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

A SPECIALLY COMMISSIONED REPORT
TENDERING AND
NEGOTIATING
MoD CONTRACTS
Tim R Boyce
THOROGOOD
PROFESSI ONAL
I NSI GHTS
THOROGOOD
PROFESSI ONAL
I NSI GHTS
A SPECIALLY COMMISSIONED REPORT
TENDERING AND
NEGOTIATING MoD
CONTRACTS
Tim R Boyce
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Tim R Boyce 2002
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THOROGOOD PROFESSI ONAL I NSI GHTS
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 Engineers 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 ...............................................................................................9
Our 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 tenderers 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......................................................................................................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.......................................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 ..................................................................................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
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.........................................................................120
Tender 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 Majestys 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 Initiative
SRD 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 1
Introduction
First principles ............................................................................................2
The procurers .............................................................................................4
Integrated Project Teams (IPT) ..................................................................5
Internal customers......................................................................................7
Project life cycle .........................................................................................9
Our friends in industry.............................................................................12
THOROGOOD
PROFESSI ONAL
I NSI GHTS
Section 1
Introduction
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. Over
6,000 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
2 THOROGOOD PROFESSI ONAL I NSI GHTS
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 realised
that 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 step
in 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 NTRODUCTI ON
The procurers
The SPI aims to solve the traditional problems of defence procurement costs
exceeding budget, timescales exceeding targets and performance not coming up
to 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.
1 I NTRODUCTI ON
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 and
the 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
1 I NTRODUCTI ON
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 Users 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 (MoDs words) leader. The IPT leader leads the team
throughout the projects 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, MoDs 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 management
2. Requirements management
3. Risk management
4. Engineering
5. Technical
6. Quality
7. Reliability
8. Integrated logistics support
9. Commercial management
10. Finance management
11. Secretariat
12. Industrial
ASSOCIATE MEMBERS
1. Scientific staff
2. Specialist procurement
services
3. Private finance/public-
private partnership experts
4. Service users
5. Service trainers
6. Safety specialists
7. Defence Export Services
Organisation
8. DTI
ATTACHED MEMBERS
1. Technical scrutineers
2. Capability resources
scrutineers
3. MoD HQ scrutineers
1 I NTRODUCTI ON
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 represented
in 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 contractors objectives
(business continuity, prot and cash) and a combined team working for the good
of 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 contractors business anyway, but industry
always hated the struggle involved in understanding the customers needs, if the
word customer meant more (which it certainly did) than just the people representing
1 I NTRODUCTI ON
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 users 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 the
User 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.
1 I NTRODUCTI ON
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.
Disposal In-service Manufacture Demonstration Assessment Concept
1 I NTRODUCTI ON
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 SPI
there 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
Disposal Support Manufacture Development Project definition Feasibility study
1 I NTRODUCTI ON
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 to
carry 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 cycle
acknowledges 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 Authors 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
1 I NTRODUCTI ON
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 continue
post 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 expects
increasing 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.
1 I NTRODUCTI ON
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).
1 I NTRODUCTI ON
Section 2
Competitive 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 ...................................................................................................24
The Montreal Protocol .............................................................................25
Dangerous articles and substances ........................................................26
Submission of tenders..............................................................................26
Tender results............................................................................................27
The tenderers Certicate of Tender .......................................................27
Special Notices and Instructions (SNI) to tenderers ............................28
Bidders conference..................................................................................29
Raising questions......................................................................................30
THOROGOOD
PROFESSI ONAL
I NSI GHTS
Section 2
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 MoDs 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 COMPETI TI VE TENDERI NG: THE PRE- BI D PHASE
Main contractors, prime contractors and
prime systems integrators
Although MoD generally prefers to refer to the company selected as the
Contractor 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 IDSLs 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, MoDs 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 or
into 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 other
matters 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 contractors 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 organisation
in 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 Tenderers 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 MoDs 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 tenderers 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 MoDs view of what is necessary. MoD may consider prices other than in
Sterling 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 with
a 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 MoDs wish to be entitled to accept only a part
of a companys tender, so the tenderers are afforded the opportunity to tender for
part 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 contract
terms 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 MoDs 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 MoDs 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 conrming
100% 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 impute
into 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 tenderers bid. Since this would not necessarily be with
the tenderers 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.
