Press release: Secretary of State for Defence accepts SSRO’s recommended profit rate

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  1. The Secretary of State for Defence has accepted the baseline profit rate and capital servicing allowance for 2015 recommended by the Single Source Regulations Office (SSRO) [1]. The baseline profit rate is paid to defence contractors by the MOD in single source defence contracts.

    The new baseline profit rate for 2015, which is lower than that currently in force, will come into effect from 1 April 2015. The SSRO recommended a baseline profit rate of 10.60% for 2015, a 0.10% reduction on the rate for 2014. The 2015 baseline profit rate as a percentage of cost of production in 2013/14 is 9.88%, down from 10.92% in the previous year.

    The baseline profit rate is common across all single source contracts and is the starting point for determining the contract profit rate to be applied in the pricing formula, after a series of adjustments have been made. A full description of this process can be found in the SSRO’s 2015 Contract profit rate.

    The table below shows the changes to the 2015 contract profit rate:

    Element 2014 rates 2015 rates
    Baseline Profit Rate (BPR) (% on contract cost) 10.70% 10.60%
    Fixed Capital Servicing Allowance (% on Fixed Capital employed 6.20% 5.94%
    Working Capital Servicing Allowance (% on positive Working Capital employed) 2.07% 1.72%
    Working Capital Servicing Allowance (% on negative Working Capital employed 1.25% 1.03%

    The details of the rate for 2015 have been published in the London Gazette.

    In addition to recommending the baseline profit rate, Section 18(1) of the Defence Reform Act 2014 specifies that the SSRO may issue guidance in relation to any of the steps set out in Section 17(2), and that contractors and the MOD must have regard to this guidance, unless there are good reasons not to.

    The adjustments to the baseline profit rate, on which the SSRO is soon to publish guidance, are:


    • the cost risk adjustment


    • the profit on cost once adjustment


    • the incentive adjustment


    • the capital servicing adjustment

    Our consultation on adjustments to the Baseline Profit Rate ran from 20 February to 13 March. Following this, we are reviewing the responses and will publish the finalised guidance before 31 March 2015.

    Footnotes


    [1] Under the Defence Reform Act 2014, the Single Source Regulations Office is required annually to review the figures used to determine the contract profit rate for pricing single source contracts. It is also required to publish the review and make an annual recommendation to the Secretary of State for Defence on whether the profit rate should be adjusted. The baseline profit rate and capital servicing allowance are two of the elements of the contract profit rate.

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