1. This paper summarises the results of contract post-costing investigations recently concluded by the MOD. These investigations arise from long-standing Government and Industry arrangements for the pricing of non-competitive work, the main features of which are:
(a) a profit formula to give contractors engaged on single source Government contracts a return comparable to the average overall return earned by relevant sectors of British industry (the formula is commonly referred to as the Government Profit Formula-the GPF);
(b) the establishment of an independent, advisory non-departmental public body, the Review Board for Government Contracts (hereafter "the Review Board"), to carry out regular reviews and to recommend the GPF target rate of return.
2. Additionally, where prices are to be agreed on the basis of estimates at the outset of work (or as soon as possible thereafter), the arrangements also provide:
(a) the right, up to the time prices are agreed, to equality of information, through an obligation on both parties to disclose relevant information;
(b) the right of the MOD to post-cost contracts, to compare the costs agreed in the price with the actual costs incurred, and so determine the actual profit achieved, as compared with the target profit agreed at the time of pricing; and
(c) if a contract cost variation is outside a pre-determined range, to share any excess profit or loss arising in accordance with a standard contract condition (DEFCON 648A); or, in certain circumstances, if either party believe that the agreement of a fair and reasonable price was frustrated by a lack of equality of information and they cannot reach a negotiated settlement, then the contract may be referred to the Review Board for Government Contracts for binding price determination.
3. The referral of an individual contract to the Review Board is a rare event: there have only been nine since the Board was formed in 1968. In last year's report we notified the PAC that the MOD had referred a contract to the Review Board in May 2009 and that the Board's decision was expected in 2011. A summary of the outcome of the referral is at paras 14-16 below.
4. The Agreement establishing these single source pricing arrangements was made between HM Treasury and the CBI in 1968. The MOD is the only operational user of the arrangements (commonly known as "the Yellow Book"), on account of the volume of its single source pricing activity. In January 2011 the Government asked Lord Currie of Marylebone to lead an independent review of the arrangements. He published his report in October 2011, making a number of recommendations which are now the subject of a further phase of consultation led by the MOD. The formal, public phase of this consultation will close in January 2012. The outcome may impact future post-costing activity by the MOD, as summarised at paras 8-10.