Drawings
The 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 referred
to 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 owners 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 provide
DEFCON 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 tenders
will 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 computer
disc, 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 MoDs 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 tenderers 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 tenderers willingness to tender on the basis of the MoDs draft
contract and that the proffering of any alternative Ts&Cs or any general reserva-
tions printed on the tenderers 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 with
an 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 third
party.
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 MoDs assessment of the tenderers 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 the
tenderers 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 are
recorded 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 takes
some 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, does
not 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 MoD
takes 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 questioners 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 this
particular game of spoof the tenderer needs to have the brain of a chess grand
master and the cunning of George Smiley!
Section 3
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 .................................50
Best 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
THOROGOOD
PROFESSI ONAL
I NSI GHTS
Section 3
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 contractors 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 not
quite 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 companys 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 companys freedom to
disclose 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 COMPETI TI VE TENDERI NG: THE POST- BI D PHASE
2
This situation is being remedied as part of the present general revision that is
taking 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 being
naturally 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
companys tender to other tenderers so as to promote an improved competition.
This practice is quite against ofcial MoD policy but it would be naive to pretend
that 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
MoDs 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 escape
MoD. 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 submitted
in 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 procedures
to 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, since
early 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 losers 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 MoD
would 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. The
project 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 considered
to 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
MoDs 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, MoDs 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 readers 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 MoDs 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 caution
should be exercised with regard to answers given to MoDs questions, whether
posed at the presentation or separately as described above.
Assessment
Having understood what is being offered, MoDs next task is to assess each offer
against the full requirements of the ITT. An assessment team may be established
the 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) disclosed
to 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 Authors 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 that
offering 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. Tenders
that 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 the
NATO 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 ruled
out 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
MoDs 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 random
nature 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 not
disclosed 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 there
is a real danger that the scheme by itself will force the tenders to look remarkably
similar. Whilst some might say that this should make MoDs 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 scheme
must 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 MoDs 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 withholding
details 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:
Price
Technical 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
MoDs 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 feature
in 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 tenderers 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 tenderers own modelling, it may use its own
model based upon its own assumptions about the tenderers programme. It may
Initial acquisition cost: Prices to be paid to company A
+
Prices to be paid to other companies who will be awarded
work in support of company A
+
Prices to be paid to companies providing support
services to MoD
+
Prices to be paid to government agencies (e.g. DERA)
+
Costs of maintaining existing in-service equipment until the
replacement 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 service
and 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 models
which 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 tenderers 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 time
needed 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 ush
out 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 core
elements 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 individual
tenders. 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 more
risk 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 decisions
The 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 MoDs 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 run
between 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 MoDs
position. 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
MoDs 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. The
immediate 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 tenderers 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 in
any 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 MoDs 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 the
introduction 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 relevant
technology (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 contract
onto the project lifecycle as shown in gure 11.
Initial Operational capability (Equipment In-Service) Full Operational Capability
Concept
Assessment
Demonstration
Finalise
Baseline
Capability
Define 1st
Increment
Define 2nd
Increment
Implement
Baseline capability
Implement 1st
Increment
Implement 2nd
Increment
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.
