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A SPECIALLY COMMISSIONED REPORT

TENDERING ANDNEGOTIATING

MoD CONTRACTS

Tim R Boyce

T H O R O G O O D

P R O F E S S I O N A L

I N S I G H T S



T H O R O G O O D


I N S I G H T S

A SPECIALLY COMMISSIONED REPORT

TENDERING ANDNEGOTIATING MoD

CONTRACTS

Tim R Boyce



Published by Thorogood

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Other Thorogood

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Jeff Woodhams

The Legal Protection of Databases

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The Internet and E-CommercePeter Carey

Technical Aspects of Business LeasesMalcolm Dowden

The Commercial Exploitationof Intellectual Property Rightsby Licensing

Charles D. DesForges

The Competition Act – PracticalAdvice and GuidanceSusan Singleton

Damages and Other Remedies forBreach of Commercial Contracts

Robert Ribeiro

Thorogood are actively commissioningnew reports in key subject areas whereadvice and guidance is at a premium.If you are interested in authoring aThorogood Report please contact NeillRoss on 020 7749 4748.



T H O RO G O O D PRO FE SSI O N A L I N SI G H T S

About the Author

Tim Boyce began his career in the Ministry of Defence holding executive positions

in contracts, contracts policy and nance. 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 responsi-

bilities 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)



Contents

1 INTRODUCTION 1

First principles..................................................................................................2

The procurers ..................................................................................................4

Integrated Project Teams (IPT)........................... .............................................5

Internal customers ...........................................................................................7

Project life cycle ...............................................................................................9Our 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 ofcial 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 Certicate of Tender.................. ...........................................27

Special Notices and Instructions (SNI) to tenderers .................................28

Bidders’ conference .......................................................................................29

Raising questions ...........................................................................................30




3 COMPETITIVE TENDERING:THE POST-BID PHASE 32

Impartiality......................................................................................................33Commercial condentiality ...........................................................................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 ..................................................................................71Formal 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 .....................................................................................................86Approaches for the contractor .....................................................................88




5 CONTRACTUAL NEGOTIATIONS 93

Taut contracts .................................................................................................94

Custom and practice ......................................................................................95

Foci of negotiation .........................................................................................96

Terms and conditions ..................... ...............................................................96

Price ................................................................................................................98

Payment .......................................................................................................100

Timescales ....................................................................................................102

Specication .................................................................................................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 .........................................................................120Tender evaluation .........................................................................................120

Fair and reasonable prices................................... .......................................121

Principles and process .................................................................................122

The shift of bargaining power ....................................................................124




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 Ofce

NAPNOC No Acceptable Price No Contract

OTS Off-The-Shelf

PE Procurement Executive




ROC Revise or Conrm

SNI Special Notices and Instructions

SPI Smart Procurement InitiativeSRD 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.




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 Denitions 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




Section 1Introduction

First principles ............................................................................................2

The procurers .............................................................................................4

Integrated Project Teams (IPT) ..................................................................5

Internal customers......................................................................................7

Project life cycle .........................................................................................9

Our friends in industry.............................................................................12

T H O R O G O O D


I N S I G H T S



Section 1Introduction

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 character-

istic – that not all is what is seems!

Firstly, it can be said that defence procurement is very expensive, strategically impor-

tant 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 gures 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. Over6,000 companies receive contracts from MoD each year. By value the preponder-

ance 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 signicant purchases from the USA and from the rest of Europe. Prots in govern-

ment defence contracts are not necessarily exciting, but the orders, cash ow and

(limited) prots 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 signicant under achievement in

terms of the performance of these equipments and systems. This phenomenon of

relative failure has been recognised by successive governments, government depart-

ments (especially the Treasury) and public bodies such as the National Audit Ofce

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

2T H O RO G O O D PRO FE SSI O N A L I N SI G H T S



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 realisedthat 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 conict with procurement ofcials. 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 exibility and openness), processes (streamlining, intro-

duction 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

ofcials, 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 internal-

to-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

Ofce 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 stepin the process of meeting the required standards of public procurement. Further-

more, 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.

1 I N T RO D U CT I O N




The procurers

The SPI aims to solve the traditional problems of defence procurement – costs

exceeding budget, timescales exceeding targets and performance not coming upto 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 impres-

sion 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 specication. 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 efciency 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 Procure-

ment 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 instruc-

tions. 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 concep-

tual 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 ushed through provided that the right level of

political and senior MoD management support maintains the SPI impetus.





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 andthe DLO replaced the previous three, service centric logistics outts (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 specic 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 acqui-

sition 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, nancial management and admin-

istrative 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





functions that are involved in the equipping of the forces with capability. The much-

loved ‘User’ and the mysterious ‘Centre’ hardly featured. The PE professed to

champion the User’s cause and explained delay and inefciency 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 efciency 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 compo-

sition of the three categories.

Figure 1: IPT Membership

CORE MEMBERS

1. Programme management2. Requirements management

3. Risk management

4. Engineering5. Technical6. Quality7. Reliability

8. Integrated logistics support9. Commercial management10. Finance management11. Secretariat12. Industrial

ASSOCIATE MEMBERS

1. Scientific staff2. Specialist procurement

services3. Private finance/public- private partnership experts4. Service users5. Service trainers6. Safety specialists7. Defence Export Services

Organisation8. DTI

ATTACHED MEMBERS

1. Technical scrutineers2. Capability resources

scrutineers3. MoD HQ scrutineers





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 sufcient to say

that the core team represents a much expanded skill set when compared with the

old PE project management teams; that crucially the ghting user is representedin 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 conict in aligning MoD objectives (timely

delivery within budget, to specication) with the prime contractor’s objectives

(business continuity, prot and cash) and a combined team working for the goodof 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-contrac-

tual 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

beneciary 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 identied. 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





the contractual interface. In any event, the plain truth is that the lack of a clearly

dened internal customer bafed many in the MoD anyway. But bafement did

not matter. Procurement was about procedure, not delivery! So the SPI xes 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

• Dene 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

• Dene 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 theUser 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.





Project life cycle

The SPI project life cycle has the phases shown in gure 2.

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 x performance

targets for manufacture.

2 . Place contract(s) to meet the SRD.

3 . Demonstrate ability to produce integrated capability.

DisposalIn-serviceManufactureDemonstrationAssessmentConcept





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 conrm that the system satises the SRD.

