production sample
Given when useable production quantity delivered together with support elements
Figure 16: Acceptance Process
Close study of the SPI material on acceptance, set against MoD’s wishes to place all-contractor-risk package contracts shows that aligning contractual acceptance with user acceptance is not at all straightforward. Two examples will serves as illustration. Firstly, the (as it happens old) concept of design certification implies a risk that the design may have to be changed if the certification process reveals that the SRD is not being met. Standard MoD contractual practice would put all the risks implied by this danger with the contractor. If the package contract includes production, the contractor may need to launch production before design certification is achieved (in order to meet the delivery schedule, possibly with liquidated damages to worry about). Thus the consequential costs of this risk could be enormous. Secondly, the achievement of in-service acceptance may require the timely completion of many contracts placed by MoD with many contracts or it may depend upon the user providing facilities. In such circumstances it is clearly unfair to attempt to link contractual acceptance on the one contract to all such other contingent events. The message on negotiating the contractual acceptance clause is to be very careful. This has always been a fraught issue for those contractors with their eyes open. The SPI makes it even more difficult.
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Intellectual Property Rights (IPR) IPR is one of the most important topics to be considered when negotiating an MoD contract. For the contractor, ‘getting it right’ has a direct effect on his ability to protect his information from competitors, to exploit it for commercial gain and to improve his chances of securing further business from MoD. For the MoD ‘getting it right’ means avoiding what is perceived as the disadvantage of becoming tied to one contractor and accordingly that open competition is freely available. Thus the parties are in diametrically opposed positions. The contractor is interested in only allowing MoD restricted, limited rights for a price; the MoD seeks completely unfettered rights free of charge. IPR means principally design rights, patent rights, copyright, database rights and rights in software (although software is copyright work, it is dealt with differently from copyright in works in other media). Other forms of IPR (trade marks, passing off for example) do not usually arise as issues in MoD contracts. To confuse matters somewhat, the word ‘design’ tends to be used in an all embracing way to cover everything from the layout of printed circuit boards to technical performance characteristics, rather than in its stricter sense of ‘that which gives an object eye appeal’. The phrase ‘proprietary products’ usually means products the design of which has been created entirely at private expense (e.g. not MoD). The phrase ‘non-proprietary products’ usually means products the design of which has been created entirely at MoD expense. In general MoD rights, if any, in the IPR of proprietary products is a matter for negotiation. For non-proprietary products the design contractor owns the IPR, MoD acquires certain licence rights under contract, the design contractor has an exclusive commercial exploitation right and MoD is entitled to levy on commercial sales These general principles are enshrined in certain of the MoD DEFCON conditions of contract. At first sight it may seem as though there is a mistake in the principles relating to non-proprietary products in so far as it might be expected that if MoD has paid for the creation of some IPR, or has a paid a price for a piece of work which expressly or implicitly covers the full cost of the creation of any intellectual property associated therewith, then it would seem logical that MoD must own the resultant IPR. However, this is not the case for the simple reason that MoD is not, prima facie, in business to create intellectual property, much less to exploit it for commercial gain. The primary function of MoD is to acquire goods and services which permit it to equip the armed forces so that Britain’s interests may be defended with military force if need be. It is for private companies to create and exploit intellectual property for gain, with MoD sharing in the financial benefits by way of levy on commercial sales.
