Its determination is the first made by the SSRO, an executive non-departmental body created in December 2014 and sponsored by the Ministry of Defence to rule on contracts awarded under the Single Source Procurement Regime.
The ruling relates to a £70m contract awarded to Rolls Royce in December 2015 to provide support for the Hawk engines.
This contract was awarded on the condition that the SSRO’s verdict was sought on the extent to which sales and marketing costs could be included, and whether the level of cost adjustment for risk was appropriate.
The SSRO is also reviewing other aspects of the contract including performance incentives, capital servicing costs and charging for extra work made necessary by faulty workmanship.
It decided Rolls Royce had not established a clear link between some of the costs being claimed and the contract in question and that the company was overstating the risk of future cost variation and should not add its 25% proposed adjustment.
Interim SSRO chair Clive Tucker said: “The law is very clear that the onus is on the contractor to justify the costs it wants to pass on to the taxpayer.
“We published detailed statutory guidance on Allowable Costs at the start of 2015 and contractors have normally been willing to remove any non-Allowable Costs we identify. However, this binding determination shows that if contractors won’t adhere to the guidance we have the ability and the will to impose a change when necessary.”
He said it was “a matter of continuing concern” that there were still other compliance questions to resolve on the contract.
Rolls Royce has been approached for comment.
Read SSRO chief executive Marcine Waterman’s blog on lessons from defence procurement savings