4 . Transfer line management of IPT to DLO.

5 . Transfer customer function to customer 2.

IN-SERVICE

1 . Conrm 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, rets or acquisition

increments.

DISPOSAL

1 . Carry out plans for efcient, effective and safe disposal of the equipment.

The SPI includes the streamlining of nancial approvals for projects. Under SPIthere 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 nancial demands must be known and known with a high degree of certainty.

The difculties that this approach carries are illuminated by a look back to the previous

‘Downey’ project cycle shown in gure 3.

Figure 3: Downey Project Life Cycle

DisposalSupportManufactureDevelopmentProject definitionFeasibility study





At rst 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 tocarry forward the project specic research work carried out as part of the feasi-

bility and project denition 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 underestima-

tion of technical difculties and development timescales. Over ten years ago, the

MoD adopted a policy of seeking to make the maximum possible use of Off-The-

Shelf (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 demon-

stration’. The laudable aim was to ensure that major project nancial 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 denition and early development stages which were unduly optimistic about

eventual costs, timescales and performance. The difculty 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 signicantly

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 demon-

strations 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 ction that

minimum development is attainable on major projects. Nevertheless the SPI cycleacknowledges 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 suf-

ciently explicit. The weakness can be seen in the high expectations about the quality

of cost, time and performance gures at the end of Assessment, in preparation for

main gate approval. The problem is that high quality gures 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 rst





amelioration is the stated intent to encourage a greater proportion of project expen-

diture 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 impli-

cation that cost, time and performance trade-offs must be permitted to continuepost 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: symbi-

otic 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 disre-

gard 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 expectsincreasing 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 rm price

contracts. It expects to use competition to drive prot as well as cost down, it uses

competition to force contractors to almost ght to the death, it uses competition

to try to buy what it cannot afford, it has little regard for UK design and manufac-

turing 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 regard-

less 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.





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 avail-

able 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).





Section 2Competitive 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 ofcial Invitation to Tender (ITT) .....................................................21

Price ...........................................................................................................21

Acceptance of portion of tender .............................................................22

Tenders for selected articles ...................................................................22

Alternative conditions..............................................................................23

Drawings ...................................................................................................24The Montreal Protocol .............................................................................25

Dangerous articles and substances ........................................................26

Submission of tenders................... ...........................................................26

Tender results................................ ............................................................27

The tenderer’s Certicate of Tender .......................................................27

Special Notices and Instructions (SNI) to tenderers .... ........................28

Bidders’ conference..................................................................................29

Raising questions......................................................................................30

T H O R O G O O D


I N S I G H T S



Section 2Competitive 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 Invita-

tion to Tender (ITT) and the implications that ow from it. But in most cases the

rst 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 rst 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 qualied. This may be

no more than conrming 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 prelim-

inary round of asking for expressions of interest. Equally, the decision to invite

particular rms 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 there-

fore 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.




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 circum-stances, 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 ofcials to try to place the respon-

sibility 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 equip-

ment, 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.

2 CO M PE T I T I V E T E N D E RI N G : T H E PRE - BI D PH A SE




Main contractors, prime contractors andprime systems integrators

Although MoD generally prefers to refer to the company selected as ‘theContractor’ 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 differ-

ences can be seen in gures 4, 5 and 6 where the company in question is Integrated

Defence Systems Limited (IDSL) 1 :

Figure 4: Main Contractor Role

Figure 5: Prime Contractor Role

Subcontractor C

MoD

IDSL manages the overall programme(including the integration task)

IDSL division Subcontractor B

Subcontractor C

MoD

IDSL carries out most of the work itself

Subcontractor A Subcontractor B



1 An imaginary company. Any similarity to any real company is accidental.



Figure 6: Prime System Integrator Role

As main contractor IDSL undertakes most of the work in-house, albeit that subcon-

tractors 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 integra-

tion 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 ‘articial’ pressure to put work into itself orinto 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 denition 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

Subcontractor C

MoD

IDSL manages the overall programme(including the integration task)

Subcontractor A Subcontractor B





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 invest-

ment 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 othermatters can prove more time consuming than might seem likely at rst sight. The

benets 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 subcon-

tractors once he has won the competition.





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 difculties of working in a team where the elected prime contractor is

not naturally the dominant partner is that the team leader will encounter difculty

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 (nance, 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 relation-

ship 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 nancial 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 contrac-

tual, 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 assess-

ment 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





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 compe-

tition at all levels throughout the project life cycle and the desire by each organisationin the supply chain (from MoD downwards) to be seen to be managing its suppliers

act as major inhibitors to team working.

The ofcial Invitation to Tender (ITT)

The majority of MoD invitations to tender (ITTs) are issued under cover of an ofcial

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 consti-

tutes ‘The Ofcial ITT’ and it also provides ‘The Tenderer’s Certicate of Tender’.

The ITT includes some useful general information but also covers certain essen-

tial 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 rm, xed 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 nancial 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 rm 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 xed

prices (being prices subject to variation due to changes in general economic condi-

tions) if the tenderer’s allowance for ination is demonstrably higher than that which

MoD would itself make.





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 uctuation that the tenderer would allow is greater

than MoD’s view of what is necessary. MoD may consider prices other than inSterling 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 signif-

icant contracts in Sweden (which has not so far adopted the Euro) and with a

signicant number of countries outside of the EU, particularly the US. In addition

many defence contractors buy materials from outside of the UK, place major subcon-

tracts 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 witha 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 forpart only of the requirement. This point can be easy to overlook and result in compa-

nies 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.





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 contractterms 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 understand-

ings that are operative between the company and MoD with regard to the

acceptability or interpretation of particular standard Ts&Cs. A number of consid-

erations 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 alterna-

tives does not usually, in itself, automatically rule out the tender or count against

the tenderer in any signicant 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 conrming100% 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 xed 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 rm prices

(i.e. those prices which are not subject to change for variation in economic condi-

tions). This naturally and quite properly has the effect of inviting MoD to consider

whether the company offering xed prices is better VFM than one offering rm

prices (since it is all a question of which side to the potential bargain is carrying

the ination risk). In practice it would be as well for the company intending to offer

xed prices to ask MoD in advance of tender submission if such an offer would be

considered (assuming that the option of xed rather than rm prices is not already

included in the ITT). In this example MoD is likely to answer in the afrmative but

with the proviso that bids will be assessed on overall VFM. At least then, everyone

knows where they stand.