Disposal In-service Manufacture Demonstration Assessment Concept
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 competitive
stages; 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 foreseen
at the
tendering stage
Technical
changes
arising during
the work
Extras desired
or necessitated
as a
consequence
of having the
new equipment
PURPOSE
To take
advantage of
initial tendering
especially if
competitive
To give MoD
the unilateral
right to demand
changes post
contract
To realise the
benefits of
MoD
investment in
the initial
procurement
EXAMPLE
Capability
Increments
Change to
external system
interface
Combat
losses
PROBABILITY*
High
Very High
Medium
ENABLED BY
Contractual
provisions in
initial contract
Standard
contract
condition
permitting
MoD to alter
specification
Further
tendering
(competitive if
possible)
IMPLEMENTED BY
Letter or contract amendment
exercising option
Change note
New contract or renegotiation
of 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 contractors
tender. In theory SPI eliminates these uncertainties of initially inadequate budgets
or 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 MoDs 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. In
this 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 MoDs 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 blame
for 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
MoDs 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 MoDs 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, MoDs 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 contractors 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 MoDs judgement as to whether to proceed
will depend upon the contractors performance under the initial contract.
Section 4
Principles and processes
of 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
THOROGOOD
PROFESSI ONAL
I NSI GHTS
Section 4
Principles and processes
of 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. The
IPT 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 is
signicantly 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 executed
consistent with MoD Value
for Money policies
Choice of contractor
Terms and conditions
Price
Payment terms
IPR
Liabilities
Indemnities
Place contract
Negotiate prices
Negotiate changes
Negotiate claims
4 PRI NCI PLES AND PROCESSES OF NEGOTI ATI ON
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 the
commercial 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 who
will 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 MoDs 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 MoDs 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 the
process 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 under
a 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 MoDs 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 MoDs 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 contractors 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 that
the 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 a
conceptual 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 contractors
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 disclose
information 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 contractors representatives to behave in an appropriate
manner. 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-purchasing
department and in its dealings it represents the Crown. With this in mind, the
guiding principle in terms of the behaviour of the contractors 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 Majestys
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 contractors 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 contractors 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 the
contractors 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 the
contractors 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 contractors 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 contractors 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 contractor
can 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. Some
useful 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 is
often 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 contractors 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 companys 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 weaknesses
of the contractors 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
companys 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 companys dangerous territory and how to get the debate into the MoDs
dangerous territory.
Having formulated the two lists it is important to categorise each of the companys
objectives as must have, like to have and bonuses and then to consider where
each of these might lie within MoDs ability to concede easily, to concede under
pressure and wont ever concede. Similarly the company must categorise each
of the MoDs 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 companys must have objectives are in the MoD wont 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 MoDs 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 be
reached 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 the
unpleasantness 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 contractors 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 others
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 meeting
with 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 then
follow 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 on
Defence, 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 purchasers duties as regards fair play and ethical standards. Indeed it has
on occasion been alarming the extent to which these responsibilities have, inten-
tionally or unintentionally, come under attack under the onslaught of MoDs 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 contractors staff well enough to appreciate
when the emotional aspects are for real. Similarly the contractors representatives
must be reasonably sensitive to the position of the MoD staff and, for example, to
be 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 contractors 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 resources
hanging 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 MoDs 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 contractors 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 contractors 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 that
he 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 contractors 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 MoDs
own rules for establishing a fair and reasonable price do not necessarily produce
an 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 companys 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 will
treat 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 contractors
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 contractors 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 recording
the agreement in
detail and
unambiguously
Agreeing
Settling upon a set
of balancing
accommodations
Moving
Stepping gradually
away from opening
positions in attempts
to find middle ground
Testing
Probing the strengths
and weaknesses
of each others
arguments
Opening
Setting out
respective 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 contractors position and
will seek to exploit such a situation. Naturally enough the contractor must also be
alert to inconsistencies in the MoDs 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 consider
a 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 les
are 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 contractors 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 logical
strength 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 be
every 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 too
easy 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 5
Contractual 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
THOROGOOD
PROFESSI ONAL
I NSI GHTS
Section 5
Contractual negotiations
Taut contracts
MoD has a policy of only placing taut contracts. This is intended to mean that the
contract should spell out clearly in unequivocal terms the precise responsibilities
and liabilities that lie with the contractor. Provided that as much care and atten-
tion is given to setting out the precise responsibilities and liabilities of the MoD,
no contractor should have any difculty with this policy. From the MoD perspec-
tive, the purpose is to ensure that there is no possibility of the contractor avoiding
his responsibilities to do the work of the contract or avoiding his attaching liabil-
ities. In the case of doing the work, MoD fears for example that a contractor might
know that a contract specication or statement of work is misleading or incom-
plete, but keeps quiet hoping to cleverly use it as a get-out later. But this can be a
two-way concern. MoD also likes to avoid over-prescription hoping for example
that a lightweight specication may later work to its (MoDs) own advantage by
allowing the MoD to demand that the contractor meets implied requirements on
the basis that the contractor should have realised! This is an example of what is
sometimes known as requirement creep. The SPI does assume an honest and co-
operative MoD/contractor relationship, but old suspicions and unfortunate
practices will take time to completely die away. Thus a clear and explicit contract
should not only alleviate MoD fears that contractors may attempt to avoid their
obligations, but it also reduces the risk of customer driven requirement creep.
