Each year, the Secretary of State for Defence receives a
recommendation of the profit rate (known as the baseline profit
rate or BPR) from the SSRO. This rate is used in the following
year to set profits for contracts that the MOD awards without
competition. The BPR has been applied to contracts worth over
£105 billion since 2014, including over £8 billion of estimated
contract profit.
The BPR is the starting point for the agreement of contract
profit rates and adjustments can be applied to tailor the rate to
suit the specific contract in question.
As part of determining the annual baseline profit rate, we use
benchmark profit data of companies who undertake activities that
are comparable to those that contribute to the delivery of single
source contracts.
In July, we consulted on proposals for changes to the way we
select those companies. Stakeholders responded and we have
updated our methodology to rationalise the activity types and
refine the scope of the activities used in our analysis.
The improvements published today further strengthen the
robustness of our assessment methodology. The BPR - currently
8.24 per cent - is the first in a series of steps used by the
contracting parties to derive the contract profit rate, which is
typically higher than the BPR. In 2023/24 contractors reported
completed contracts earning 11.57 per cent profit on average. The
majority of those completed contracts achieved a higher rate than
was originally agreed when pricing, as a result of good
contractor performance or successful risk mitigation during the
contract.
We appreciate everyone who participated in the consultation and
shared their opinions with us. We continue to gratefully receive
any feedback and comments on further suggestions to enhance the
baseline profit rate assessment process.
To read more about the updated methodology take a look here.
