Updating the benchmarks used in determining the profit rate for non-competitive defence contracts
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The SSRO is required each year to provide the Secretary of State with a recommendation of the appropriate starting rate of profit on Ministry of Defence contracts placed in the absence of competition, known as the baseline profit rate or BPR. We have published the outcome of our consultation on developments to the annual profit rate assessment methodology, which will apply from this year’s assessment and is available on our website. The feedback received is outlined in the consultation response, along with how it was considered when finalising the adjustments to the updated methodology.
The improvements published today further strengthen the robustness of our assessment methodology. The BPR is the starting point for the agreement of contract profit rates and is 8.24 per cent for 2024/25. The BPR has been applied to contracts worth over £105 billion since 2014, including over £8 billion of estimated contract profit. The BPR is only 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 profit rate than was originally agreed when pricing, as a result of good contractor performance or successful risk mitigation during the contract.
The BPR supports both value for money for taxpayers and fair and reasonable contract prices because it reflects the profits that companies contracting competitively earn when they undertake activities comparable to those that support the delivery of non-competitive defence contracts.
The SSRO launched a consultation in July 2024 on the comparable activities used in the BPR assessment. The 2024 consultation was Phase 2 of a larger review building on the outcomes of Phase 1 published in October 2023. The purpose of the review was to ensure the activities used in the BPR assessment remain representative of those that are known to contribute to the delivery of non-competitive defence contracts.
We consulted on proposals to:
- remove rental and leasing activities from the assessment;
- combine two existing groups called Develop and Make (D&M) and Provide and Maintain (P&M) into one new group called Develop, Make and Support (DM&S); and
- expand the scope of our benchmarks to cover technical support services and labour outsourcing.
Changes to the BPR methodology taken forward sees the removal of rental and leasing activities and the combining of the D&M and P&M groups into a newly formed DM&S group. The changes are effective for this year’s baseline profit rate assessment process, which will be applied to the BPR for financial year 2025/26 and onwards. The consultation feedback indicated further work was necessary to establish the merits or otherwise of proposed changes in respect of technical support services and labour outsourcing.
We thank all those who responded to the consultation and for sharing their views. Where respondents gave permission, their responses have been published.
Feedback received
Original consultation
Consultation description
As part of determining the annual profit rate for non-competitive defence contracts, we use benchmarks derived from the business activities of a range of comparable companies. We are proposing changes to the way we select those companies. We want to hear your views.
Each year we are required to provide the Secretary of State for Defence with an assessment of the profit rate to be used in MOD contracts placed without competition - also known as single source contracts. The profit rate (known as the baseline profit rate or BPR) provides the starting point for calculating the contract profit rate for single source contracts.
To arrive at the profit rate, we have a methodology, which we publish on our website, and which has developed through use and stakeholder feedback over the past decade. One part of the methodology relies on using benchmark profit data of companies who undertake activities that are comparable to activities that contribute to the delivery of single source contracts.
We are consulting on changes to keep the activities representative of those that are known to contribute to the delivery of MOD single source contracts and to ensure we can produce a profit rate which supports our aims of ensuring value for money and fair and reasonable prices.
Responding to the consultation
The consultation runs until 5.00 pm Friday 16 August 2024. Written responses should be sent:
- to: consultations@ssro.gov.uk (preferred).
- BPR Activities Review consultation responses, SSRO, 100 Parliament Street, London, SW1A 2BQ.
If you wish to discuss the guidance or consultation, please contact us on 020 3771 4767.
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Updates to this page
Last updated 7 October 2024 + show all updates
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Consultation outcome published
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Consultation outcome published
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First published.