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 imputeinto 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 rst 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 prospec-

tive 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 identier. There can be quite signicant alterations between successive

versions and the unwary may be caught out by not checking the specied edition

of each reference version.

DrawingsThe 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 specic

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.





These are:

• The recipient must not allow the material to be seen by unauthorised

persons (this is an undened term but can be taken to mean that only

those persons who have a need to have access for tendering purposes

are suitably qualied 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 referredto the commercial branch.

• The material may not be copied without the specic 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 restric-

tions 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 nal 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 rst things that the recipient of such information should do upon

receiving the ITT is to apply immediately to MoD for further copies and permis-

sion 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.





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 provideDEFCON 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 other-

wise the tender will be classied as ‘late’ which potentially eliminates the chance

of the tender being opened and considered. Generally MoD policy is that late tenderswill not be considered. This is a necessary principle if the conduct of public procure-

ment 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 ofcials modify the

policy to the effect that late tenders will not be considered unless there is signi-

cant 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 dened but circumstance

dependent) for bona de reasons. Left until the last minute, the granting of an exten-sion 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 proba-

bility 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 neces-

sary 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 afxed to the exterior of the package in

order to be assured that the tender will be admitted by the Tender Board (see later

topic).





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 computerdisc, 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 notied as early as possible’. Whilst this

declaration undoubtedly reects ofcial policy, the practice, as with many such

matters, is not necessarily in line with policy. Most companies follow up the submis-

sion 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 ofcials 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 negli-

gent. So just about everybody does it.

The tenderer’s Certicate of Tender

The second part of the DEFFORM 47 proforma is for the tenderer to ll in and sign

as his ofcial tender. It calls for the provision of some straightforward informa-

tion (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 signicant matter worthy of note is that the certi-cate 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 reserva-

tions 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 certicate or otherwise to make the basis of his

tender perfectly clear.





Special Notices and Instructions (SNI)to tenderers

The foregoing material pretty much covers the routine information concerned withan 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 specied. If the tender is

required to be split into a number of volumes, this will be described. Most impor-

tantly 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

ts 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.

• Conrmation that a tender bond will be provided.

• Conrmation that the tenderer, if selected, will provide MoD with a parent

company guarantee or a bond or guarantee from a bank or other thirdparty.

• Details of how prices are to be broken down to assist MoD in its invest-

ment 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 condentiality agreements with the relevant external

assistance contractors.





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 thetenderers to have read and formed a preliminary view about the ITT before the confer-

ence. 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 arerecorded 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 clari-

cation only. This being to ensure that there is no unintentional modication 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 under-

standable. As with written questions submitted during tender preparation it takessome 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 benet 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 ushed out and thus corrected before the ITT is formally

issued.





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 conict 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, doesnot 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 conrm that his alter-

native 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 rst 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 difcult 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 physi-

cally 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 inten-

tionally 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 impor-

tant, accidentally leaving his bid not compliant or leaving it without adequate

coverage of the associated costs within his price.





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 MoDtakes a signicant 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 con-

dential 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 opportu-

nity 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 conrm 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 afrmatively thus spiking the questioner’s own guns or if

the answer is indeed in the negative, it may give the competitor sufcient time to

change tack and come up with something compliant and attractive. To play thisparticular game of ‘spoof’ the tenderer needs to have the brain of a chess grand

master and the cunning of George Smiley!





Section 3Competitive tendering:The post-bid phase

Impartiality ................................................................................................33

Commercial condentiality..................................................... .................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 .................................50Best 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

T H O R O G O O D


I N S I G H T S



Section 3Competitive 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 experi-

enced 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 difculty, leading companies to feel that all was notquite 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 rst place.

Commercial condentiality

It has long been a matter of policy for the MoD that all dealings with commercial

organisations are conducted on a commercially condential basis. The policy, the

practice and implied fetters of condence on the MoD and its employees all serve

to protect a company’s private information. Indeed, as a general principle, this

respect for the condentiality of private information is so profound that MoD and




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

condential basis 2 . In contract there are express restrictions (both as regards

commercial condentiality and national security) on the company’s freedom todisclose 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 condentiality 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 specied number of copies

so that further copying within MoD is unnecessary.

• Tender information which is most sensitive (usually including prices) is

conned to a separate, special volume (normally referred to as the ‘commer-

cial 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 avail-

able 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 condentiality agreements

with those tenderers who so desire.

3 CO M PE T I T I V E T E N D E RI N G : T H E PO ST- BI D PH A SE


2 This situation is being remedied as part of the present general revision that istaking place to the MoD standard conditions of contact



• The staff of support contractors may be required to enter into conden-

tiality 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 regula-

tions are complied with).

Although these protection measures may seem academic and perhaps unneces-

sary 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 beingnaturally 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 ofcial MoD policy but it would be naive to pretendthat 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 nal concern has arisen especially where MoD is conducting competitions for

the outsourcing of services, in particular where private nance 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 ghting 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





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 aw that compa-

nies will not invest their intellectual efforts without appropriate respect for the value

of that investment (and consequently with appropriate protection) seems to escapeMoD. 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 irrevo-

cable, 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 denition to distinguish between innovative and

non-innovative bids) are clearly and boldly marked to show that they are submittedin condence and that permission is not given for disclosure to third parties.

Tender validity

The ITT will have specied 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 proceduresto 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

conrm 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.





Decision times

It is a matter of policy that MoD will make up its mind and award a contract as

quickly as possible. This benets the MoD and in particular the service user, sinceearly decisions must reduce the time from contract award to delivery of the goods

into the hands of the service user. It should also benet the tenderers. The losers

nd 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 conrm

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 opportu-

nities. 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 sufcient to cause MoD to think

again and perhaps to decide to go for a further round of tendering then, from the





ostensible loser’s point of view, he has bought himself the chance to ght 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 ofcial 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 commer-

cial branch in order that the decision-making process can be commenced.

If the tenders are physically bulky, arrangements may be made for the non-commer-

cial volumes to be sent direct to the staff dealing with the particular tender.

Commercial or price volumes are received by the Tender Board.

The ofcial 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 assess-

ment 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 ‘suspi-

ciously low prices’ and the use of best and nal offers (BAFO).





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 MoDwould 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 conrm 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 ercely competitive situation,

a bidder may deliberately offer an articially 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 compet-

itive tendering exercise would produce from each of the tenderers his best offer.

