Regulation 17 Insertion of regulation 13A (costs associated with group profits)

After regulation 13 insert—

“Costs associated with group profits

13A

(1)

The requirements in section 20(2)(a) to (c) (allowable costs to be appropriate, attributable to the contract or component, and reasonable) will not be met if—

(a)

the primary contractor is a party to or proposes to enter into a group sub-contract; and

(b)

a deduction from the allowable costs has not been made in accordance with paragraph (2).

(2)

Where paragraph (1)(a) applies to a qualifying defence contract—

(a)

the allowable costs of that qualifying defence contract that relate to the price payable under any group sub-contract must be reduced by an amount equal to the attributable profit on that group sub-contract; and

(b)

the allowable costs of the qualifying defence contract that relate to the price payable under any further group sub-contract which relates to the group sub-contract described in sub-paragraph (a) must be reduced by an amount equal to the attributable profit on that further group sub-contract.

(3)

“Group sub-contract” means a contract—

(a)

the price payable under which includes an amount of profit;

(b)

which is made between the primary contractor and any person connected with the primary contractor;

(c)

the value of which is no less than £250,000;

(d)

the award of which was not the result of a competitive process (within the meanings given in regulation 59 or 60);

(e)

the price of which is not determined in accordance with regulation 19A (commercial pricing) or 19B(3) (prices determined in accordance with law); and

(f)

where the goods, works or services to be provided under the contract are necessary to enable the performance of the qualifying defence contract.

(4)

“Further group sub-contract” means a contract—

(a)

the price payable under which includes an amount of profit;

(b)

which is made between the two or more persons, each of which is associated with the primary contractor or a group sub-contractor;

(c)

the value of which is no less than £250,000;

(d)

the award of which was not the result of a competitive process (within the meanings given in regulation 59 and 60);

(e)

the price of which is not determined in accordance with regulation 19A (commercial pricing) or 19B(3) (prices determined in accordance with law); and

(f)

where the goods, works or services to be provided under the contract are necessary to enable the performance of the qualifying defence contract.

(5)

The attributable profit is—

(a)

where all of the output of a group sub-contract or further group sub-contract is necessary to enable the performance of the qualifying defence contract, all the profit element in the price payable under that group sub-contract or further group sub-contract;

(b)

where only part of the output of a group sub-contract or further group sub-contract is necessary to enable the performance of the qualifying defence contract, that part of the profit element in the price payable under that group sub-contract or further group sub-contract which relates to the output necessary for that performance.

(6)

Attributable profit does not include—

(a)

any appropriate sub-contractor profit;

(b)

any capital servicing adjustment made under regulation 11(7);

(c)

any profit which is received by a person who is not connected with the primary contractor.

(7)

In determining the value of a contract for the purposes of sub-paragraph (3)(c) or (4)(c), paragraphs (5) to (8A) of regulation 5 do not apply.

(8)

In this regulation, “appropriate sub-contractor profit” means an amount of profit in the price of a group sub-contract or further group sub-contract which the Secretary of State is satisfied is not duplicated by the values calculated by applying step 1 (baseline profit rate) and step 2 (cost risk adjustment) of regulation 11.

(9)

A person is connected with another person for the purposes of this regulation if they are associated with each other.”.