But being clear on the responsibilities for doing the work is one thing after all
the genuinely co-operative MoD/contractor axis has the same, shared objective
but getting to a taut agreement on liabilities is quite another. In days gone by, some
normal liabilities (for example delay damages) were not dealt with expressly in MoD
contracts. Those that were covered (for example damage to government property)
were not contentious. MoD contracts were drafted using government contracting
conditions. Contractor liabilities received much more attention than MoDs. Many
contractors did not very much care, because if things went wrong, reasonable negoti-
ations sorted matters out, almost regardless of what the contract said (this is an
over simplication, but is essentially correct). Then MoD decided that the contract
should be the vehicle for allocating all risks to the contractor and that commercial
sanctions and legal recourse would be used as enforcement. The resultant long period
of poor, antagonistic, non-trusting MoD/contractor relationships eventually forced
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 the
contractor 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 NEGOTI ATI ONS
Foci of negotiation
Given below is a list of the principle topic areas that will attract most attention during
the negotiation of a new contract with MoD or that are most likely to create a need
for some degree of negotiation during or after contract performance.
Terms and conditions.
Price.
Payment.
Timescales.
Specication.
Acceptance.
Intellectual property rights.
Liabilities.
Variations and claims.
Subcontractors.
The text will examine each of these in turn.
Terms and conditions
As a matter of policy MoD procures equipment and services using MoDs own Ts&Cs
(for convenience referred to as MoD contract conditions). This is a prudent approach
for MoD and, as a public procurer, it is subject to audit (by the NAO for example)
to show that it does comply with this intent.
MoD contract conditions comprise a number of different sources. Certain of the
conditions appear in pre-printed booklets and forms that are available to contrac-
tors on request. Others exist only as model forms of words that are internal to MoD
and which only appear in a particular ITT or draft contract. Eventually, all MoD
conditions of contract will appear in a single, unied form that will be generally
available to all.
It maybe thought that the MoD contract conditions are even-handed as between
MoD and the contractor. This is simply not the case. For the most part, the condi-
tions denitely favour the buyer and, therefore, in negotiating a contract with MoD,
the contractor is well advised to pay close attention to the proposed conditions.
