2021 contract profit rate
2021/22 baseline profit rate, capital servicing rates and SSRO funding adjustment
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Under the Defence Reform Act 2014 (the Act), the Single Source Regulations Office (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 us to provide the Secretary of State with an assessment of the appropriate baseline profit rate, SSRO funding adjustment and capital servicing rates for fixed and working capital for that year.
The Secretary of State for Defence announced his determination of the rates that will apply from 1 April 2021 on 15 March 2021 following a recommendation from the SSRO.
We welcome the Secretary of State’s decision to accept our recommendations on the SSRO funding adjustment and capital servicing rates. The Secretary of State’s determination included a second baseline profit rate in addition to the SSRO’s recommended rate. As required by section 19(6) of the Act the Secretary of State has explained the reasons for the difference in the London Gazette notice, which is available at: https://www.thegazette.co.uk/notice/3760612.
The SSRO plans to launch a consultation on Friday 19 March 2021 to explore if any changes are required to its Guidance on the baseline profit rate and its adjustment (“Profit rate guidance”) to facilitate the application of the additional rate. We will also seek views on how the 2022/23 rates recommendation, and beyond, could accommodate an additional net-zero baseline profit rate to apply to wholly owned UK Government companies.
As in previous years, the SSRO has published information on our methodology and its application this year to aid those who may wish to scrutinise or replicate the approach taken for the SSRO’s 2021/22 recommendations. The practical application of the methodology remains unchanged from last year. We are confident that the methodology is correct, and that our stakeholders will consider it to be robust.
In addition, as in previous years the SSRO has published a supporting information pack that sets out details of the SSRO’s recommendation to the Secretary of State alongside analysis of changes to the baseline profit rate since last year and sensitivity analysis around some of the key judgements in the methodology.
Part of the SSRO’s methodology is the categorisation of comparator companies in to four activity types: Develop and Make, Provide and Maintain, Ancillary Services, and Construction. The baseline profit rate combines results from Develop and Make and Provide and Maintain. The SSRO has published separate fact sheets for each group for information.