The conventional wisdom held that a ‘one shot’ competition is bound, by deni-

tion, 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 rst 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. Theproject 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

nal 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





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 difcult to make on the basis that new deals might be less compa-

rable 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 virtu-

ally 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 nal 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 repre-

hensible) 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 rst 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 condence.

• 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 effec-

tively little more than a Dutch auction.





It is very difcult 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 regard-

less 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 consideredto 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 Conrm (ROC) offers.

Thus a tenderer may be asked to produce ROC1, ROC2, and ROC3 ad innitum.

Decision process

The route leading to a nal decision to place a contract with one of the tenderers

can be summarised as shown in gure 7.

Figure 7: Competition Decision Process

DECISION-MAKING

ADJUDICATION

ASSESSMENT

UNDERSTANDING





Understanding

MoD’s rst 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 situa-tions, 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 rst 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 clarication 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 oppor-

tunity 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 conict between the presentation

and the detailed written tender is to be resolved in favour of the latter. Similar cautionshould be exercised with regard to answers given to MoD’s questions, whether

posed at the presentation or separately as described above.





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 establishedthe principle tasks of which will be to make an objective assessment of the following

main elements:

• Technical compliance with the specication(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 scientic 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) disclosedto 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





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 difcult 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 t, 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 specied 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 de. In such situations price

is implicitly the adjudication criterion that carries 99% of the ‘points’ and the cheapest

thus, by denition, 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 thatoffering delivery as specied 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 specied 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 specied 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 rst hurdle to cross! Alter-

natively, 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 specied, 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

difcult to avoid at least three (cost, time and performance) of the VFM criteria.





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 adjudi-

cation 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 difcult 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 condent 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’. Tendersthat 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 procure-

ments. The advantages are that the approach is simple in concept, simple to operate



3 A system of conducting competitive defence procurement agreed between theNATO nations that operate wherever the procurement is to be funded by NATO.



and is and can be seen to be scrupulously fair, provided that the technical assess-

ment 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 ruledout because it is technically not compliant then nobody ever knows what VFM oppor-

tunity has been lost! Indeed the underlying aw (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 offer-

ings 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 aw, perceives not disadvantage

in the lack of integrity of the purported tender adjudication scheme, but advan-

tage 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 randomnature 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 adjudi-

cation 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 nal decision on another basis’!





Highest scorer, on an adjudication scheme notdisclosed 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 signicance of cost, time, risk and perform-

ance (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 rst disad-

vantage, 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 thereis 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 sties the

very innovation that is believed to be the true source of real VFM.

The resolution of the rst 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 require-

ment 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 stimu-

lates 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 schememust 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 recom-

mendation as to the winner must inevitably cause some legitimate concern about

the possibility of bias, whether unintentional or otherwise.





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 nds 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 conrms 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 combi-

nation 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 withholdingdetails 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 perform-

ance) of VFM will sufce 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:

PriceTechnical Compliance

VFM Quotient =





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 deter-ministic. The principle is clear and each tenderer can see that the underlying rule

is not ‘cheapest wins’! Here lies the aw. 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 appro-

priately 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 scienti-

cally 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 relation-

ships 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 mathe-

matical 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 atten-

tion 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 consider-

ably 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





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 nal 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 denition 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 denition of cost would therefore be as shown in gure 8.





Figure 8: Acquisition Cost Denitions

Thus it becomes easy to see that ‘cost’ alone is a very difcult parameter to featurein any adjudication scheme if it is to take account of so many variables, many of

which are uncertain and for which it is therefore difcult to produce reliable nan-

cial gures. 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

Initial acquisition cost: Prices to be paid to company A

+Prices to be paid to other companies who will be awardedwork in support of company A

+Prices to be paid to companies providing supportservices to MoD

+Prices to be paid to government agencies (e.g. DERA)

+Costs of maintaining existing in-service equipment until thereplacement 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 serviceand ultimate disposal.





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 uncer-

tainty in much of the underlying data and also because there are different modelswhich 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 immedi-

ately 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 timeneeded to deliver the project.

• Companies tendering, offering to meet the specied 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 ushout 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 compo-

nent parts of performance in an MoD ITT might include the following:

• The degree of compliance with any specication.

• Reliability.

• Durability.

• Ease of use.

• Ease of maintenance.

• Scope for enhancement.

• Ease of enhancement.

• Resilience to countermeasures.





Again it is easy to see that capturing the complexities of such intertwined charac-

teristics 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 inter-

linked. 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 devel-

oped 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 nding

a sensible mathematical means of describing a robust, objective assessment and

adjudication scheme, the main reason perhaps being that in practice the four coreelements of VFM are too difcult 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 combina-

tion 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 individualtenders. These, essentially commercial aspects could include the considerations

shown in gure 9.





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

difcult in the nal 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 difcult 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 difcult 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 species 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-manda-

tory 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

CRITERION

Exploitability of product overseas

Degree of compliance with MoD Ts&Cs

Grant of IPR to MoD for downstream competition

Willingness to offer firm prices

REASONS FOR MoD INTEREST

• Supports ‘UK Ltd’• Improves balance of trade• May earn MoD commercial exploitation levy

• Alternative Ts&Cs usually move morerisk to MoD

• Indicates future tone of dealings• Saves time in placing contract

• Complies with MoD policy• Perceived to offer later cost savings• Avoids a single contractor getting too tight

a grip on the project

• Complies with MoD policy• Avoids MoD providing for inflation

cost increases





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 weight-

ings. Experience shows that achieving this in a VFM environment is difcult 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 decisionsThe 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 signicant proportion of the scientic and techno-

logical 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 ofcial interest in the industrial impli-

cations of procurement decisions. This is not to say that individual ministers and

other senior ofcials 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





is simply this, defence policy was wholly concerned with VFM alone. The deni-

tion of this, as has been seen, does not extend to industrial implications. It is not

VFM for ‘UK Ltd’, but, narrowly, VFM for the ghting 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 commu-

nications, 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 signicant 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 rms 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.





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 require-

ment 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 runbetween British rms 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

rms 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 contrac-

tual 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 inuence 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 nal 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 essen-

tial 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.





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’sposition. Frequently a decision is arrived at in advance of the conclusion of all contract

negotiations. Whilst it is strongly preferred that nal 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 negoti-

ations 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 signicantly 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 nal 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 announce-

ment 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 articial 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 nal negotiations.

