When we talk about defense related procurement, we're referring to defense and security contracts which are public contracts.

Defense procurement reform has been a significant topic on the House of Commons agenda for some time. There has been debate in the Commons around the difficulties of defense procurement linked to reliance on a domestic industrial base and on single source suppliers, and long running and complex projects with spiraling costs and delays. More recently, the Labour party manifesto said, "We will prioritise UK businesses for defence investment and will reform procurement to reduce waste" and in the King's Speech, the new Government announced a Strategic Defence Review.

Defense related procurement is currently regulated, primarily, by the Defence and Security Public Contracts Regulations 2011 (DSPCR) and the Defence Reform Act 2014. This will change once the Procurement Act 2023 comes into force in October 2024. The Act is expected to have a significant impact on how defence and security contracts are awarded and managed in the future.

What is the rationale for the Act?

The DSPCR are based on an EU Directive. Post Brexit, the UK has had the ability to diverge from EU legislation and this has presented an opportunity to reform the UK’s procurement regime.

The Procurement Act consolidates the current procurement related regulations in the UK into one single Act. The stated purpose of the changes was to increase flexibility for contracting authorities and increase transparency.

Previously, defense and security contracts were regulated by the DSPCR. Those contracts will now be covered under the Act in a similar way to other purchasing carried out by public sector bodies for contracts for goods, works and services. The rationale for this change is to reduce the overall volume of procurement legislation and simplify the rules for contracting authorities.

The Procurement Act reflects the DSPCR position but introduces new terminology and concepts. Guidance issued by the Cabinet Office states that while the Act will govern defense and security contracts in the same way as other public contracts, the Act allows for some derogations and flexibility due to the nature of defense contracting.

What changes does the Act make?

The Procurement Act will introduce the following changes to defense related procurement:

• Wider scope – The scope of what is considered to be a "defence and security contract" is broader than under the DSPCR. The Act contains a catch-all which covers goods, services or works that are otherwise relevant to the operational capability, effectiveness, readiness for action, safety or security of the armed forces. This broad scope is likely to bring additional contracts into the defense related procurement regime.
• National Security exemption – The Act includes a national security exemption which is broader than the exemption currently included in the DSPCR. The contracting authority has the discretion to decide whether exempting the contract is in the interests of national security. The Home Office guidance notes that the Act does not define national security to maintain flexibility. It gives the example of a procurement that is too sensitive to advertise, or where the UK's national security interests mean that a UK supplier must deliver the contract.
• Central Debarment List – The Act provides for the creation and maintenance of a centralized debarment list. This is a completely new concept which is intended to provide additional protection against public contracts being awarded to unfit suppliers. Suppliers which are listed on the debarment list on the basis of a mandatory ground for exclusion must be considered an excluded supplier for the purposes of the procurement. A supplier which is excluded from a defense and security contract on national security grounds can still be considered for other public contracts.
• Exclusion of suppliers from the procurement process - The Act provides a wide range of mandatory and discretionary grounds for excluding suppliers from procurements. A discretionary ground applies where the supplier or a connected person poses a threat to the national security of the UK. There is also a mandatory ground if a supplier is on the central Debarment List.
• Poor Past Performance - Concerns have been raised about the lack of consideration for suppliers' previous poor performance when awarding defense contracts. The Act introduces an exclusion ground which applies where a supplier has not performed a contract to the authority's satisfaction, was given a proper opportunity to improve performance, and failed to do so.
• KPIs – Key performance indicators or KPIs are a measure against which supplier performance can be assessed during the lifetime of the contract. The Act provides that where a contract is valued at more than £5 million, at least 3 KPIs must be published via a Contract Performance Notice. The Act requires the contracting authority to assess the supplier's performance against the KPIs at least annually and on termination and to publish information relating to the outcome. This is intended to create a mechanism which will ensure that the contracting authority keeps the supplier's performance under review, perhaps reflecting previous issues with long running and complex projects.
• Termination right for national security – The Act provides a new mechanism to enable the termination of a contract if there is a change in circumstances relating to the threat posed to national security.
• Contract modifications – The Procurement Act allows for increased flexibility relating to modifications in defense and security contracts. Modifications to such contracts are allowed in order for the contracting authority to take advantage of technological advancements or to mitigate any adverse effects of those advancements. Such contracts can also be modified to ensure there is no interruption to service provision or supply under the contract.
• Changes to procurement procedures – The DSPCRs allow for 4 different procurement procedures. The Act will replace this with only 2 competitive tendering procedures; the open procedure and the competitive flexible procedure.
• Competitive Tendering v Direct Awards - Generally, contracting authorities awarding defense and security contracts must use the same procurement procedures as other contracting authorities. The Act will permit a contracting authority to award a defense and security contract directly in three specific instances. This includes a contract for the supply of air or maritime transport services to the armed forces or security services where they are deployed outside UK/or for them to be deployed there. A direct award is also permitted where necessary to enhance or maintain operational capability.
• Reforms to the Single Source Contract Regulations – These regulations apply when a defense contract is awarded with a value over £5 million without any competition. Single source procurements are very frequent within MOD contracting, in circumstances where there is only one possible contractor available to perform the contract. The Act enables changes to the Single Source Contract Regulations by way of amendments to the Defence Reform Act 2014. The changes include the power to clarify that some cross-government single source contracts with a substantial defence element will come under the Defence Reform Act regime, providing assurance on value for money for a higher proportion of single source defence expenditure.

Will all defense and security contracts be regulated by the Act?

The scope of what is considered to be a "defence and security contract" is specified in the Procurement Act.

The Act also sets thresholds above which the regime contained in the Act applies. In the case of defense and security contracts, this is £429,809 for goods and services and £5,372,609 for works and concessions. These thresholds will be updated before the Act comes into force.

A number of specific exemptions apply in the case of defense and security contracts. This includes government-to-government defense and security contracts and where international agreements and arrangements apply. There is also a national security exemption.

Key dates

The Act received Royal Assent on October 26, 2023. The corresponding Procurement Regulations, which provide the detail of the new procurement regime, were laid in Parliament on March 24, 2024. Both pieces of legislation will come into force on October 28, 2024, as we discussed in our Procurement Spring Update.

The DSPCR remains in force until the Act goes live, at which point it will be repealed.

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