Press release

Major changes proposed for profit rate calculations on single source defence contracts

The Single Source Regulations Office has today published a consultation on how baseline profit rates for UK single source government defence contracts should be calculated.

Picture of Lynx helicopter lowering man onto a vessel

The changes proposed are the most far reaching since 1968.

Single source procurement represented around 53 per cent of new MOD contracts in 2014/15 and the MOD spent approximately £8.3 billion on single source contracts that year.

The most radical new measure is the proposal that there should be different baseline profit rates for different types of work. The consultation document sets out six possible types:

  1. Contract manufacture (e.g. manufacturing / assembly to specification and order)

  2. Contract design and development (e.g. research and development of intellectual property to order)

  3. Ancillary support services (e.g. back office and routine support services, for example clerical work or upkeep of grounds and facilities)

  4. Equipment upkeep, maintenance and support (including training) (e.g. servicing and training contracts for MOD equipment, spare parts including high tech maintenance)

  5. Capacity provision (e.g. provision of asset hours, such as flying hours for an aircraft, to MOD requirements)

  6. IT (e.g. provision of IT related services)

The second departure from the past is the proposed inclusion of comparisons with the profit achieved by companies headquartered outside the UK.

Explaining the proposals, Jeremy Newman, Chair of the SSRO, said:

The current approach provides a single baseline profit rate for every type of defence work. However, defence contracts are increasingly varied in nature, complexity and risk and those differences should be reflected in the profit they receive.

Secondly, while it is still right to decide the rate by looking at the profits achieved by a range of companies, we intend to make sure those companies operate in comparable sectors. We should also look to Western Europe and North America, not just at companies headquartered in the UK, as at present.

The consultation document can be downloaded from our website and the deadline for responses is 20 November 2015.

Published 25 September 2015