Defence & Aerospace Supplier Guidance:

UK MOD Defence Acquisition:
The Commercial Framework Codes of Best Practice

Publication date: 2001

The following document was produced by the UK Ministry of Defence (MOD) and Industry and released as Commercial Policy Group (CPG) Guideline Number 5 in 2001.

Jeffrey Strategic promotes these Codes of Best Practice as guidance for MOD suppliers and has reproduced this document for informational purposes.

Introduction
MOD and its Suppliers
Sub-Contractor Selection by Prime Contractors in MOD Acquisitions
Defence Contractors Relationships with Suppliers

Introduction

1. The Codes of Practice covered by this Guideline are intended to demonstrate a commitment by the Ministry of Defence (MOD) and its suppliers to the establishment of mutually satisfactory relationships, based upon openness and trust, to enable mutual benefits in the acquisition of goods and services by the MOD. The Codes do not seek to deal directly with the performance of those good and services, or to specify contractual terms for their supply. Rather they establish principles for the conduct of defence acquisition business throughout the supply chain. The objectives are to enable improvements in quality, efficiency, timeliness and supply chain relationships in the defence acquisition business.

2. The three Codes attached cover the following areas: the relationship between the MOD and its suppliers; the involvement of the MOD in the selection of sub-contractors by prime contractors; and, the relationship between defence contractors and their suppliers.

3. The three Codes are the product of the MOD/Industry Commercial Policy Group (CPG), which will promote and consider, periodically, their review for continued relevance of their content. If you have comments on those aspects, questions, or information on experience in using the Codes, all these would be welcome and should be directed to the Defence Commercial Policy Group (DCPG) within the MOD, and to the defence trade associations in industry.

4. The three Codes are intended to be implemented coherently with other Codes of Practice which are relevant to defence acquisition and the contacts above would be happy to deal with any questions of interpretation that might arise.

MOD and its Suppliers

In this Code the phrase "Ministry of Defence" and/or "MOD" embraces the acquisition community throughout the Ministry of Defence. The word "Suppliers" means the MOD’s supply base, which includes all existing or potential suppliers at all levels of the supply chain.

Objective

The objective of this Code is to encourage a positive and co-operative approach by all stakeholders involved in setting the terms for the supply of goods and services to the MOD. Many will already be involved in teamworking under the arrangements for Integrated Project Teams (IPTs), but this code advocates a team approach in all cases, to use best practice to achieve shared goals, whilst recognising and respecting each other’s interests, by the avoidance of confrontation and the adoption of reciprocal behaviour.

Common Principles

MOD and its Suppliers will maintain the highest levels of honesty, integrity, impartiality and objectivity. They will strive to perform their obligations efficiently and to the highest professional standards, treating each other fairly, and with courtesy.
The MOD and its Suppliers recognise that mutually satisfactory relationships based upon openness and trust between each other are fundamental to successful outcomes throughout the supply chain. Irrespective of whether relationships are short-term or long-term (since that will depend in part on the nature of the procurement concerned), the MOD and its Suppliers are committed to working together to improve the climate of defence contracting, through the adoption of the behaviours described in this Code.
Where appropriate, the MOD and its Suppliers will negotiate longer-term partnering-style commercial relationships, combining competition and co-operation in an optimum way. The MOD and its Suppliers recognise that creating the right relationship, and managing it well, requires skill, judgement and experience.
To facilitate culture change and the sustainment of best practices the MOD and its Suppliers will encourage their staff to learn from each other’s and wider experience. This should include promotion of joint training, interchange and other associated staff development initiatives.