When the decision nally emerges into the cold light of day MoD may write to the

winner accepting the tender (as may have been modied 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 nal and complete draft contract, which might then be jointly signed at some form of ceremony.





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. Theimmediate 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 poten-

tial future benet 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 face-

to-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 inany 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 advan-

tage 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 illumi-nating for the winner to know if all this expenditure was worthwhile. If, in the nal

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.





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 rst 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 ‘specication’, post SPI this the ‘system requirement document’.

Step 4 both pre and post SPI is the performance of the contract leading to theintroduction of the system into service.

In practice this four-step process is not in the least bit simple. Finalisation and agree-

ment 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 difculty 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 nish. 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 poten-

tially 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 rst place.





So where does change sit in the SPI era? The SPI project lifecycle shown earlier

in gure 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 ‘Incre-

mental Acquisition’. This can best be illustrated as shown in gure 10.

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 relevanttechnology (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 rst glance this might appear to allow for something along the lines of tradi-

tional 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 xed 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 contractonto the project lifecycle as shown in gure 11.

Initial Operational capability (Equipment In-Service) Full Operational Capability

Concept

Assessment

Demonstration FinaliseBaselineCapability

Define 1stIncrement

Define 2ndIncrement

ImplementBaseline capability

Implement 1stIncrement

Implement 2ndIncrement





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.

DisposalIn-serviceManufactureDemonstrationAssessmentConcept





By having one super competition, MoD not only secures the benet of maximum

competitive pressure (remember competition is good even if prices are higher

because of risk contingency cost allowances), but MoD also avoids the interrup-

tion to the delivery process occasioned by the stop-start of multiple competitivestages; 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 exible strategies. The super

competition has, to MoD, the disadvantage of ‘supplier lock-in’ denying it the poten-

tial benets of downstream innovation from other sources and denying it the chance

to nancially again from improving efciency 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 gure 12.





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 nishes.

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

*of the work being placed with the original contractor

CATEGORY

Options

Variations

‘Real’follow-on

COVERS

Extras foreseenat thetendering stage

Technicalchangesarising duringthe work

Extras desiredor necessitated

as aconsequenceof having thenew equipment

PURPOSE

To takeadvantage ofinitial tenderingespecially ifcompetitive

To give MoDthe unilateralright to demandchanges postcontract

To realise thebenefits of

MoDinvestment inthe initialprocurement

EXAMPLE

CapabilityIncrements

Change toexternal systeminterface

Combatlosses

PROBABILITY*

High

Very High

Medium

ENABLED BY

Contractualprovisions ininitial contract

StandardcontractconditionpermittingMoD to alterspecification

Furthertendering

(competitive ifpossible)

IMPLEMENTED BY

Letter or contract amendmentexercising option

Change note

New contract or renegotiationof existing contract





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 budgetsor doubts over nal 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 gure

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 compet-

itive tendering situation, this is clearly better from MoD’s perspective as the xing

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 signicant benets 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 specication of the goods to be supplied.

The intention is to allow MoD the ability to require the introduction of modica-

tions into the nature of the work during the course of contract performance. Inthis context the word ‘specication’ is intended to mean strictly the technical deni-

tion 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 specication 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 unilat-

erally 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 rst place).

A change to the specication 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 specied will not, after all, make the expected

contribution to the desired capability.





The rst and second of these points amounts to no more than a pragmatic recog-

nition that even the SPI process cannot guarantee complete certainty in the art of

crystal ball gazing. The third point is potentially more difcult as examples of this

category can lead to disputes between the MoD and the contractor as to the blamefor the apparent inadequacy of the specication.

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 specication 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 denition 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 benet 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 prepa-

ration 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 ow 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 compe-

tition 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 nal determinant may be the position regarding IPR. If the MoD has sufcient

rights to mount a competition then the nal 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





the nal say, MoD’s options being to proceed with the contractor, not to proceed

at all or to attempt to nd 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.





Section 4Principles and processesof 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

T H O R O G O O D


I N S I G H T S



Section 4Principles and processesof 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. TheIPT 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 ofce’ 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 manage-

ment 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 differ-

ences, the respective interests can be classified between overall interests,

pre-contract interests and interests post contract award as shown in gure 13.




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 issignicantly empowered and indeed the role of the programme manager in informal

negotiations is itself of vital importance.

Overall interest

Pre-contract interest

Interest post contract award

PROGRAMME MANAGER

• To ensure that the URD is

met on time and to budget

• Specication (e.g. SRD)

• Statement of Work

• Quantities

• Delivery Schedules

• Quality Plan

• Project management Plan

• Risk management Plan

• Project Progress

• Specication changes

• Delivery forecasts

• Risk Management

• Financial forecasts

• Billing

COMMERCIAL MANAGER

• To ensure that the

procurement is executedconsistent with MoD Valuefor Money policies

• Choice of contractor

• Terms and conditions

• Price

• Payment terms

• IPR

• Liabilities

• Indemnities

• Place contract

• Negotiate prices

• Negotiate changes

• Negotiate claims

4 PRI N CI PL E S A N D PRO CE SSE S O F N E G O T I AT I O N




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 imprac-

tical 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 specic

functions such as MoD quality assurance but for these purposes it is sufcient 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 thecommercial 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 whowill 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 condi-

tions 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.





EXAMPLE 3: CONCESSIONS AND PERMITS

Many MoD contracts contain provisions that contemplate that goods tendered for

delivery will, in terms of specication, 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 specications 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 specication 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 arrange-

ments 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 theprocess 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 specication and it is the programme manager

who exercises the right to accept or reject the work of the contract then it logically

ows 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.





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 specica-

tion 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

Modications 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 dened 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 undera repair contract, but would not be given authority to nally 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 princi-

ples. 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 benet. There-

fore 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.





EXAMPLE 3: AGREEMENT OF TERMS AND FEES FOR IPR

IPR is normally seen as a specialist subject. Although the commercial branch will

possess sufcient knowledge to cover routine situations (for example, the selec-

tion 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 commer-

cial 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 equiv-

alent 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 preju-

dice 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 nancial 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,





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 commer-

cial ofcer 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 ofcer at the grade of senior executive

ofcer (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 signicant delegated authority (signing powers) if he/she is a seasoned

commercial ofcer 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 thatthe 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 procure-

ment functions with a mixture of different reporting lines, there is within MoD aconceptual 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 gure 14.