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On the face of it then, both sides should be happy. The contractor owns and can exploit the IPR. MoD buys weapons to fight wars. However, the licence rights that MoD sees that it should enjoy as a natural consequence of its role as defender of the realm, bring it into conflict with the contractor’s aims. In this respect, MoD has two objectives. Firstly, that it should be able to exercise sufficient rights in the contractor’s IPR to permit it to have the product manufactured, modified (in both the intellectual and physical senses), repaired and maintained. Secondly, that it should be able to achieve this first objective by open competition. It is this latter objective that causes difficulty in negotiating with MoD since, for the design contractor, the implication is that he must agree that all of the data that is necessary for manufacture, modification, repair and maintenance can be released to his competitors without charge. Whilst it might be expected that he could come to terms with this in the simple sense of acknowledging what would appear to be a common sense or moral argument – if MoD has paid for the design, then surely MoD must be free to have the product made and supported by whomsoever it chooses – the practicalities of life are somewhat different. Typically, contractors will argue that the moral argument is to simplistic. For example, the design contractor may bring to the design work much background knowledge that was not created at MoD expense. He may plead the inequity of his having undertaken the high-risk work of design and development not in the expectation that the lower risk ‘pay-back’ work would be awarded to someone else. He may simply protest that the contractor receiving his data will not in practice be able to restrict its use purely for the performance of a particular MoD contract, notwithstanding the presence of confidentiality agreements. It is in the domain of IPR more than elsewhere that contractors should take the closest of looks at MoD’s DEFCONs before just signing up. DEFCONs that are agreed between MoD and Industry are temptingly comforting for many contractors who may understandably feel that any standard contract condition ratified by the trade associations must by definition be acceptable. This can be a misleading presumption. In certain instances the trade associations feel that a standard condition even if it is less than ideal, is preferable for its qualities of uniformity of use and protection for the contractor, rather than to prolong the policy debate with MoD, which leaves contractors in the dark as to how to proceed. Further, it is sometimes the case that the trade associations must attempt to represent the views of a broad spectrum of their members who may actually have opposing views on various matters. IPR is a good example. The position of the design contractor who wants to enjoy the benefits of manufacture and repair work flowing from the application of his intellectual skills is bound to be opposed to the position of the repair agency who wants every opportunity to take on repair work for MoD regardless of the origin of the design of the product. Thus contractors negotiating the IPR aspects of a contract with MoD are well advised to review the proposed IPR terms with
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the utmost thoroughness and only to agree to the minimum grant of rights to MoD. This is especially so in the case of proprietary products not only because the contractor himself will have paid for the intellectual effort, but also because the IPR DEFCONs do not always distinguish clearly enough between rights in proprietary designs and rights in non-proprietary designs. Thus the unwary contractor may find himself agreeing to IPR terms for his proprietary products that strictly speaking should only apply to non-proprietary products.
Liabilities It would be reasonably fair to say that there was a period in which an MoD contract was seen as the vehicle by which the parties primarily recorded the work that the contractor had to do and the price that MoD would pay (or the mechanism by which a price would eventually be agreed). Some essentially administrative details would also be recorded. For example, the process by which the contractor would be paid; the procedure for controlling the issue of government owned property. It would also be true to say that MoD procurement policy was founded upon the fundamental principle that the objective was to acquire equipment for the armed forces and to ensure that such equipment enjoyed one hundred per cent support, not only by ensuring that the forces possessed the logistics capability to fight a sustained battle with the equipment but also that all necessary contractual arrangement were in place to provide for continuing industrial support. This meant that the transition from development to production and then into ‘fielding’ (deployment of equipment to operational units) would be supported by contracts for continuing design services (to cover the period from design approval certification to production release certification), post design services (to cover the period from production release certification), the supply of spares, the provision of repair facilities, maintenance and further development. The net effect of these cultures was that to a significant extent, the parties tended in effect to ignore the question of the contractual and legal liabilities that the contractor should carry in the first place. The change in procurement wisdom characterised by the ‘all risk to industry’ concept mentioned earlier in the Report has brought into much greater focus the question of contractual liabilities. Thus the increasing attention on contractual acceptance has not only meant that MoD seeks to have that milestone tautly and burdensomely defined, but also that it will seek to delay acceptance for as long as possible, perhaps for some years into the service life of the equipment. Whereas MoD as a general policy had little interest in express warranties (on the basis that they cost more, are more noteworthy for their exclu-
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sions than their coverage and that they duplicate the ‘insurance’ provided by post design services contracts), MoD now has greater interest in them as vehicles for holding the contractor liable. Whereas MoD had little concern with the undertakings implied by the Sale of Goods Act regarding fitness for purpose and satisfactory quality, MoD now seeks to rely on these provisions in addition to other rights. Whilst the principles of ‘best risk allocation’ emerging through the MoD/Industry dialogues on partnering and the Private Finance Initiative allow the contractor some comfort, it must be acknowledged that at the level of individual contracts, MoD’s first position will always be to seek the most taut and longest surviving liabilities on the contractor. This is a key area for the negotiation as the risks that MoD would like the contractor to bear may far outweigh the potential benefit of the business to the contractor. It can also be a difficult area to negotiate because of MoD’s simplistic view that if the contractor is confident in his products and capabilities then he can surely carry any liability that MoD cares to describe on the basis that the risk will never materialise.