Complementary Behaviours

The MOD and its Suppliers will constantly develop the most effective customer/supplier relationship in the following ways:

The MOD Shall:	Suppliers shall:
1. Strive to deliver value for money from the Defence Budget by managing its acquisition processes efficiently, while understanding the needs of Suppliers to be profitable and give shareholder value.	1. Strive to deliver value to the MOD, and to improve competitiveness in line with internationally recognised benchmarks of best practice, whilst understanding the constraints that public accountability places on MOD.
2. Behave as an intelligent customer with well informed and objective capability requirements and assumptions which will be made readily available to Suppliers at the earliest opportunity within the acquisition cycle.	2. Inform the MOD fully and frankly, and at the earliest opportunity, of the industrial and commercial realism of its requirements and assumptions.
3. Make available to Suppliers as much information as is practicable and responsible, to allow Suppliers to facilitate long-term planning.	3. Make known his skill base, capabilities, strategies and alliances to enable MOD to form an adequate assessment of the supplier’s capability to satisfy MOD’s forward needs.
4. Work continuously with Suppliers to establish realistic budgets to balance performance, cost and time parameters to achieve affordable, definitive capability requirements and conduct tendering on this basis.	4. Assist MOD in devising realistic budgets for acquisition programmes, highlighting options to trade among timescales, quality, operational effectiveness and/or cost.
5. Where practical, encourage the long-term availability of military capability by promoting arrangements that can lead to a continuous support relationship with the Supplier and his supply chain.	5. Demonstrate commitment to supply of long-term industrial capability by presenting MOD with a range of support options including the methodologies for their measurement.
6. Protect commercially sensitive information and intellectual property in any pre/or post-tender discussions with Suppliers.	6. Protect the confidentiality of information provided by MOD, regardless of the identity of the originator.
7. When seeking tenders: Always take account of the resources needed to respond to it and sustain the subsequent evaluation process. Fully state the data requirements needed from tenderers to negotiate a contract and, where necessary, indicate whether they are mandatory or merely desirable. Make available the criteria and weightings to be used in tender evaluation and notify the outcome promptly. In the competitive environment, fully, frankly and fairly debrief tenderers to facilitate continuous improvement. Award an effective contract to the winning bidder as soon as is practical on the basis of the offer made, modified as necessary by any post tender negotiations.	7. When responding to invitations to tender: Do so wholeheartedly within his capability and resources. Always identify all non-compliances and the reasons for them. Participate in debriefing opportunities fully and frankly to improve future performance. Provide feedback on MOD’s conduct of the competitive process. Promptly accept a contract from MOD that reflects what has been offered in the contractor’s most recently submitted bid as modified by any post tender negotiations.
8. In establishing and monitoring performance under the contract: Use incentivisation techniques that promote balanced risk and gain sharing. Set out clear and objective contract criteria for assessing compliant performance, whether for payments, acceptance, or both. Conduct contract oversight activities that are reasonable and proportionate to the Supplier’s performance of his obligations. Work with individual suppliers to overcome any programme problems in good faith without disturbing effective performance, and encourage an open, co-operative and non-adversarial environment in which legal recourse is the option of last resort. Seek to avoid placing disruption, delay and other additional cost burdens on the Supplier.	8. During the performance of the contract: Adopt internal and supply chain management procedures that encourage innovation, cost reduction and continuous improvement to create gainsharing opportunities. When certifying performance provide the necessary evidence of compliance called for in the contract. Support and facilitate reasonable MOD contract oversight activities. Inform MOD fully and frankly, and at the earliest possible time, of any programme problems and work with MOD and other suppliers to resolve them in good faith, and with fidelity to the programme. Seek to mitigate disruption, delays and additional costs by whomsoever caused.
9. Undertake, and discuss with suppliers, effective risk identification and reduction at all stages of the acquisition process. Allocate risks to the supplier that are well-defined and that can be economically managed or controlled in the private sector.	9. Implement effective risk identification and reduction processes at all stages of the acquisition process, and throughout the supply chain. Help MOD form an accurate view about risk allocation applicable to a contract and to trade off risks as effectively as possible.
10. Maintain a record of supplier past performance for review with him; encourage an approach where lessons are learned from experience.	Provide MOD with feedback on its comparative performance as a customer and encourage an approach where lessons are learned from experience.