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 ofcer 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 straight-

forward 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 rst 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.

• No misrepresentation.

• No bribes, corrupt gifts or payments of commission.

• Promissory representations are binding in contract.

• The parties are free to use their bargaining power to their best advantage.

POSITION

Commercial Director

Assistant Director

Senior Executive Officer

Higher Executive Officer

Executive Officer

RESPONSIBILITIES

Policy/international aspects/post costing/very high value contracts

Complex disputes/higher value contracts/complex pricing

Disputes/medium value contracts/pricing

Medium value contracts/pricing

Lower value contracts/routine pricing/contract administration





As a rst principle, it must be remembered that there is no duty to disclose infor-

mation 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 negoti-

ations 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 other-

wise 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 discloseinformation 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 obliga-

tions 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 signicant extent.





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 appropriatemanner. 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-purchasingdepartment 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’ repre-

sentatives 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 corpo-

rate 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 difcult deal in trying circumstances. Provided only that thecontractor’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





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 thecontractor’s staff know the MoD terms and conditions better than the MoD staff.

This is not necessarily so difcult to do as it sounds because MoD commercial branch

staff change posts on a regular basis, whereas contractor commercial representa-

tives 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 under-

lying legal principles in negotiating with MoD, in forming and then performing

the resultant contract. This is not only important in order to combat any legal-

istic 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 proce-

dures 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 contractorcan 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 impor-

tant 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 quali-

ed. 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.





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. Someuseful 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 isoften seen that the negotiation is the start of a process that brings a contract discus-

sion 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 negotia-

tions will be held; where they t 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.





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 relation-ships 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 devel-

opment 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 weaknessesof 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 impor-

tant 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 ‘terri-

tory’ for one side is by denition 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’sdangerous ‘territory’.





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 eachof 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 difculty 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 situa-

tion 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 advan-tage 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 ofces. 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 resolu-

tion to be reached than might be thought at rst 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 bereached 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 rst place.





General tactics

At the essential level, negotiating with MoD can involve the same basic techniques

as are used in any negotiation:• Compromise.

• Bargain.

• Logic.

• Emotion.

• Threat.

Compromise is sometimes said to be the English disease – the idea that two protag-

onists will come to an accommodation at all costs rather than indulge in theunpleasantness 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 intel-

ligent 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 compro-

mise 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 impor-

tant 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 gure. Negotiations with MoD

are a serious and professional business and neither side should waste the other’s

time with pointless games.





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 meetingwith 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 thenfollow 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 agree-

ment. 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 accommoda-

tion being reached. However, where this is relatively easy for the contractor to do,

it can be more difcult for MoD. If the negotiation is to embrace matters associ-

ated with six different contracts then it is difcult 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 Ofce, the

Public Accounts Committee and the House of Commons Select Committee onDefence, means that MoD must do, and be seen to do, the ‘right thing’. This is impor-

tant for contractors who can thus rely to a very signicant 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 identied and analysed

in advance, of course), then he will have a strong chance of winning the day. This

is of crucial signicance because these pressures on the MoD negotiators can have

the effect of the MoD making an agreement, which although logically correct and





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 hason occasion been alarming the extent to which these responsibilities have, inten-

tionally 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 quasi-

commercial agencies and the drift of executive power (which is denitely 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 repre-

sentatives 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, tobe 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 negoti-

ation 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





it is usually easier for MoD to play call-my-bluff than it is for the contractor. Secondly,

without taking any specic 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 resourceshanging on the outcome of the negotiations.

MoD tactics

If on the one hand it is safe to consider MoD as a fair playing, logical, decision-

maker 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 negoti-

ation. 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 procure-

ment and the MoD does not possess sufcient 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-





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 repre-

sents 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 settle-

ment 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 ow. 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 thathe 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 privi-

leges 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 proce-dural ‘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 negoti-

ating 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’





or, to put it crudely, the aim of getting ‘more for less’. Thus in competitive situa-

tions 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 producean 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 nds it difcult 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.

• Listening well.

• 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.





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 gure has been given, MoD willtreat any attempt to increase it with the utmost suspicion. In any event if an early

and low gure 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 gure 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 impor-

tant 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 gure 15:

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 account-

ability the ‘presentational’ aspects are very important and it is an unwise contractor

who pays them no heed.

Recording

Mutually recordingthe agreement indetail andunambiguously

Agreeing

Settling upon a setof balancingaccommodations

Moving

Stepping graduallyaway from openingpositions in attemptsto find middle ground

Testing

Probing the strengthsand weaknessesof each other’sarguments

Opening

Setting outrespective positions





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 commer-

cial) 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 poten-

tial 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 bealert 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 considera 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 difcult. He/she may feel that the deal is good,

but he/she must be condent in his ability to ‘write it up on the le’ when he/she

makes his formal record of the meeting. This is very important because such lesare 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 benet 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 commer-

cial 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





argument is centred upon an interpretation of a complex set of MoD contract condi-

tions and conventions (for example those relating to the contractor’s rights to multiple

layers of prots 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 logicalstrength 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 negotia-tors 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 condence, 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 inuence 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 beevery attempt to ensure that the MoD commercial manager who was unable to do

the deal does not feel that this move in any way reects upon his/her own capabil-

ities. 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.





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 appro-

priate 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 rm 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 tooeasy 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 under-

standing 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 conrming 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 paper-

work 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.





Section 5Contractual negotiations

Taut contracts................................ ............................................................94

Custom and practice ................................................................................95

Foci of negotiation....................................................................................96

Terms and conditions ..............................................................................96

Price ...........................................................................................................98

Payment .................................................................................................100

Timescales ...................................... .........................................................102

Specication ...........................................................................................104

Acceptance ............................................................................................105

Intellectual Property Rights (IPR) .........................................................108

Liabilities .................................................................................................110

Variations and claims ............................................................................111

Subcontractors .............................. .........................................................115

T H O R O G O O D


I N S I G H T S





a change in thinking. In 1996 the policy was modied 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 thecontractor – 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 prece-

dents and are made without prejudice to other negotiations unless stated so in

writing. This general rule does not necessarily stop either side from quoting specic

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.

5 CONTRACTUAL NEGOTIATIONS






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 inso 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 condi-

tions are not negotiable or that no modications 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 Condi-

tions of Government Stores Contracts, which are HMG wide, will eventually be

completely superseded by replacement conditions in the DEFCONs that are exclu-

sive 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.





