4.23 The Long Term Partnering Agreement, signed at the time of the PPP, sets out the terms and conditions for the provision of test and evaluation services for 25 years (see paragraph 2.27). The price of these services is fixed for the first five years but subject to negotiation for each subsequent five-year period. This exposes the Department to two major price risks:
■ The Department may be exposed to significant price increases if it does not develop appropriate benchmarks against which to negotiate the proposed costs at each review period. This risk is greater in year ten (and at each subsequent review), as QinetiQ has the right to terminate the contract if it does not agree to the outcome of the price reviews. The Department has recognised this and in February 2007 decided to review some of the services conducted by QinetiQ to build cost benchmarks in advance of the first review in March 2008.
■ If there are no other contractors that can supply these services in the market, QinetiQ may be able to negotiate significant price increases.
4.24 The Department carried out a detailed study of its dependency on QinetiQ prior to the flotation (see paragraph 3.7). The Customer Group, created following this study to monitor ongoing dependence, must have regard for the initiative to award more of the research budget through competition. A fixed percentage of the research budget45 is allocated to QinetiQ and this is set to decrease year by year. The remaining budget is awarded through competition except where it is decided that there is insufficient capacity in the market to support an effective competition. In these cases contracts are awarded to a single supplier. The Department does not currently monitor how much of the total relevant research budget is being awarded to QinetiQ but changes to its reporting systems will make this simpler from 2007. An overdependence on QinetiQ could impact on the value for money obtained from defence research.
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45 What formally comprised the Applied and Corporate Research Programmes.