Sub-Contractor Selection by Prime Contractors in MOD Acquisitions

Introduction

1. Competition remains the preferred means of supplier selection by the Ministry of Defence for defence requirements. MOD also wishes to see the greatest application of competition by its prime contractors for sub-contract activities, while recognising that a contractor’s longer-term strategic relationships with suppliers may also provide demonstrable value for money in the supply chain.

2. As a result of the consolidation in the defence industry, MOD’s suppliers are faced with less sourcing opportunities where often the choice may be limited either to one of their own business units or to an unaffiliated company for the supply of sub-systems or components. As a result of the potential for bias in sourcing decisions, additional MOD insight may be necessary to ensure fairness for the supply chain and best value for MOD.

3. This Note addresses the circumstances where conflicts of interest may arise where a prime contractor’s business unit, operated as an separate profit centre (an "in-house" capability), may be competing with unaffiliated companies for work arising under an MOD contract.

Principles

4. MOD expects its suppliers to adopt and implement good practice in supply chain management and will have regard to the extent to which a company can demonstrate the implementation of relevant Codes of Practice such as SCRIA or Defence Contractors’ Relationships with Suppliers. MOD may also have regard to compliance with any relevant undertakings given by Defence Contractors.

Competitive Acquisitions by MOD

5. Evaluation by MOD of competitive tenders from companies will consider the approach undertaken or proposed for the selection of the supply chain (including, where appropriate, make-or-buy plans), where this is determined by MOD to be a material matter in assessing value for money and fairness in the competition. The invitation to tender issued by MOD will establish the relevant evaluation criteria and information requirements.

Non-Competitive Acquisitions by MOD

6. In order to achieve value for money in the pricing of non-competitive prime contracts, MOD will wish to see the greatest application of competition in the selection of suppliers by the prime contractor. Prime contractors will be expected to provide opportunities on an even handed basis for suppliers (both in-house and external) to participate in competitions and to promote, conduct, evaluate and select suppliers in a fair and unbiased manner, avoiding conflicts of interest. MOD will normally require a prime contractor to describe the means by which it proposes to select or has selected its proposed suppliers as part of the tendering and pricing process.

7. MOD recognises the potential conflict between its policy of seeking the widest possible application of competition at the sub-contract level and the tendency in industry to form and maintain teaming arrangements or longer term strategic arrangements between prime contractors and suppliers. Where these arrangements exist and are offered as a reason for not applying competition for packages of work further down the supply chain, the MOD will expect the prime contractor to:

a) demonstrate this position in clear value for money terms, and

b) demonstrate that it has established procedures to give due regard, where practicable, to any reasonable representations made by prospective suppliers for inclusion in a competition.

Development of Supply Chain Relationships

8. With the increasing consolidation in the defence industry, fewer suppliers will be contracting directly with MOD. Increasingly suppliers will find themselves part of a supply chain of prime contractors. MOD will expect suppliers to promote their capabilities at the appropriate levels in the supply chain and for buyers to provide opportunities for qualified and competent suppliers to participate in competitions where appropriate, so that potential suppliers are not locked out of the acquisition process. Buyers should consider identifying significant sub-contract opportunities above £ 250,000 as soon as practicable, in accordance with the Code of Practice on Defence Contractors’ Relationships with Suppliers, by publication in MOD Contracts Bulletin or by other appropriate means. As electronic means for publicising sub-contract opportunities on a more global basis become more accessible it is expected that opportunities at a lower value threshold will be publicised.

Exceptional Circumstances

9. In exceptional circumstances, for example where MOD wishes to sustain a diversified defence industrial base to ensure competition for the future in the UK, MOD may require contractors to establish a sub-contract competition for specified capabilities and for contractors to provide MOD with sufficient insight into the procedures for those competitions for MOD to be satisfied that a fair competition will be conducted. In these circumstances MOD may require contractors to advertise in the MOD Contracts Bulletin those sub-contract opportunities that exceed the above financial threshold.

