The Secretary of State for Defence (Mr Ben Wallace)
I am today announcing that I have set the baseline profit rate for single-source defence contracts at 8.31%, in line with the rate recommended by the Single Source Regulations Office (SSRO). The baseline profit rate is calculated on a three-year rolling average of underlying profit rates. The underlying profit rate decreased from 8.23% for 2020-21 to 8.19% for 2021-22.1 have accepted the methodology used by the SSRO to calculate these figures. Element 2020 Rates 2021 Rates Baseline Profit Rate (BPR) (% on contract cost) 8.22% 8.31% Baseline Profit Rate to apply to contracts between the Secretary of State and a company wholly owned by the UK Government and where both parties agree (% on contract cost) N/A 0.057% Fixed Capital Servicing Rate (% on Fixed Capital employed) 3.66% 3.27% Working Capital Servicing Rate (% on positive Working Capital employed) 1.22% 1.33% Working Capital Servicing Rate (% on negative Working Capital employed) 0.61% 0.65% SSRO Funding Adjustment 0.052% 0.057%
In addition to the main rate, I am announcing an additional baseline profit rate of 0.057%. This will only apply to qualifying defence contracts where:
i. the contract is between Secretary of State and a company incorporated under the Companies Act that is wholly owned by the UK Government; and
ii. both parties to the contract agree that it should apply.
The intention is that this rate can be used to set contract profit rates at a rate that does not result in such companies making a profit, should it not be appropriate for them to do so. Application of the five further steps set out in section 17 of the Defence Reform Act 2014 may result in a rate that is slightly different from zero on individual contracts.
Setting this additional rate diverges from the SSRO’s recommendation. The SSRO has welcomed the intention to bring contracts into the regime where it is appropriate that the contractor does not make a profit. This will enable the pricing and transparency provisions of the regulatory framework to be applied to both the contract and relevant subcontracts, which provisions are intended to assist the Government to obtain value for money and contractors to be paid fair and reasonable prices.
I am also announcing new capital servicing rates and an SSRO funding adjustment as recommended by the SSRO, which can be found at Table 1 below. These rates have been published in the London Gazette, as required by the Defence Reform Act 2014.
All of these new rates will come into effect from 1 April 2021.
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