Single source baseline profit rate methodology
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Detail of outcome
The SSRO launched a consultation in June 2022 on the approach to the 2023/24 baseline profit rate assessment. We received six responses. We would like to thank all those who responded to the consultation for sharing their views with us. Where respondents gave permission for their responses to be published these are available below.
For the 2022/23 rates recommendation, the SSRO applied its established methodology, giving particular attention to the effects of the COVID-19 pandemic. The SSRO’s recommendation used a four-year average of the underlying annual rates, rather than the usual three. This was in response to the heightened variability in the data which we found during the period of the pandemic.
In determining the rates for 2022/23, the Secretary of State went further than the SSRO to remove the effects of COVID-19 by excluding data for financial year 2020[1], resulting in the baseline profit rate and the capital servicing rates remaining at the same level as in 2021/22. In a written statement to Parliament, the Minister for Defence Procurement said:
I have asked the SSRO to engage with industry and my officials in returning (next year) to a market based benchmark based on their established methodology that reflects my intention to remove the impact of Covid-19”.[2]
This consultation response aims to support delivery of the Secretary of State’s intent, and explains to stakeholders our proposals for the 2023/24 rates assessment.
The objective for the 2023/24 rates assessment is, as in past years, to recommend predictable stable rates that support value for money for the government in its expenditure on qualifying defence contracts and fair and reasonable prices for contractors.
The consultation response concludes that:
In line with the Secretary of State’s announcement, we will return to a market-based benchmark based on our established methodology that reflects the intention to remove the impact of COVID-19. The available macroeconomic data shows an adverse COVID-19 impact in FY2020 and subsequent recovery in FY2021. This improvement in FY2021 is consistent with the profit data for comparator companies used in the 2022/23 rates assessment. The SSRO has not yet finalised collecting and assessing all FY2021 comparator group data. Stakeholders should note that based on this evidence to date, the SSRO is currently minded to exclude FY2020 company financial data and to include FY2021 company financial data. If the SSRO proceeds on this basis, its assessment of the baseline profit rate would be calculated as a three year average of FY2021, FY2019 and FY2018. We will keep under review the FY2021 company information and the final decision will be made in January 2023. If FY2021 company financial data is not used the most recent data available to calculate a baseline profit rate as a three year average would be FY2019, FY2018 and FY2017.
[1] FY2020 means the latest year ending on or before 31 March 2021 that is addressed by the financial statements of each comparator company. For most comparator companies this is the year ended 31 December 2020 but some company financial statements cover different time periods, for example the year ended 31 March 2021, or the year ended 30 June 2020
[2] https://questions-statements.parliament.uk/written-statements/detail/2022-03-28/hcws726
Feedback received
Original consultation
Consultation description
The SSRO is today launching a consultation on the approach to the 2023/24 baseline profit rate assessment.
During the 2022/23 rates recommendation, the SSRO applied its established methodology, giving particular attention to the effects of the COVID-19 pandemic. The SSRO’s recommendation used a four-year average of the underlying annual rates, rather than the usual three. This was in response to the heightened variability in the data which we found during the period of the pandemic.
In determining the rates for 2022/23, the Secretary of State went further than the SSRO to remove the effects of COVID-19 by excluding data from the most recent year. The baseline profit rate and the capital servicing rates remained at the same level as in 2021/22. In a written statement to Parliament, the Minister for Defence Procurement said:
I have asked the SSRO to engage with industry and my officials in returning (next year) to a market based benchmark based on their established methodology that reflects my intention to remove the impact of Covid-19.[1]
This consultation aims to support delivery of the Secretary of State’s intent, and seeks stakeholder input on proposals for the 2023/24 rates assessment, that the SSRO will consider before deciding its approach.
The objective for the 2023/24 rates assessment is, as in past years, to recommend predictable stable rates that support value for money for the government in its expenditure on qualifying defence contracts and fair and reasonable prices for contractors.
Responding to the consultation
This consultation is open to all interested persons. We particularly welcome comments from individuals or organisations with an interest in single source defence procurement and ensuring that good value for money is obtained in government expenditure on qualifying contracts and that the prices paid under these contracts are fair and reasonable.
The consultation runs until 5.00 pm Friday 16 August 2022. Written responses should be sent:
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by email to: consultations@ssro.gov.uk (preferred),
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by post to: Baseline profit rate consultation responses, SSRO, Finlaison House, 15-17 Furnival Street, London, EC4A 1AB,
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by telephone including arranging an appointment to speak to the SSRO about the consultation: 020 3771 4767
[1] https://questions-statements.parliament.uk/written-statements/detail/2022-03-28/hcws726
Documents
Last updated 6 October 2022 + show all updates
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Consultation response published
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First published.