Bias and Conflict of Interests

10. MOD may anticipate the need to take positive steps to avoid the possibility of bias or conflict of interest by introducing in an Invitation to Tender specific procedures for the conduct of competitions by a prime contractor. The extent of these procedures and of MOD’s oversight or involvement of them will be reasonable and proportionate to the real risk of bias or conflict of interest.

11. There may also be circumstances where suppliers have reasonable grounds for believing their commercial interests may be jeopardised by the possibility of bias or conflict of interest in the conduct of a competition by a prime contractor, despite the application of best practice techniques to be applied in the conduct of the competition. Prior to the start of a competition, these suppliers may make representations in the first instance to the prime contractor concerned about any changes that they consider are necessary to the competition procedures or finally to the MOD organisation responsible for the acquisition. MOD will consider any representations and will discuss and agree with the prime contractor what steps (if any) are necessary to avoid any bias or conflict of interest arising.

12. Where the supplier can demonstrate to the MOD that there are reasonable grounds for believing that risks exist that the prime contractor cannot avoid or mitigate sufficiently, then MOD will take a reasonable and proportionate active role in the bid evaluation process to the extent necessary to satisfy a fair competitive process. This active role may involve the MOD taking control of and keeping confidential to itself, the pricing sections of competitive tenders until the final assessment of all other elements of the tenders have been completed, or implementing such other controls that will in the MOD's reasonable opinion secure a fair competitive process. Notwithstanding any involvement of MOD in the bid evaluation process the prime contractor shall remain responsible for the selection of suppliers.

Defence Contractors Relationships with Suppliers

In this Code, "Defence Contractors" means those companies who provide goods and services for military use. It includes all those companies at any tier in the supply chain.

Objective

1. The objective of this Code is to improve the quality, effectiveness and efficiency of the supply chain relationships in the defence industry through good practice to ensure fair competition, to eliminate duplication and waste and to increase the satisfaction of both the customer and the industry with the processes and the outcomes of defence procurement.

General

2. It is the aim of Defence Contractors to achieve continuing improvements in efficiency, based on whole-life costs and quality, and to enhance the competitiveness of suppliers, through the development of professional procurement systems and practices. Where appropriate the use of effective team-working will encourage a more open relationship with suppliers, identifying common goals and opportunities for improvements. These outcomes will support the delivery of projects within the performance, time and cost parameters agreed with customers.

Principles

3. Within this aim Defence Contractors, for their part, undertake in all dealings with suppliers and potential suppliers:

to maintain the highest standards of honesty, integrity, impartiality and objectivity;
to be fair, efficient, firm and courteous;
to strive for the highest professional standards in the award of contracts, usually by means of competition, so as to maximise efficiency, while conforming to strategic partnering objectives and undertakings;
to make available as much information as is practicable and responsible on future procurement plans to facilitate business decisions;
to enter into early consultation on draft specifications, statements of requirement, special terms of trading and/or contract conditions before new procurements to encourage innovation and, by team-working, identify, evaluate and implement effective trade-offs between operational and reliable performance, delivery and through-life costs;
to provide clear specifications of requirements which encourage innovation and refer where appropriate to relevant technical and other standards;
to make available sufficient time and information for suppliers to respond to the bidding process appropriate for the work, and to define and publicise amongst its supplier community contact points for the handling of enquiries and complaints;
to manage the bidding process so as to avoid/minimise the burdens on suppliers, while preserving genuine competition and avoiding discrimination;
to provide opportunities on an even handed basis for suppliers (both in-house and external) to participate in competitions or market tests, but in the interests of both customer and suppliers limiting numbers to ensure optimum economy, whilst honouring (and testing, where appropriate) preferred supplier status and strategic alliances;
to make available the criteria for the evaluation of bids, to evaluate bids objectively and to notify the outcome promptly;
to avoid improper business practices;
to protect commercially-sensitive information in suppliers' pre-contract discussions, unsolicited proposals and formal tenders and respect and protect their intellectual property;
to use sensible risk sharing arrangements which avoid the need for unnecessary pricing contingencies, whilst using incentivisation techniques to encourage innovation and improve performance;
to notify all tenderers on the same day of the outcome of a competition and, within the bounds of commercial confidentiality, to debrief winners and losers on request on the outcome of the bidding process and the reasons for not being selected to bid or losing a bid (having regard to the applicable evaluation criteria), so as to facilitate better performance on future occasions;
having regard to the contractual requirements, where agreement has been reached with MOD that the prime contractor should price non-competitive sub-contracts directly, to agree prices for those sub-contracts based, where appropriate and in consultation with MOD, on the Government Profit Formula and costing and pricing conventions applicable to such sub-contracts, supported by suitable undertakings on the adequacy of the information provided by suppliers;
to strive for the highest professional standards in the management of contracts;
to pay promptly for work done in accordance with contracts made;
to assess supplier performance in an objective and open manner and apply those assessments coherently in the process of supplier selection and tender evaluation;
to establish an effective system of handling complaints and disputes from suppliers with the mutual objective of resolving differences by negotiation at the lowest level of delegation appropriate to the nature of the issue and its effect on the parties, or otherwise escalating the matter within each party’s management structure, before resorting to arbitration or other forms of Alternative Dispute Resolution; and
to respond promptly, courteously and efficiently to suggestions, enquiries and complaints, seeking an open exchange of information on all technical and commercial issues based on mutual trust.

Application

4. All methods of acquisition implementation should be carried out in the same spirit of good practice. Whatever procurement mthod is chosen there is a need for clarity and certainty.

5. Defence Contractors will need to objectively assess the efficiency of in-house, preferred supplier or strategic partner capability by competing or market testing the work, on an arms-length basis, from time to time in accordance with the principles of this Code or by the use of benchmarking. Defence Contractors will ensure that, where competitions include subsidiaries or associated companies of the Defence Contractor as well as other companies, no bias in favour of the Defence Contractor’s subsidiaries or associated companies will be given. In particular, all tenderers are to be informed at the earliest time of the inclusion of a prospective in-house tenderer in the tender field.

6. Defence Contractors will establish policies and procedures to give effect to these principles and they will assess their conformance on a regular basis. By agreement the customer will be given access to these policies and procedures and any relevant assessments. Individual plans may be drawn up for each contract as appropriate to the size and nature of the work.

7. Defence Contractors will look to their suppliers, at every tier, in return, to observe similar principles, standards of integrity, professionalism, co-operation, courtesy, competence and efficiency.

General

8. In many cases Defence Contractors will be inviting tenders, or seeking commitments from partners, at a stage when they themselves are not yet - and may never be - appointed for the work. In these circumstances the time available for tendering, and the information that can be provided to tenderers, is often not in the direct control of the Defence Contractor. All the principles in the Code are dependent on those constraints to which the Defence Contractor seeking tenders is himself subject. Where a Defence Contractor is given insufficient time or information by the customer for the tendering process the Defence Contractor will attempt, where practicable, to mitigate the effects on the supply chain.

9. In circumstances where the award of work to an in-house capability or to a preferred supplier (without having first undertaken a competition in each case) might be regarded as anti-competitive or an abuse of market position, other codes or regulations may apply as well.

10. This Code does not replace, and should be implemented coherently with, other codes and standards such as the SBAC’s Supply Chain Relationships in Action and the standards required by ISO 9000.

11. Procurement, both in the bidding and in respect of any contract which may be entered into, involves rights and obligations which are enforceable in law. This Code is not intended to create further rights and obligations: it is a statement of good practice.

Source: UK MOD Commercial Policy Group (CPG)
Publication date: 2001