Variations and claims The MoD places many thousands of contracts and amendments to contracts in a typical year. For a good proportion of these the paper work (i.e. the contract itself) is incidental to the transaction. The supplier accepts an order, delivers the goods and is paid. End of story. In such situations the contract is of academic interest only and in itself it remains unchanged from start to finish. The deal panned out exactly as the parties intended. However, in many instances the deal does not pan out exactly as intended. The contract may have been subject to variation or events may have resulted in a claim by one party against the other. Thus variations and claims can be a considerable feature of the experience of dealing with MoD and in both cases work needs to be done at the stage of negotiating the contract so as to legislate for the possibilities, and at the stage of agreeing a contract variation or in settling a claim. A ‘variation’ is an anticipated but unidentified alteration to some aspect of the contract. A ‘claim’ is the seeking of redress by one party from the other when a risk materialises to the detriment of one when that party considers that the other is liable. Most MoD contracts include a standard condition that permits MoD at its option to unilaterally require a change in the contract specification. This option is limited as a standard to alterations in the ‘technical specification’ and the word ‘specification’ is not intended to be construed so widely as to encompass quantity/volume of work or timeframe for performance. The right to so alter the specification is needed
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by MoD in order for it to be sure that the goods as delivered will be capable of meeting the military threat, which may well change during the period of product development or manufacture. Where MoD at the outset can see the potential need to also modify the quantity/volume of work or timeframe it is free to negotiate the relevant terms with the contractor. Furthermore, MoD is prepared to acknowledge at the outset that the contractor may be prevented from delivering exactly to specification for reasons such as the risk of component obsolescence occurring during the contract forcing the contractor to substitute ostensibly non-conforming components in order to meet contract timescales. Even on the financial side of matters, MoD may acknowledge that the price is subject to variation not only as a natural and proper consequence of it having changed the specification, but also for changes in economic conditions, for example where the contract allows for price adjustment as a result of variations in exchange rates (where the price has a large foreign currency element) or in general economic conditions. It is therefore possible to characterise variations as expected, factual, uncontentious and procedural. The practice of legislating for variations means that that change is expected. Such changes are primarily concerned with matters that are ascertainable as a matter of fact and being both expected and factually based means that negotiating the effect (for example on the contract price) is not contentious in principle. Furthermore, there are tried and tested processes for handling variations. By contrast claims may be described as unexpected, less factual, contentious and non-procedural. On the face of it, the contract will have been concluded a result of good faith negotiations and consequently both parties will have entered into their arrangement believing that they have a ‘do-able’ deal. Each will perform its respective obligations and there will be no friction between them in their relationship as customer and supplier. However, claims are a feature of doing business with MoD and whilst those ‘long in the tooth’ may well anticipate possible future strife the apparent position is one of expectation of harmony. Any sound claim will naturally be based upon the facts that gave rise to the damage suffered or purported to be suffered by one side. However, in many instances the dynamics of the contract result in a post facto statement of claim and assembling the evidence to support the alleged facts is not always easy. As an extrapolation of these first two observations it is reasonably clear that claims are likely to be more contentious than are variations. Similarly the degree of prescription for the handling of claims is quite minimal in so far as the conduct of the parties is concerned. MoD has its own internal procedures, but these are not visible to the contractor. All these things considered, claims are a difficult area in the negotiation and management of MoD contracts.
