Reforming Single Source Contracts: Key Takeaways for Defence Customers and Suppliers

The Government’s statement last week on updates to the Single Source Contract Regulations signals the latest step in the Government’s ambitious plans for reform of defence procurement policy. Following on from the promises made in the Strategic Defence Review and Defence Industrial Strategy, and set against a backdrop of increased defence spending and a renewed emphasis on “warfighting readiness,” the reforms aim to address well-documented concerns of inefficiency in defence procurement; particularly delays, cost overruns, and insufficient incentives for innovation. 

A Stronger Link Between Profit and Performance

At the heart of the reforms is a substantial increase in performance‑linked profit under regulated single source contracts. For prime contractors, the Government will raise the maximum “incentive adjustment” permitted when calculating regulated contract profit rates from 2 percentage points to 10 percentage points. The expectation is that the additional profit will be tied to achieving priority outcomes such as faster delivery and improved productivity.

This will of course be welcome news for direct suppliers to the MOD, with significantly greater returns available for the achievement of priority outcomes. However, the amended regulations seek to tighten the way in which incentivised outcomes are specified and measured, requiring outcomes and performance to be objectively verifiable and capable of independent determination.  The additional pressure on performance will need to be managed, with industry likely to look to increase focus on their own processes for delivery assurance and programme controls. On the customer side, the MOD will also gain a much stronger lever to drive outcomes, although of course this will rely on those outcomes being clearly specified and sufficiently challenging – incentivisation mechanisms are already often a very heavily negotiated area, and are likely to become even more so with more money contingent upon performance. 

It is also notable that this increase does not flow down to Qualifying Sub-Contracts, for which the maximum incentive adjustment remains at 2%. The policy rationale for this is to avoid prime contractors from having to assess the applicability of the incentive fee on behalf of the MOD, and to avoid inflation of profits at prime level, but clearly this approach creates a much stronger position in the single source supply chain for primes, which we may see influencing decisions around contracting structure going forward. Sub-contracts below £25 million in value continue to fall outside the regime.

Rebalancing Risk and Reward and opening the door for SMEs

As well as the changes to the incentive adjustment, which are due to come into effect on 5^th June, a further suite of changes have also been announced, which are planned to come into effect through a further Statutory Instrument prior to the Summer recess.

These additional changes will include a reduction in baseline profit for lower-risk contracts, particularly where government bears most of the cost risk. This is designed to push suppliers toward more risk-bearing arrangements and higher productivity – and of course to promote better value for money by aligning profit with risk.

The Government have also announced a notable structural change to the single source regulatory regime: an increase in the SSCR contract threshold from £5 million (where it has been since the introduction of the SSCR in 2014) to £25 million. This increase is intended to remove most SMEs from the regulatory regime, making defence markets more accessible to SMEs and innovative entrants due to the reduced regulatory burden. 

Another interesting development aimed at encouraging innovation in defence programmes is the proposed introduction of an “innovation uplift”, whereby suppliers investing their own resources into new technologies, without guaranteed contracts, will be rewarded for doing so. For suppliers, this creates a clearer commercial case for internal R&D investment, particularly in emerging technologies, and could give the MOD earlier access to cutting-edge capabilities without fully funding early-stage development.

A Cultural Shift in Defence Procurement

Taken together, these reforms represent a broader cultural shift. The Government is seeking to replicate competitive pressure within single-source environments by linking profit more directly to performance. For affected suppliers, this means a shift in emphasis from compliance-led contract delivery to performance-led execution. For customers within the MOD, it provides new tools to drive efficiency, innovation, and operational readiness.

Ultimately, these reforms signal a more dynamic, outcome-driven defence procurement environment - one that aims to deliver capability faster, more efficiently, and with greater strategic impact.