Defence firms incentivised to deliver on time as MOD ties profit rates to improved delivery

• New rules, announced today, mean suppliers can be paid more for completing projects to time and budget, while those who fail to deliver will receive less
• Incentive payments of up to 10% can reward suppliers who get equipment to our Armed Forces faster and more efficiently.
• Smaller and innovative businesses will find it easier to work with defence, bringing new ideas and technologies to the frontline sooner.

Defence companies will be incentivised to provide equipment to the Armed Forces faster and more efficiently but could earn less if they fail to deliver under a government crackdown on waste and delays.

Defence procurement will be sped up under the changes being introduced by Ministers in Parliament today, which will see the amount of profit companies can make from a contract being tied to delivering on time.

Through changes to the Single Source Contract Regulations (SSCRs), suppliers who deliver at pace, improve productivity and take on more risk will earn more, while those who do not could make less.

Every pound saved through better supplier performance is a pound that can be reinvested in equipping the Armed Forces.

Minister for Defence Procurement and Industry, Luke Pollard MP, said: 

"To deliver the warfighting readiness our country requires, we need procurement that delivers on time and on budget. We inherited a programme where 96% of our major defence projects had issues with delivery or cost. That is not acceptable.

“That's why suppliers who deliver better outcomes and take on appropriate risk will be rewarded, but those who do not, will make less profit.

“That is how we make sure we get more equipment to the front line faster.”

These reforms deliver on commitments made in both the Strategic Defence Review (SDR) and the Defence Industrial Strategy (DIS), which said that with the promise to invest more comes a responsibility to invest better.

The reforms introduce four key changes:

• Maximum incentive payments for suppliers will increase from 2% to 10% of costs, but only when suppliers hit agreed performance targets, giving the MOD the ability to reward suppliers who get equipment into service faster.
• Profit floors on lower-risk contracts will be reduced, so suppliers could earn less unless they improve performance. The new rules will allow higher-risk contracts to attract stronger returns - motivating suppliers to take on the risk-bearing work the DIS specifically committed to encouraging.
• A new Innovation Uplift will reward suppliers, particularly smaller businesses and new entrants to defence, who invest their own money in developing new products without a guaranteed government contract.
• The threshold at which contracts come under the regulations will rise from £5 million to £25 million, meaning nearly all small and medium-sized enterprises will no longer have to comply with the mandatory reporting regulations, while keeping 97% of single-source contracting value within the model.

Today, the Government is laying a Statutory Instrument to increase available incentive payments. A further Statutory Instrument, covering the profit floor changes, the Innovation Uplift and the increased threshold, will be introduced prior to the Summer recess. We will be consulting on these changes in the coming weeks.

Rupert Pearce, National Armaments Director, said: 

"The NAD Group is committed to driving greater performance across the defence enterprise. These changes give us better tools to reward innovation, incentivise delivery, and ensure that public money is spent where it generates real value. We will work closely with industry and the Single Source Regulations Office to implement them effectively."

The reforms have been developed after extensive discussions with industry and the Single Source Regulations Office and support the National Armaments Director (NAD) Group's wider mission to accelerate procurement and ensure critical capabilities reach UK warfighters faster.