In the wake of rising global security challenges, the UK Treasury's 2025 Spring Statement revealed increasing defence spending to 2.5% of GDP by 2027, including an additional £2.2 billion of funding to the Ministry of Defence next year.
A significant proportion of the UK's defence budget will be spent on contracts that have been publicly procured, and many will be governed by the new Procurement Act 2023 (the Procurement Act). The Procurement Act replaces the prior regime under the Defence and Security Public Contracts Regulations 2011. Contracts that are awarded without competition (including by way of an exemption from the Procurement Act) will continue to be governed by the Single Source Contract Regulations 2014 (SSCR), which remain in effect but are subject to certain reforms by the Procurement Act.
The Procurement Act came into force on 24 February 2025 and, where it applies, introduces key changes to how public sector contracts are awarded, managed and investigated. The change in legislation and policy incentives creates significant opportunities in the defence technology space, but an awareness of the regime, and procurement strategy more generally, will be vital to take advantage where possible of the flexibility in the new act.
Does the Procurement Act apply to my defence contract?
The Procurement Act will generally apply to competitively awarded public defence contracts above certain value thresholds. However, the Procurement Act contains certain exemptions and flexibility in respect of defence contracts broadly where this is necessary to protect the UK's defence and security interests
Is my contract a 'defence and security contract' under the Procurement Act?
The Procurement Act provides additional flexibility and exemptions to competitively awarded 'defence and security contracts', which include contracts for:
- military equipment (which includes any parts, components or subassemblies) and goods, services or works related to the development, production, maintenance or decommissioning of the same; and goods, services or works for wholly military purposes
- sensitive equipment and goods, services or works related to the development, production, maintenance or decommissioning of the same; and sensitive services or works
- logistics services relating to military equipment and sensitive equipment
- goods, services or works that are otherwise relevant to the operational capability, effectiveness, readiness for action, safety or security of the armed services.
While the first three items largely align with the previous regime, the final item introduces a new measure poised to offer greater flexibility for defence technology companies. Specifically, the final item covers operational capability-enhancing software and data analytics tools that can serve both military and ancillary purposes – such as AI implementations used for real-time battlefield intelligence or AI-driven threat detection. In light of the £1 billion investment in the innovative Digital Targeting Web announced on 29 May 2025, this addition is likely to accommodate the burgeoning realm of AI-driven analytics and related emerging technologies where they have relevance to armed forces operations.
Examples of the benefits of this additional flexibility for certain 'defence and security' contracts include:
- Contracting authorities may directly award certain 'defence and security' contracts where it is necessary to maintain the "operational capability or readiness" of the armed forces, rather than running a full tender process – a point particularly relevant where time is critical, or technology must be acquired rapidly.
- Contracting authorities can modify existing defence and security contracts without publishing a contract change notice or re-running a competitive tendering process if doing so is necessary to take advantage of new technological developments (such as updating AI functionality) or to ensure a continuous supply of crucial equipment.
These flexibilities should allow defence technology providers to more swiftly adapt solutions or secure urgent awards to meet emerging operational demands.
What defence contracts and contracting authorities are fully exempt?
Certain 'defence and security contracts'
None of the requirements under the Procurement Act will apply to 'defence and security contracts' (as outlined above) where:
- the supplier is located in an area outside the UK in which the armed forces are deployed, and operational needs require the contract to be awarded to that supplier
- the supplier is the government of another state or territory
- the contract is awarded under a procedure adopted by an international organisation that the UK is a member of
- there is an arrangement between the UK and another state or territory for the joint development or exploitation of a product.
These exclusions broadly mirror the prior regime and avoid requiring compliance with the Procurement Act where contractual awards are required to defence contractors with a local presence or foreign authorities.
Other contracts
There are additional exemptions that may apply to defence technology companies regarding:
- contracts for the purposes of carrying out, facilitating or supporting intelligence activities
- contracts for research and development services
- contracts made with 'Intelligence Services' including the Security Services, the Secret Intelligence Service and GCHQ
- where the contracting authority determines the contract should otherwise not, in the interests of national security, be subject to the Procurement Act (or any of its provisions).
Importantly, 'national security' is not defined in the Procurement Act. The Home Office Guidance provides that this is "in order to ensure that it is sufficiently flexible to protect the UK’s national security interests, but must be properly justified". As such, defence technology companies may benefit from increased flexibility in the application of this ground. This open-ended definition may be something that contracting authorities seek to utilise when contracting with technology companies, allowing broader grounds for exemption.
There is a note of caution: the increased discretion may encourage challenges to contracting authorities’ decisions – whether by successful bidders seeking lighter compliance obligations or by competitors demanding greater transparency.
What defence contracts benefit from additional flexibility under the Procurement Act?
In addition to the above contracts being fully exempt from the requirements of the Procurement Act, there are further scenarios in which reduced obligations apply.
Defence and security contracts
Contracts can be directly awarded for example where it is necessary to enhance or maintain the operational capability, readiness for action, safety or security of the armed forces; in practice, the Cabinet Office and the Ministry of Defence have agreed that Cabinet Office approval will be required to exercise the direct award ground above a threshold of £20 million.
Contracts can be modified in certain cases, for example to take advantage of or mitigate developments in technology, or to ensure the continuous supply of goods and to maintain the readiness and operations of the armed forces; this can be done without the requirement to publish contract change notices or the modified contract.
Overriding public interest
A contract may be directly awarded where there is an overriding public interest in doing so, which is likely to apply to certain defence contracts; this includes where it is essential to ensure the proper functioning of a sector on which the defence or security of the UK relies.
Call off contracts
There is no requirement to publish a contract award notice for a call-off contract under a defence and security framework, although suppliers may nonetheless decide to do so, which would trigger the resulting voluntary standstill period as outlined in our separate article.
National security
In addition to being a potential ground for the exclusion of the entirety of the Procurement Act to a given contractual award, it is also likely that contracting authorities may determine that certain provisions, such as in respect of the transparency and notice requirements under the Procurement Act, or the debarment list of excluded suppliers (as discussed in our separate article), should not apply in the interest of national security.
Comment
The latest policy drive and culture that is being pushed from central government surrounding the changes to UK public procurement suggests that contracting authorities will seek to use the flexibilities available in defence contracting. The logic is that given the evolving global security climate, and the pace of technological development such as in relation to AI and drones, strict compliance with the Procurement Act's increased transparency and reporting requirements may otherwise risk technological obsolescence and materially compromise the UK's military interests. This follows comments by the Parliamentary Defence Committee that the prior system was "broken" and "[w]ith a major war now underway in Ukraine, now is the time to act".
However, this additional flexibility and discretion could lead to increased tensions with competing suppliers on the grounds of competitive markets and transparency; in many cases, accountability and transparency obligations will remain, and contracting authorities in any event must be prepared to justify their decisions to forego competition, openness and transparency on the grounds listed above. This may, in turn, foster new grounds for challenge by suppliers and competitors alike.
Our public procurement article series also explores other considerations in more detail. Please contact Matt Evans, Adrian Touloungi or a member of our team if you want to discuss this or any other issue.
