2022 contract profit rate recommendation
2022/23 baseline profit rate, capital servicing rates and SSRO funding adjustment recommendation
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The Minister for Defence Procurement, on behalf of the Secretary of State for Defence, has announced his determination of the baseline profit rate, SSRO funding adjustment and capital servicing rates for fixed and working capital for this year. These rates will apply to qualifying contracts entered into from 1 April 2022. The rates can be found in The Gazette and in the SSRO’s guidance on the baseline profit rate and its adjustment.
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). We gave particular attention in this year’s assessment to the effects of the COVID-19 pandemic. We found the pandemic had varying effects on the profit benchmarks which contribute to the BPR assessment. Having carefully analysed the data, we were able to apply our methodology as intended. This year’s BPR recommendation used a four-year average of the underlying annual rates, rather than the usual three, to enhance the stabilising effect of averaging in our assessment of the BPR.
The Secretary of State went further than the SSRO to remove the effects of COVID-19 by fixing the BPR at the same level as in 2021. We welcome the Secretary of State’s support for our methodology and the actions we have taken in light of the pandemic and the expressed aim to return to a market based benchmark which uses our established methodology from next year. The reasons for the Secretary of State’s determination are found in this Written Ministerial Statement.
This year, in addition to the standard baseline profit rate, the SSRO recommended a baseline profit rate to apply to contracts between the Secretary of State and a company wholly owned by the UK Government where both parties agree. This rate was introduced in 2021 by the Secretary of State, and the reasons for its introduction can be found here: https://www.thegazette.co.uk/notice/3760612.
The SSRO has published information on our methodology and its application to aid those who may wish to scrutinise or replicate the approach taken for the SSRO’s 2022/23 recommendations. This includes supporting information detailing the SSRO’s recommendation to the Secretary of State, analysis of changes to the baseline profit rate since last year and sensitivity analysis around some of the key features of the methodology.