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U.K. regulator cuts Rolls-Royce defense contract

Landmark ruling sees $1.8 million worth of company contracts stripped, more under investigation.

By Geoff Ziezulewicz
An independent regulator on Monday stripped about $1.8 million from a U.K. Ministry of Defense contract with Rolls-Royce for engines that power Hawk aircraft, like those used by the British Royal Air Force's Red Arrows demonstration team, shown here in 2003. File photo by AFIE/Val Gempis/UPI | <a href="/News_Photos/lp/4fe5153fb008785d7dbf4159647a47e3/" target="_blank">License Photo</a>
An independent regulator on Monday stripped about $1.8 million from a U.K. Ministry of Defense contract with Rolls-Royce for engines that power Hawk aircraft, like those used by the British Royal Air Force's Red Arrows demonstration team, shown here in 2003. File photo by AFIE/Val Gempis/UPI | License Photo

LONDON, May 17 (UPI) -- The U.K. Ministry of Defense announced Monday it would strip about $1.8 million from an existing Rolls-Royce contract as part of a review of what costs are appropriate to pass on to taxpayers.

The ruling, issued by the Single Source Regulations Office, an independent defense regulator, is in connection to a $101 million contract awarded to Rolls-Royce in late 2015 to support the engines that power Hawk jet aircraft, including those flown by The Red Arrows, a Royal Air Force aerobatic team.

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The contract was awarded on a condition that the regulations office would rule on the extent to which sales and marketing costs could be included and if the cost adjustment level for risk is appropriate.

"On the first of the issues addressed by today's ruling, the SSRO decided that Rolls Royce had not established a clear link between some of the costs being claimed and the contract in question," a release announcing the ruling states. "The burden of proof rests with the contractor to demonstrate the potential for sales arising from the marketing activity and that these would benefit the cost base of the contract."

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On the second issue, the office ruled that Rolls-Royce overstated the risk of future cost variation and thus could not justifiably add a 25 percent adjustment the company proposed.

"The SSRO is also reviewing other aspects of the contract related to costs amounting to several million more pounds, as part of its routine compliance duties," the announcement states. "These are in areas including performance incentives, capital servicing costs and charging for extra work made necessary by faulty workmanship."

Interim regulation office head Clive Tucker said "it is a matter of continuing concern to us that there are further compliance questions to resolve."

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The office's investigative process involves gathering written evidence from the contractor and government, face-to-face meetings and site visits, according to the announcement.

Single-source procurement represented about 53 percent of new MOD contracts in 2014/15, with the ministry spending about $12 billion on single-source contracts that year.

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