Price

The MoD overall objective is to achieve value for money. Inevitably, this means that

MoD seeks to get the maximum possible specication for the minimum possibleprice. The effect of this is that MoD will continue to negotiate both in a competi-

tive and non-competitive environment until it is satised 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 specication and delivery in the

rst round of tendering. These days MoD works on the basis that tenderers do not

necessarily table their best package at the rst 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 nal offers.

The affordability argument can also be used by MoD to good effect in the non-

competitive 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 estab-

lishing 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 wouldrely upon the mechanism being operated and the resultant price being, by deni-

tion, 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 never-

theless 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 specication or scope of work.

As far as terminology is concerned, it is important to be clear as to the distinctionbetween rm prices and xed prices. A rm 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 specication. In contrast a xed price is a price

the nal value of which is xed by reference to something that is moving, for example,

an ination index. Although these are now standard denitions in MoD contracting,

there is still some variation from the standard. On occasions one can see the use

of the expressions ‘rm and xed prices’ or ‘xed and rm prices’ which adds to

any confusion. All things considered, the only safe thing to do is to ensure that at





the time of quoting or drafting the contract, that there is a written denition 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 rm 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 uctuations in the general economic conditions

prevailing. However, to the extent that the effect of a rm price is simply to clarify

that the risk of inationary uctuations in the cost base rests with the contractor,

it should be understood that MoD is required to evaluate the value for money benets

of carrying some of that risk itself. In principle, therefore, MoD will call for prices

both on a rm and on a xed basis. In this way, MoD can see the amount of money

that the contractor proposes to include in his rm price in respect of the ination

risk. If MoD believes that it could cover that risk at a lesser sum of money, then

supposedly it will prefer a xed 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 xed 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 ination 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 suchallowance in the contract prices. Industry has never liked the principle of a xed

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 xed 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 xed element encour-

ages contractors to participate in the overall management of the economy.

However, inationary forces in the economy are far more to do with the interna-

tional scene and the government’s domestic policies and it is difcult to see howthe inclusion of xed elements in defence xed price contracts is really going to

make very much difference.

From a negotiation standpoint it is important to realise that MoD will be most insis-

tent upon the inclusion of a xed element. Nevertheless, the contractor is free to

argue for its complete removal or indeed for the inclusion of a xed element that

is less than 25%. Neither of these options is likely to be secured from MoD with

anything other than the greatest of difculty. 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





is nished 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 insulatedfrom the inationary 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 reects 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 reect 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 deliv-

ered 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 ow 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.





As far as MoD is concerned, the making of interim payments is purely one of allowing

some assistance to the contractor’s cash ow, 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 nancing 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 ow 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 verication 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 difculties in negotiating milestone-based stage payment schemes with

MoD are nding 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 impor-

tant thing is to attempt to ensure that the contract captures a avour of realism,





that is to say it can be very difcult 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 exibility tomodify the scheme in the situation whereby if the contractor’s plans for execution

of the contract have to be modied 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 reect 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 programmemanager should be prepared to see that exibility 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 denition of this term the intent is fairly clear.

That is the ISD is the point at which the user needs to have the equipment opera-

tionally available to him to ght 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 conict 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 compe-

tition 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





too much reliance upon what would otherwise appear to be the reasonable assump-

tion that the equipment is required on an urgent basis, or if not on an urgent basis,

then certainly by a specied 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 specied 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

awed when one considers the legal principles behind a liquidated damages provi-

sion. 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 incen-

tivising 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 signicant

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.





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 noties the MoD of any force majeure event, where the

contractor mitigates the effect of the event and provided that the intervening eventcomes within the denition of force majeure events as stated in the contract. The

MoD preferred list of force majeure events will normally include re, ood, 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 rst sight this appears to be a benet 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 mustreasonably 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.

Specication

In all MoD contracts the requirement of the contract is specied in one manner or

another. In the case of simple study contracts, a specication 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 speci-

cation 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 designand development, the word ‘specication’ can take on a whole new meaning. Conven-

tionally, MoD would specify the requirement of a design and development contract

in terms of a formal specication stating the technical characteristics that the product

being designed must meet. Whilst at rst 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 satised. Thus in this manner, MoD holds to itself, quite unintention-

ally, some responsibility for the utility of the result of the contract.





To avoid this responsibility, MoD will structure the specication 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

specication 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 performancespecication 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 specication 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’ hastwo 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

conrm that they can ght a war with the equipment. There is more to this than

meets the eye. To ght a war with the new equipment means that it must be capable

of meeting the military threat for which it was designed; sufcient of it, in volume

terms, must have been delivered to represent an adequate equipping of the relevant

service units; sufcient spare parts must be available to keep the equipment opera-

tional; 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 signicance 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





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 nd 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 ‘conrms accept-ance in accordance with the procedure specied in the contract’ or otherwise upon

the rst to occur of: the MoD taking the equipment into use; MoD not having rejected

the equipment within any period specied in the contract; the elapse of a reason-

able 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 species 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 areasonable 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 accept-

ance 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 ‘eld trials’.

Therefore the acceptance procedure aims to stress a limited range of features in

a restricted environment only. Once this procedure is successfully completed accept-

ance 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. Contrac-

tors can expect it to receive close attention from MoD and they should pay it equal

attention themselves.





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 repre-

sented by the URD. Individual IPTs fully understand the linkage betweencontractual 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 gure 16.

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 illus-

tration. Firstly, the (as it happens old) concept of design certication implies a risk

that the design may have to be changed if the certication 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 produc-

tion, the contractor may need to launch production before design certication 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 contrac-

tual 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 difcult.

In-service Acceptance

Given when useableproduction quantitydelivered togetherwith support elements

System Acceptance

Acceptance givenagainst productionsample

Design Certification

IPT grants certificate

URD & SRD AcceptanceCriteria Fixed

Criteria agreed by allMoD stakeholders





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 toprotect 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 charac-

teristics, 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-propri-

etary 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 exclu-

sive 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 rst sight it may seem as though there is a mistake in the princi-

ples 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 intel-

lectual 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 intel-

lectual property for gain, with MoD sharing in the nancial benets by way of levy

on commercial sales.





