Response to the review of Canada’s contract cost principles and profit policy

In 2015, PricewaterhouseCoopers provided a review of how we currently determine contract price for defence procurement. Learn how their recommendations are helping us to improve our price policies and practices.

How prices are set

The Government of Canada makes every effort to ensure that the price of goods and services is determined by the market through competition. But sometimes the price is determined by adding the actual cost to do the work with a fair and reasonable profit, especially in defence contracts. This situation occurs:

The Canadian pricing framework is composed of Canada’s contract cost principles and Public Services and Procurement Canada’s profit policy. The intent of the framework is to apply a consistent approach to all contracts and for all contractors to calculate a price that best represents a fair market price.

Partners around the world have a similar approach to pricing and audit. Canada works with them to share information and performs contract audits of Canadian suppliers on behalf of its partners. This is increasingly important given the globalization of military business and the involvement of Canada’s defence sector internationally.

Opportunity to improve our price policies and practices

In November 2013, the Canadian Association of Defence and Security Industries (CADSI) published a report on government policies. The report highlighted the need to more broadly examine issues around how to price non-competitive contracts and to consider alternative approaches to contracting.

At the same time, the sustainment initiative was created to pilot innovative approaches to contracting. It involved Public Services and Procurement Canada, National Defence, and Innovation, Science and Economic Development Canada. The objective was to improve defence procurement by enhancing the relationship with contractors, introducing incentives for contract performance and examining best practices from our partners.

In 2015, we asked PricewaterhouseCoopers (PwC) to review how we determine the price for goods and services in defence contracts. We had concerns that the pricing framework had not kept pace with innovative procurement practices in Canada and abroad.

The review was conducted as part of the sustainment initiative and completed in December 2015. It made several recommendations on how to update our interpretation of the pricing framework (the guidance).

The renewal of the pricing framework will be strengthened by the contract review project. The contract review project recently initiated by Public Services and Procurement Canada’s procurement policy group aims at:

As we are updating our policies, we will apply plain language and remove duplicate and outdated information from contract clauses. This will make it easier for businesses to sell to government and simplify training and policy documents.

Read our responses to each of the PwC report recommendations and learn about our plan of action.

Main findings of the review

Recommendations and our responses

We respond to each of the seven recommendations provided in the review. Four of the recommendations refer to the interpretation of the pricing framework (the guidance) we currently use to determine contract prices:

Three of the recommendations refer to the management of the pricing framework, which governs how the guidance is applied.

Recommendation 1

Some specific terms in section 3.1031-2 of the Standard Acquisition Clauses and Conditions Manual should be changed, and more instructions on application given.

Our response for recommendation 1

We will:

Recommendation 2

The Supply Manual requires substantive changes to overcome significant shortcomings.

Our response for recommendation 2

We will:

Recommendation 3

An application manual should be created to assist government procurement practitioners.

Our response for recommendation 3

We will:

Recommendation 4

The government needs to improve its access to support from military industrial specialists.

Our response for recommendation 4

We will:

For example, Public Services and Procurement Canada has hired an independent expert to provide advice on the National Shipbuilding Strategy.

Recommendation 5

Practitioners need to recognize the limitations of the guidance and consider contracting alternatives.

Our response for recommendation 5

We will:

Recommendation 6

A protocol for enhanced coordination between the departments should be developed.

Our response for recommendation 6

Public Services and Procurement Canada and National Defence will:

Recommendation 7

A management framework for sole-sourced contracting is required, which may include a regulator.

Our response for recommendation 7

We will:

Our plan of action

Fall 2016

We will:

Fall 2016 and winter 2017

We will:

Winter and spring 2017

We will:

2017 to 2018

For all the recommendations, we will:

March 2018

We will:

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