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Because MoD business is seen by some as a rather unique business area possibly surrounded by some degree of mystique it can be easy to forget that an MoD contract in most respects is the same as any other business contract. Thus the basis of claiming, in either direction, can be founded upon one or more of a number of principles shown in figure 17.
TYPE OF CLAIM
BASIS
EXAMPLES
Contractual
Express
Standard conditions Special conditions Statutory or common law given contractual effect
Contractual
Implied
Prior course of dealing Custom in the trade Actions at meetings
Statutory
Legislation
Sale of Goods Act Unfair Contract Terms Act Trades Descriptions Act
Legal
Precedent
Negligence Duty of care
Figure 17: Types of Claim
Claims by MoD against the contractor could be based upon one or more of the following: 1.
Failure to pay.
2.
Late payment.
3.
Failure to provide agreed MoD owned equipment, facilities or data.
4.
Late provision of agreed MoD owned equipment, facilities or data.
5.
Failure to attend meetings.
6.
Failure to witness tests.
7.
Failure to approve documents.
8.
Failure to return delivery.
9.
Damage to contractor’s property.
10. Improper rejection.
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11. Improper termination. 12. Costs and other consequences of cancellation for MoD convenience. 13. Infringement of IPR. 14. Subcontract failure (for example, where MoD nominated the subcontractor). Claims by MoD against the contractor can also take several different forms: 1.
Failure to deliver on time (liquidated damages or damages at large).
2.
Failure to achieve the specification.
3.
Failure to achieve quality standards.
4.
Loss or damage to MoD owned property.
5.
Breach of express warranty.
6.
Breach of implied conditions/warranties.
7.
Failure to deliver required data and documents.
8.
Breach of third party IPR for which MoD may be indemnified.
9.
Injury to third parties causing MoD costs.
Claims against MoD by the contractor may take the form of claims for money in respect of damage or contractual default; the contractor may be entitled to more time to perform the contract if delay is caused by MoD or by ‘force majeure’ events. Settlement maybe by payment, grant of more time or other valuable consideration as appropriate. MoD claims against the contractor might be settled on a monetary basis but frequently the contractor will offer MoD some benefit other than cash in settlement. MoD may find merit in the offer of extra work or some such similar device on a free-of-charge basis, rather than pursue a purely financial conclusion.
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Subcontractors In most commercial contracts the customer is remote from the subcontracts placed by his supplier. Generally speaking, MoD does not like to interfere in the choice of subcontractors or in the performance of subcontracts for fear of imputing to itself some liability if things go wrong. However, MoD is not really remote in so far as certain of its policies and in any event the mandatory ‘flow down’ of various of its contract conditions does cause it to have some involvement with subcontractors. For example MoD is interested in the following: 1.
Encouraging competition at the subcontract level.
2.
Security requirements.
3.
Preservation of MoD rights in its own property which is issued to subcontractors (via the main contractor) for the purposes of the contract.
4.
Acquisition of vesting rights for MoD where the main contract provides for the making of interim payments.
5.
MoD rights as regards price investigation and audit in respect of subcontracts awarded other than on the basis of competition.
6.
The right to require the cancellation of subcontracts where the main contract has been cancelled by MoD for its convenience.
7.
Acquisition by MoD of rights in subcontractors’ intellectual property.
Thus with MoD taking an interest in subcontract matters relating to competition, security, issued material, vesting, pricing, audit, cancellation and IPR, it is difficult to see what aspects MoD is not interested in!
