As part of our ongoing changing landscape series, this insight explores the key developments, changes and exclusions for defence and security contracts under the Procurement Act 2023 (the Act).

So, what are the key takeaways as regards defence and security contracts?

Exemptions and exclusions

The Act sets out a number of exemptions and exclusions from its coverage. Here's a summary of some of the exemptions from the main requirements of the Act for defence and security contracts.

Procurement by the following organisations will be exempt from the Act:

  • the Security Service;
  • the Secret Intelligence Service; and
  • the Government Communications Headquarters ((section 2(5)(a)).)

A number of contract types are also exempt. Specifically, these include defence and security contracts where:

  • the supplier is the Government of another state (schedule 2 (paragraph 4));
  • the supplier is located in an area outside the UK where the armed forces are deployed, and the operational needs require the contract to be awarded to that supplier (schedule 2 (paragraph 27));
  • the supplier is located in a state outside the UK where the armed forces maintain a military presence, and that state requires that the supplier supplies the goods to which the contract relates (schedule 2 (paragraph 28));
  • the contract was awarded under a procedure adopted by an international organisation of which the UK is a member (schedule 2 (paragraph 29); and
  • it was awarded under an arrangement between the UK and other states where the purpose of the arrangement is regarding:
    • the joint development of a new product; or
    • the exploitation of that product once developed (schedule 2 (paragraph 30)).

Also exempt are contracts that the contracting authority determines should not, in the interests of national security, be subject to the Act or a part of it (schedule 2 (paragraph 25)), and contracts for the purposes of carrying out, facilitating or supporting intelligence activities (schedule 2 (paragraph 26)). "National security" is not defined by the Act: this is intentional, so that the concept of national security (and the ability to have recourse to the Act's provisions which deal with it) is kept flexible and adaptable.  

Debarment list

The Act has paved the way for a public "debarment list", i.e., a list of suppliers prevented from bidding for public contracts. This list can cover suppliers in the field of defence and security, as well as others. Suppliers who are found to pose a threat to national security can be placed on the list.

A supplier can end up on the list where a minister has conducted an investigation (section 62(1)(a)) and is satisfied that the supplier is excluded or eligible for exclusion under a mandatory or a discretionary ground (section 62(1)(b)), or there has been a serious failure by the supplier to comply with an investigation, such as to amount to a mandatory exclusion ground (section 61(2)).

A supplier may be excluded where a minister has determined that it poses a threat to the national security of the UK ((s.57(6) and Schedule 6)).

A minster must first undertake an investigation and be satisfied that the supplier fulfils the criteria of a discretionary or mandatory exclusion ground (section 62(1)). The supplier must be notified of (a) the relevant ground being investigated and (b) how the supplier can make representations (section 58(2) and 60(3)). Before adding a supplier to the debarment list, a minister must first notify the supplier of the decision. A supplier may appeal the decision and apply to have it suspended.

The debarment list must be kept under review, and the Act confers quite wide powers to revise it. Contracts may nevertheless be awarded to an excluded supplier where there is an overriding public interest, including defence and security considerations. The Government has also indicated that a new National Security Unit for Procurement will be responsible for monitoring the supplier landscape and investigating those who may pose a risk to national security.

A supplier can apply to the court to be removed from the debarment list where a minister made a material mistake of law. The supplier's appeal must be made within 30 days of the date when the supplier knew (or ought to have known) about the minister's decision (section 65(2)). 

If the court is satisfied with the appeal, it may set aside the minister's decision or compensate the supplier for the costs incurred from being excluded from a competitive tendering procedure (section 65(4)).

Framework agreements

Framework agreements have long provided a flexible means of procurement for many contracts, and defence and security contracts are no exception. The Act has introduced the concept of "open frameworks", which essentially allow supplier refresh at intervals throughout an eight-year term. This new flexibility is likely to be broadly welcomed, including in the fields of defence and security.

Light-touch services

The fields of defence and security are set to benefit from a range of services contracts that qualify for procurement as "light touch" contracts by virtue of Schedule 1 to the (draft) Procurement Regulations 2024, laid before Parliament on 25 March 2024. Assuming these regulations become law, the list of light-touch contracts will be longer for defence and security contracts than for other public contracts and will include contracts for services such as transport support services, refuelling, salvaging and ROV services. The procurement of such contracts will thereby be subject to fewer procedural requirements than contracts which are fully covered by the Act.

Exemptions from publication of notices

Certain exemptions from the requirement to publish standard procurement notices may apply to defence and security contracts. These include the requirement to publish a contract change notice (or a copy of the amended contract), which will not apply to defence and security contracts. Similarly, the requirement to publish a contract award notice will not apply to the award of a contract under a defence and security framework.

The Act also provides additional grounds under which contract modifications may be made without the need for a new procurement, which apply specifically to certain defence contracts, including where a modification is necessary to enable the contracting authority to take advantage of developments in technology.

Update to the Single Source contracting regime 

Part 2 of the Defence Reform Act 2014 created a regulatory framework for single source defence contracts operating in accordance with the Single Source Contract Regulations 2014 (the single source framework). It was designed to "provide value for money in public expenditure while ensuring fair prices are paid to industry" by placing pricing controls on qualifying contracts and requiring greater transparency on the part of defence contractors.

The single source framework was reviewed in 2021, resulting in 30 proposals for reforming the single source contracting regime. Those reforms aim to:

  • improve choice and flexibility in the contracting approach by ensuring the regulations can be used in a wider range of sectors and contracts;
  • allow the acquisition process to be sped up and simplified; and
  • adapt the regulations to ensure they support innovation and exploitation of technology.

Schedule 10 of the Act amends the Defence Reform Act 2014, thereby providing the basis for changes to be made to the single source framework.

The first tranche of secondary legislation focuses on "urgent" reforms and aims to provide more flexibility in the way contracts can be priced under the Defence and Security Industrial Strategy.

In particular, we will see the introduction of:

  • alternative pricing methods for contracts, which will see non-competitive defence contracts able to be priced in new ways;
  • more flexibility and transparency through broadening the ability for a contract to be split into different components or parts, each with its own profit rate and price (known as componentisation); and
  • rationalisation of how the contract profit rate is to be calculated.

A second tranche of secondary legislation will implement changes to reporting regime and more technical changes.

In anticipation of the reforms taking effect from 1 April 2024, the Single Source Regulations Office issued new and updated pricing and reporting guidance to assist those impacted by the new rules. This guidance is currently being consulted upon and may be subject to further changes.

If you have any questions or need support navigating these developments, get in touch with Christopher Brennan, Elizabeth Williams or Alison Richards.