On the face of it then, both sides should be happy. The contractor owns and can

exploit the IPR. MoD buys weapons to ght 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 conict with the contractor’s aims. In this respect, MoD hastwo objectives. Firstly, that it should be able to exercise sufcient rights in the

contractor’s IPR to permit it to have the product manufactured, modied (in both

the intellectual and physical senses), repaired and maintained. Secondly, that it should

be able to achieve this rst objective by open competition. It is this latter objective

that causes difculty 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 manufac-

ture, modication, 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 moralargument – 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 devel-

opment 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 condentiality 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 ratied by the trade

associations must by denition be acceptable. This can be a misleading presump-

tion. 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 protec-

tion for the contractor, rather than to prolong the policy debate with MoD, whichleaves 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 benets of manufacture and repair work owing 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





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 propri-etary designs and rights in non-proprietary designs. Thus the unwary contractor

may nd 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 ght 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 ‘elding’

(deployment of equipment to operational units) would be supported by contracts

for continuing design services (to cover the period from design approval certi-

cation to production release certication), post design services (to cover the period

from production release certication), the supply of spares, the provision of repair

facilities, maintenance and further development.

The net effect of these cultures was that to a signicant extent, the parties tendedin effect to ignore the question of the contractual and legal liabilities that the

contractor should carry in the rst place. The change in procurement wisdom charac-

terised 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 dened, 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-





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 tness 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

rst 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 benet of the business

to the contractor. It can also be a difcult area to negotiate because of MoD’s simplistic

view that if the contractor is condent 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 nish. 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 unidentied 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 specication. This option is limited

as a standard to alterations in the ‘technical specication’ and the word ‘speci-

cation’ 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 specication is needed







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 principlesshown in gure 17.

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.

TYPE OF CLAIM

Contractual

Contractual

Statutory

Legal

BASIS

Express

Implied

Legislation

Precedent

EXAMPLES

Standard conditionsSpecial conditionsStatutory or common law given contractual effect

Prior course of dealingCustom in the trade

Actions at meetings

Sale of Goods ActUnfair Contract Terms ActTrades Descriptions Act

NegligenceDuty of care





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 specication.

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 indemnied.

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 benet other than cash in

settlement. MoD may nd merit in the offer of extra work or some such similar device

on a free-of-charge basis, rather than pursue a purely nancial conclusion.





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 choiceof 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 ‘ow 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 subcon-

tractors (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 difcult

to see what aspects MoD is not interested in!





Section 6Non-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

T H O R O G O O D


I N S I G H T S



Section 6Non-competitive business

The absence of competition

It is by now well understood that MoD prefers wherever possible to procure every-

thing that it buys by the use of competition where a good number of qualied bidders

have all submitted serious proposals. As has been seen, MoD may use contrac-

tual options to preserve competitively tendered prices into the ostensibly

non-competitive phase of a project. However, there are a number of instances wherethe competition goal eludes MoD entirely. There are perhaps ve 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 sufciently 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 ofcials, but it did overtly save the time taken to run a compe-tition (major competitions can take years, medium sized can take 6-12 months).

However, from the ‘eighties, this practice was abolished leaving the non-compe-

tition 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 efcient process – maintains this

principle.




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 nding 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 signicant 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 IPRThe single source supplier just mentioned would be expected to own all the IPR

in his product and this in itself is a sufcient 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 require-

ments 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 therights that it would ideally like to secure for the purposes of pursuing its compet-

itive 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 other-

wise extract itself from a particular contractor.

6 N O N - CO M PE T I T I V E BU SI N E SS




Industrial alignments

In MoD’s ideal world for every requirement there would be at least six serious, compe-

tent and absolutely independent bidders each of whom is prepared to ght to the

death in order to win, accepting the odds of six-to-one. For large-scale procure-

ments 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, regard-

less 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 incompetition 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 procure-

ment is conducted in the absence of competition.





Non-competitive tendering

There are three approaches that MoD uses to seek proposals for contracts in a non-

competitive environment. Firstly, MoD may simply run a ‘single tender’ exercisewhereby 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 accept-

ance 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 signicant 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 benecial 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-compet-

itive tender. Assessment will largely use the same methods as for competitive

tendering. It is MoD’s primary concern that a non-competitive situation never-

theless 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 atleast dogmatic basis, that on both of these points, only effective competition can

achieve best value and good prices.





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 competi-tive 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 non-

competitive 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

nished and, in certain circumstances, to seek a nancial 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 gure 18.

Figure 18: Non-Competitive Pricing Arrangements

The rst 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 nancial risk in the performance

of the contract (except to the extent that certain risks having a nancial dimen-

sion, 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 rm prices

at the outset, the MoD nancial commitment is bounded, which is good practice

from a budgeting and control point of view. For these same reasons MoD prefers

Price agreed at the outset Where prices are capable of being agreed beforethe contract is placed.

Price agreed during the contract Where there is insufcient condence inestimating to permit the agreement of priceswithout some work being done.

Price agreed after the work is nished Where it is agreed that the risk in the work is toogreat for the contractor to carry and prices areagreed after the work is nished based upon thecosts actually incurred by the contractor.

Target cost contracting Where the price is agreed after the work isnished based upon costs incurred but withsavings/overspends against a target cost (whichwas agreed at the outset) being shared betweenMoD and the contractor.







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 subcon-

tract and material costs) and also upon the credibility of any risk allowances and

contingencies that the contractor proposes.

Agreed prot rate

There must be an agreed prot rate for the contractor deduced from the Govern-

ment Prot Formula. This Formula aims to ensure that contractor’s working on

non-competitive government contracts earn prots 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 prot 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 prot 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 eventu-

ally 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 certicate. This certicate sets down

the detailed build up of the prices as agreed and states the underlying assump-

tions. 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 rm prices is agreed it is forthe contractor to aim to drive costs down below the agreed estimates and, if he

his successful, to retain the savings as additional prot, 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 state-

ment of costs incurred and an audit at the end of the contract to determine the

actual prot 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 satised there may be grounds





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 ingeneral terms. Inevitably if the MoD nds 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 benets of one competitive tender against another in terms of value

for money (no easy task) and checking that the budget is sufcient, MoD does not

concern itself with prices submitted in competition. Its bargaining power almost

by denition 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 prot 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, prot 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 combi-

nation 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,





Documents

Tim Boyce-Tendering and Negotiating MOD Contracts (Thorogood Professional Insights) (2002)