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Section 6 Non-competitive business The absence of competition...................................................................117 Non-competitive tendering ...................................................................120 Tender evaluation ...................................................................................120 Fair and reasonable prices ....................................................................121 Principles and process ...........................................................................122 The shift of bargaining power...............................................................124
Section 6 Non-competitive business
The absence of competition It is by now well understood that MoD prefers wherever possible to procure everything that it buys by the use of competition where a good number of qualified bidders have all submitted serious proposals. As has been seen, MoD may use contractual options to preserve competitively tendered prices into the ostensibly non-competitive phase of a project. However, there are a number of instances where the competition goal eludes MoD entirely. There are perhaps five main reasons for MoD having to procure in the absence of competition: 1.
Extreme operational urgency.
2.
Single source situations.
3.
Obstacles concerned with IPR.
4.
Industrial alignments.
5.
Competition ineffective.
Extreme operational urgency It has long been an established principle of MoD procurement that competition can be dispensed with where extreme operational urgency demands. If the need is sufficiently great MoD has the ability to proceed immediately with contract award to a preferred supplier in order to achieve the earliest possible delivery. In the ‘sixties and ‘seventies this ability was frequently exercised in order to improve the chances of meeting the User’s desired in-service date. Not only is it an easy option for the procurement officials, but it did overtly save the time taken to run a competition (major competitions can take years, medium sized can take 6-12 months). However, from the ‘eighties, this practice was abolished leaving the non-competition route strictly reserved for situations of the utmost, immediate operational urgency. To all practical intents and purposes this means a situation of real military tension or actual hostilities. Even then the dispensing of competition is not automatic. The SPI – with its emphasis on planning and efficient process – maintains this principle.
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Single source situations Where MoD has a requirement that can only be met from a single source of supply for the simple reason that no other supplier has a comparable product, then MoD is forced to proceed without competition. MoD does not like finding itself in single source situations because of the dependency upon that single source which is implied and because of the superior bargaining power that appears to lie in the hands of that source. For significant procurements, MoD will go to considerable time and cost to avoid single source situations. Of course, where MoD needs to make a technical change to an existing contract, it is stuck with the incumbent contractor, in virtually every case.
Obstacles concerned with IPR The single source supplier just mentioned would be expected to own all the IPR in his product and this in itself is a sufficient barrier to MoD seeking access to and the right to use that information which would allow it to mount a competition. This situation not only obtains for the initial ordering but also for consequential requirements for spares and other such needs. It would be expected that this IPR barrier would relate only to so-called proprietary products – where the design of the product and the generation of all the design data has been other than at MoD expense. However, even where the design has been created at MoD expense the standard MoD contract conditions relating to IPR do not necessarily grant to MoD all the rights that it would ideally like to secure for the purposes of pursuing its competitive procurement policy. This IPR obstacle has been (and is) an increasing irritant to MoD. Increasingly, MoD has little regard for proprietary rights or arguments over the intent of IPR contract conditions. It concerns itself simply with securing the rights it thinks it needs (or may need) to facilitate future competition or to otherwise extract itself from a particular contractor.
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Industrial alignments In MoD’s ideal world for every requirement there would be at least six serious, competent and absolutely independent bidders each of whom is prepared to fight to the death in order to win, accepting the odds of six-to-one. For large-scale procurements this ideal may be no more than that. The long-term rationalisation of the global defence industry in combination with the sometimes prohibitive bidding costs, the very lengthy tendering and decision time periods and the understandable wish of potential bidders to improve the win probability by working in teams, as mentioned earlier, can sometimes result in there being only one possible bidder. Of course as individual companies consolidate into a bidding consortium they must be sure that their arrangements are not in breach of relevant anti-competition law, but provided there is no such breach then the resulting single bidder situation is perfectly proper, even if inconvenient to the MoD and its competition policy.
