Under the Defence Reform Act 2014 (the Act), the SSRO is required annually to review the figures used to determine the contract profit rate for pricing qualifying defence contracts (QDCs) and qualifying sub-contracts (QSCs). Section 19(2) of the Act requires that, for each financial year, the SSRO must provide the Secretary of State with its assessment of the appropriate baseline profit rate and capital servicing rates for fixed capital and working capital.
This document sets out the methodology used by the SSRO to calculate the baseline profit rate and capital servicing rates recommended to the Secretary of State in January 2025. The recommendation was accepted for use in pricing QDCs and QSCs and the rates came into force on 1 April 2025.
The baseline profit rate is the first step of the four-step process set out at section 17(2) of the Act and regulation 11 of the Single Source Contract Regulations 2014 (the Regulations) for determining the contract profit rate. The SSRO must aim to ensure that good value for money is obtained in government expenditure on qualifying defence contracts, and that persons (other than the Secretary of State) who are parties to qualifying defence contracts are paid a fair and reasonable price under those contracts.
The capital servicing rates are used in the determination of the baseline profit rate and as part of step 4 of the four-step process set out in the Act and Regulations for determining the contract profit rate. The purpose of step 4 is to adjust the contract profit rate so as to ensure that the contractor receives an appropriate and reasonable return on the fixed and working capital employed by the contractor for the purposes of enabling it to perform the contract.
We encourage those with an interest in the setting of the baseline profit rate and capital servicing rates to familiarise themselves with this document.
We are always interested to hear the experience of stakeholders to help us to understand how the methodology may be further improved. Queries related to the methodology, or any other aspect of the regime should be addressed to helpdesk@ssro.gov.uk.