This is for a number of reasons. Firstly, since the conditions favour the buyer, the
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 in
so 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 possible
price. 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 would
rely 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 distinction
between 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 such
allowance 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 governments domestic policies and it is difcult to see how
the 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 insulated
from 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 contractors 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 contractors 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 contractors
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 to
modify the scheme in the situation whereby if the contractors 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 programme
manager 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 MoDs 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 users 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 contractors 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 event
comes 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 contractors 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 must
reasonably 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 design
and 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 performance
specication 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 has
two 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 a
reasonable 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 contractors 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 systems 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 between
contractual 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 MoDs 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 useable
production quantity
delivered together
with support elements
System Acceptance
Acceptance given
against production
sample
Design Certification
IPT grants certificate
URD & SRD Acceptance
Criteria Fixed
Criteria agreed by all
MoD 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 to
protect 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 Britains 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 contractors aims. In this respect, MoD has
two objectives. Firstly, that it should be able to exercise sufcient rights in the
contractors 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 moral
argument 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 MoDs 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, which
leaves 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 tended
in 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, MoDs
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 MoDs 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
by MoD in order for it to be sure that the goods as delivered will be capable of
meeting the military threat, which may well change during the period of product
development or manufacture. Where MoD at the outset can see the potential need
to also modify the quantity/volume of work or timeframe it is free to negotiate the
relevant terms with the contractor. Furthermore, MoD is prepared to acknowledge
at the outset that the contractor may be prevented from delivering exactly to speci-
cation for reasons such as the risk of component obsolescence occurring during
the contract forcing the contractor to substitute ostensibly non-conforming
components in order to meet contract timescales.
Even on the nancial side of matters, MoD may acknowledge that the price is subject
to variation not only as a natural and proper consequence of it having changed the
specication, but also for changes in economic conditions, for example where the
contract allows for price adjustment as a result of variations in exchange rates (where
the price has a large foreign currency element) or in general economic conditions.
It is therefore possible to characterise variations as expected, factual, uncontentious
and procedural. The practice of legislating for variations means that that change is
expected. Such changes are primarily concerned with matters that are ascertain-
able as a matter of fact and being both expected and factually based means that
negotiating the effect (for example on the contract price) is not contentious in principle.
Furthermore, there are tried and tested processes for handling variations.
By contrast claims may be described as unexpected, less factual, contentious and
non-procedural. On the face of it, the contract will have been concluded a result
of good faith negotiations and consequently both parties will have entered into their
arrangement believing that they have a do-able deal. Each will perform its respec-
tive obligations and there will be no friction between them in their relationship as
customer and supplier. However, claims are a feature of doing business with MoD
and whilst those long in the tooth may well anticipate possible future strife the
apparent position is one of expectation of harmony. Any sound claim will naturally
be based upon the facts that gave rise to the damage suffered or purported to be
suffered by one side. However, in many instances the dynamics of the contract result
in a post facto statement of claim and assembling the evidence to support the alleged
facts is not always easy. As an extrapolation of these rst two observations it is
reasonably clear that claims are likely to be more contentious than are variations.
Similarly the degree of prescription for the handling of claims is quite minimal in
so far as the conduct of the parties is concerned. MoD has its own internal proce-
dures, but these are not visible to the contractor. All these things considered, claims
are a difcult area in the negotiation and management of MoD contracts.
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 principles
shown 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 contractors property.
10. Improper rejection.
TYPE OF CLAIM
Contractual
Contractual
Statutory
Legal
BASIS
Express
Implied
Legislation
Precedent
EXAMPLES
Standard conditions
Special conditions
Statutory or common law given contractual effect
Prior course of dealing
Custom in the trade
Actions at meetings
Sale of Goods Act
Unfair Contract Terms Act
Trades Descriptions Act
Negligence
Duty 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 choice
of 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 6
Non-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
THOROGOOD
PROFESSI ONAL
I NSI GHTS
Section 6
Non-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 where
the 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 Users 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 IPR
The 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 the
rights 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 NON- COMPETI TI VE BUSI NESS
Industrial alignments
In MoDs 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 in
competition 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 exercise
whereby 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 MoDs 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 at
least 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 before
the contract is placed.
Price agreed during the contract Where there is insufcient condence in
estimating to permit the agreement of prices
without some work being done.
Price agreed after the work is nished Where it is agreed that the risk in the work is too
great for the contractor to carry and prices are
agreed after the work is nished based upon the
costs actually incurred by the contractor.