Competition ineffective MoD considers that a competition is only effective if at least two serious tenders (some branches of MoD hold that at least three such tenders) are received, regardless of the number of companies invited. This is a source of much angst on the industry side where the opinion is that if several ostensibly real potential bidders are invited to bid, if the procurement is advertised as competitive and conducted according to the competition rules then each company believes himself to be in competition and prepares his offer accordingly. It is not his fault if there are then no other bids but his. The angst is caused by MoD seeking to apply, after the event, the non-competitive rules (which, as will be explained shortly, are fundamentally different) to what, until the moment of tender submission, appeared to be a fully effective competition. Thus it might be argued that this is not a true category of non-competition. It is mentioned here for completeness. For these reasons it turns out that some £2 billion annually of defence procurement is conducted in the absence of competition.
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NON-COMPETITIVE BUSINESS
Non-competitive tendering There are three approaches that MoD uses to seek proposals for contracts in a noncompetitive environment. Firstly, MoD may simply run a ‘single tender’ exercise whereby MoD seeks from the chosen company an offer against a full ITT constructed as far as possible along the lines of a competitive tender. If the offer is acceptable a contract is placed or negotiations opened. The simple situation of offer and acceptance with no negotiation (not even on price) would only operate for low value requirements. Alternatively MoD might issue the ITT in the expectation that the offer will then lead to full-scale negotiations on price and all other aspects, conducted over a significant period of time. Finally, it may be that MoD would provide only the technical requirement (in complete or outline form) to the company and ask for detailed proposals including draft contract conditions as well as prices. In any event the contractor is required to submit a full proposal at some stage or another. There may or may not be a tender return date. Strictly a tender return date is unnecessary here since its main function in a competitive situation is to ensure that tenders are submitted concurrently so as to avoid questions of impropriety. In the non-competitive situation it is likely that MoD and the company will just agree a suitable date by which the full proposal may be submitted. Indeed the much lesser degree of formality demanded allows for other beneficial approaches, such as the progressive submission of tender material allowing technical discussions and other useful dialogue to get underway at the earliest time.
Tender evaluation Just as in a competitive situation, MoD must undertake evaluation of a non-competitive tender. Assessment will largely use the same methods as for competitive tendering. It is MoD’s primary concern that a non-competitive situation nevertheless affords good value for money and in particular that the prices which are agreed are not excessive, it being generally thought by MoD on a doctrinal or at least dogmatic basis, that on both of these points, only effective competition can achieve best value and good prices.
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Fair and reasonable prices There is a very substantial contractual and procedural regime that MoD uses to establish fair and reasonable non-competitive prices. In a fully effective competitive environment MoD usually has no interest in the constituent parts of the contract prices, which almost always will be established at the date of contract. In a noncompetitive situation MoD requires the utmost disclosure of pricing details and requires that costs and price are formulated according to its special requirements. In addition MoD reserves the right to investigate contract costs after the work is finished and, in certain circumstances, to seek a financial adjustment. The regime subsists in a number of different forms (some of which allow for prices not to be established at the outset of the contract) as shown in figure 18.
Price agreed at the outset
Where prices are capable of being agreed before the contract is placed.
Price agreed during the contract
Where there is insufficient confidence in estimating to permit the agreement of prices without some work being done.
Price agreed after the work is finished
Where it is agreed that the risk in the work is too great for the contractor to carry and prices are agreed after the work is finished based upon the costs actually incurred by the contractor.
Target cost contracting
Where the price is agreed after the work is finished based upon costs incurred but with savings/overspends against a target cost (which was agreed at the outset) being shared between MoD and the contractor.
Figure 18: Non-Competitive Pricing Arrangements
The first of these options is the very much-preferred MoD policy. The approach is known by the acronym NAPNOC that means ‘No Acceptable Price No Contract’. It is the preferred approach because by establishing prices at the outset MoD ensures two things. Firstly, the contractor carries all the financial risk in the performance of the contract (except to the extent that certain risks having a financial dimension, for example the provision by MoD of data to the contractor, may be assigned to MoD under express conditions of the contract). Secondly, by securing firm prices at the outset, the MoD financial commitment is bounded, which is good practice from a budgeting and control point of view. For these same reasons MoD prefers
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not to place contracts where the price is to be agreed later. However, where the inherent technical risk in the contract is very high MoD will consider the use of target cost contracting which has the effect of sharing risk, albeit that MoD will invariably seek to bound its overall financial commitment by including a maximum price for the entire contract.
