1. The Government Profit Formula arrangements provide that where outturns exceed certain "trigger figures", cases may be referred to the Review Board for Government Contracts for a possible price adjustment, binding on both parties. This has been incorporated into defence contract conditions (specifically, DEFCONs 650 and 650A). The trigger figure is expressed in terms of a variation between estimated and outturn costs of 10% or more, although the figure does not of itself involve a presumption of reimbursement, nor does it preclude a referral of contracts where the cost variation is less than 10%, if the variation is believed to have arisen from an inequality of information at the time of pricing (ie one party knew something that could be expected to materially impact the contract outturn but did not share that information with the other, as required by the pricing process).
2. The importance of ensuring that there is full equality of information between the parties at the time of pricing is recognised by the Department and industry. In order to implement improvements in the achievement of equality of information and following consultations with industry, the Department adopted an Equality of Information Pricing Statement (EIPS) in 1995. This was introduced to improve the confidence on both sides that the principle of equality of information was fully observed during pricing negotiations. The EIPS is signed by both sides after the conclusion of pricing negotiations and provides an agreed record of the basis of the settlement. It becomes a contractual document through the inclusion of DEFCON 652.
3. Cost variations may arise from a variety of reasons, eg increased efficiency, over or under provision in estimates made in good faith, management of risk etc. In other words, cost variations do not automatically indicate an inequality of information between the parties.
Written evidence from the Permanent Under-Secretary, Ministry of Defence
MINISTRY OF DEFENCE: MPR 11
Thank you for your letter of 5 December covering a copy of the uncorrected transcript of oral evidence from the PAC hearing on "MPR11", held on 30 November 2011.
I enclose a version of the transcript with corrections shown as tracked changes. I would be grateful if you would arrange for the corrected version of the transcript to be posted on the PAC website.
I also enclose a note providing the supplementary material which we undertook to provide at the Hearing. As there was much debate on the role of Senior Responsible Owner, attached is a PDF document which explains the roles and responsibilities in more detail, which I hope the Committee will find useful.
I am copying this to the Comptroller and Auditor General and the Treasury Officer of Accounts.
14 December 2011
MPR11 PAC HEARING-SUPPLEMENTARY INFORMATION
During the PAC hearing, it was agreed that we would provide two items of supplementary information to the Committee as follows:
(1) A note on the committees that Cdre Beverstock was a member (or not) of. If we could supplement this with a fuller note on SROs that explains clearly what their role is and how decisions on capability are made within the Dept. (Question 94)