Target cost contracting Where the price is agreed after the work is
nished based upon costs incurred but with
savings/overspends against a target cost (which
was agreed at the outset) being shared between
MoD and the contractor.
not to place contracts where the price is to be agreed later. However, where the
inherent technical risk in the contract is very high MoD will consider the use of
target cost contracting which has the effect of sharing risk, albeit that MoD will
invariably seek to bound its overall nancial commitment by including a maximum
price for the entire contract.
Principles and process
The essence of the non-competitive pricing regime is one of equality of informa-
tion at the time the prices are agreed. This means that in negotiating the price the
contractor must have put the MoD in a position whereby MoD knows as much about
the plans and estimated costs for the contract, as does the contractor. In theory
this equality of information principle is mutual in so much as the MoD is under an
equal obligation to bring relevant information to the contractors attention.
However, in 99% of cases it is the contractor who possesses the relevant information
and thus it his burden that is the centre of attention. In addition the amount of prot
that the contractor is entitled to include in his price is calculated under the Govern-
ment Prot Formula. Furthermore the overheads that he is allowed to recover must
be formulated in accordance with the Government Accounting Conventions.
Thus in order for the commercial branch to be in a position just to start negoti-
ating non-competitive prices means that the following building blocks must be in
place:
Quotation and breakdown
The contractor must have provided MoD with a written quotation together with
a complete analysis of the price that shows, for example, the estimated effort (usually
to be shown in hours of effort against different activities); details of subcontract
charges; details of estimated materials costs; risk allowances and contingencies.
Charging rates
The proposed charging rates for direct labour and overheads must have been agreed
with the MoDs own accountants. This will have required complete disclosure about
salaries and wages, forecast orders and volumes of activity. Overhead rates must
have followed the Government Accounting Conventions (GAC), which state which
categories of costs are admissible, inadmissible or partially admissible in Govern-
ment non-competitive contracts. The commercial branch must be in receipt of a
written report from the MoD accountants as to the acceptability of the contractors
proposed charging rates and factors.
Technical cost report
The commercial branch must also be in receipt of a written report from the MoDs
technical costs investigators. This report will provide exhaustive detail on the likely
accuracy of the contractors 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 contractors 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 MoDs own accountants in negotiation with the
contractors staff. The GAC also dictate the allowable make up of the contractors
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 contractors
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 others 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 for
the 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 in
general 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,
having comparatively little MoD business (that is, the MoD has little leverage with
the contractor at the corporate level) and is offering a proprietary product (that
is, MoD has no prior information about the cost base) which is very urgently
required in a currently operational theatre. Such combinations are relatively rare.
Thus the apparent swing of bargaining power from MoD to the contractor that
the non-competitive environment appears to represent is really not so substan-
tial. In any event in the normal course of things the pressure to come to an agreement
is greater upon the contractor than upon MoD. To paraphrase, the contractor needs
the order, MoD can wait for the goods; the contractor knows the minimum price
below which he does not want the order at all, MoD can push him towards this
gure with arguments of affordability, value for money and comparability with
competition; the contractor can argue for the strict application of the pricing regime
to produce a fair and reasonable price, the MoD can say that the regime fails if,
for example, it produces year-on-year overhead rate increases which are out of
line with ination.
As regards aspects of the potential contract other than price, the same picture
emerges. The contractor certainly enjoys an improved bargaining position in terms
of, for example, the grant of IPR to MoD, payment terms and distribution of risk
since, in none of these examples does MoD have a contractual and procedural regime
that is the equivalent of the pricing regime upon which to fall back. However, the
same commercial pressures to secure the deal apply to the contractor and less so
to MoD.
In summary, the shift of bargaining power to the contractor is not always as great
as might be assumed. The real advantage in a potential non-competitive award is
that, provided only the contract negotiations are successful the contractor will get
the order. Improved bargaining power as regards those negotiations is only as great
as the particular circumstances allow. In any event it should be remembered that
just because MoD has approval to award a non-competitive contract, this does not
mean that it will actually award that contract if it believes that it cannot secure the
right price and the right contract terms and conditions.

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

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