Principles and process The essence of the non-competitive pricing regime is one of ‘equality of information’ at the time the prices are agreed. This means that in negotiating the price the contractor must have put the MoD in a position whereby MoD knows as much about the plans and estimated costs for the contract, as does the contractor. In theory this equality of information principle is mutual in so much as the MoD is under an equal obligation to bring relevant information to the contractor’s attention. However, in 99% of cases it is the contractor who possesses the relevant information and thus it his burden that is the centre of attention. In addition the amount of profit that the contractor is entitled to include in his price is calculated under the ‘Government Profit Formula’. Furthermore the overheads that he is allowed to recover must be formulated in accordance with the ‘Government Accounting Conventions’. Thus in order for the commercial branch to be in a position just to start negotiating non-competitive prices means that the following building blocks must be in place:
Quotation and breakdown The contractor must have provided MoD with a written quotation together with a complete analysis of the price that shows, for example, the estimated effort (usually to be shown in hours of effort against different activities); details of subcontract charges; details of estimated materials costs; risk allowances and contingencies.
Charging rates The proposed charging rates for direct labour and overheads must have been agreed with the MoD’s own accountants. This will have required complete disclosure about salaries and wages, forecast orders and volumes of activity. Overhead rates must have followed the Government Accounting Conventions (GAC), which state which categories of costs are admissible, inadmissible or partially admissible in Government non-competitive contracts. The commercial branch must be in receipt of a written report from the MoD accountants as to the acceptability of the contractor’s proposed charging rates and factors.
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Technical cost report The commercial branch must also be in receipt of a written report from the MoD’s technical costs investigators. This report will provide exhaustive detail on the likely accuracy of the contractor’s prime cost estimates (the estimates of effort and subcontract and material costs) and also upon the credibility of any risk allowances and contingencies that the contractor proposes.
Agreed profit rate There must be an agreed profit rate for the contractor deduced from the Government Profit Formula. This Formula aims to ensure that contractor’s working on non-competitive government contracts earn profits which are comparable to those earned by an appropriate representative sample of companies within British industry as a whole. In part the formula aims to calculate profit as a return on capital employed. Since in most cases it is impossible to allocate capital employed to individual contracts there is a device that allows for the profit to be expressed in terms of contract costs. This device is known as the CP:CE ratio (the ratio of annual cost of production to capital employed). The CP:CE ratio must be calculated for individual contractors. This task is also done by the MoD’s own accountants in negotiation with the contractor’s staff. The GAC also dictate the allowable make up of the contractor’s capital employed and cost of production. Thus armed with the foregoing information the commercial branch can commence formal price negotiations with the contractor, which hopefully will lead eventually to contract award. At the time the commercial branch and the contractor’s representative are prepared to shake hands on the price agreement they are also required to sign an equality of information certificate. This certificate sets down the detailed build up of the prices as agreed and states the underlying assumptions. It also carries a warranty that each party has brought to the other’s attention all relevant information that is material to the agreement of fair and reasonable prices under the concept of equality of information. However, the story does not even end there. Although MoD accepts that once a firm prices is agreed it is for the contractor to aim to drive costs down below the agreed estimates and, if he his successful, to retain the savings as additional profit, this regime has built into it safeguards against the possibility of the contractor not having fully complied with the obligations of equality of information. In particular the MoD can demand a statement of costs incurred and an audit at the end of the contract to determine the actual profit made. The commercial branch will then do a comparison between the cost estimates and underlying assumptions at the time of the price agreement and the picture as it emerges at the end of the contract. If there is any reason to believe that the equality of information principle was not fully satisfied there may be grounds
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for MoD securing a refund from the contractor. If any attempt by the contractor to avoid or subvert the equality of information obligation deliberately, then there may also be grounds for civil or criminal action against the contractor or his staff. This regime is given effect by a number of contract conditions and a number of procedural requirements.
The shift of bargaining power Within this Report the intention is not to cover the non-competitive regime in detail but to give an outline of the situation so that a comparison can be made of the relative bargaining positions of MoD and contractor both as regards the price and also in general terms. Inevitably if the MoD finds itself negotiating in a non-competitive environment then it must prima facie be in a weaker position than if it is in control of a fully effective and aggressive competition. With the exceptions of having to work out the benefits of one competitive tender against another in terms of value for money (no easy task) and checking that the budget is sufficient, MoD does not concern itself with prices submitted in competition. Its bargaining power almost by definition is optimised. In a non-competitive position MoD is concerned that the balance of bargaining power shifts to the contractor. Whilst the full panoply of the non-competitive pricing regime can be brought to bear on the negotiation of prices, it is unarguably the case that MoD considers this to be a second best (to competition) approach to settling prices. The opinion of MoD is that competitive pressure will, in addition to promoting the most cost effective and innovative solutions, cause (or force) tenderers to suppress or eliminate risk allowances and contingencies, lower overhead recoveries and reduce or eliminate profit margins in order to secure business. Whether this opinion is accurate, whether such practice, if it exists, is good for the Defence Industry and whether such a practice provides the right basis for a sound MoD/contractor relationship can be left to the reader to decide. But to the extent that overhead rates, profit rates and, to a lesser extent, allowances and contingencies are allowable and mechanistically predetermined in the non-competitive pricing regime, then it is hardly surprising that MoD believes that this approach does not produce such good prices as in competition. On the one hand, in a non-competitive situation, the contractor is constrained in his aspirations for a high price by the non-competitive pricing regime, but, on the other hand, he is apparently in a stronger negotiating position. However, in reality he is not always in a position to fully exploit the situation. The only combination of events that would give the contractor the opportunity to offer MoD a price on a take-it-or-leave-it basis is where the contractor is a large organisation,
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having comparatively little MoD business (that is, the MoD has little leverage with the contractor at the corporate level) and is offering a proprietary product (that is, MoD has no prior information about the cost base) which is very urgently required in a currently operational theatre. Such combinations are relatively rare. Thus the apparent swing of bargaining power from MoD to the contractor that the non-competitive environment appears to represent is really not so substantial. In any event in the normal course of things the pressure to come to an agreement is greater upon the contractor than upon MoD. To paraphrase, the contractor needs the order, MoD can wait for the goods; the contractor knows the minimum price below which he does not want the order at all, MoD can push him towards this figure with arguments of affordability, value for money and comparability with competition; the contractor can argue for the strict application of the pricing regime to produce a fair and reasonable price, the MoD can say that the regime fails if, for example, it produces year-on-year overhead rate increases which are out of line with inflation. As regards aspects of the potential contract other than price, the same picture emerges. The contractor certainly enjoys an improved bargaining position in terms of, for example, the grant of IPR to MoD, payment terms and distribution of risk since, in none of these examples does MoD have a contractual and procedural regime that is the equivalent of the pricing regime upon which to fall back. However, the same commercial pressures to secure the deal apply to the contractor and less so to MoD. In summary, the shift of bargaining power to the contractor is not always as great as might be assumed. The real advantage in a potential non-competitive award is that, provided only the contract negotiations are successful the contractor will get the order. Improved bargaining power as regards those negotiations is only as great as the particular circumstances allow. In any event it should be remembered that just because MoD has approval to award a non-competitive contract, this does not mean that it will actually award that contract if it believes that it cannot secure the right price and the right contract terms and conditions.
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