News story

New baseline profit rate for defence contractors announced

The baseline profit rate for contracts awarded without competition will be set at 8.95% for the next 12 months.

The move is designed to ensure that better value is obtained for taxpayers. It represents a 15 per cent reduction in the rate applied to so-called ‘single source’ contracts signed during 2015. That will reduce profits in 2016 on such contracts, with further reductions expected in future years creating significant savings, all of which will be reinvested into defence.

The rate was recommended to the Ministry of Defence by the Single Source Regulations Office (SSRO). It will apply to new qualifying contracts signed from 1 April 2016 to 31 March 2017. The unique nature of much of the MOD’s work means the department often has to award contracts to single source contractors, either because there is one specialised supplier or because the procurement must not risk national security.

The SSRO was formed in 2014, following the Currie Review into single source procurement, to ensure that such contracts were charged at a reasonable rate both for taxpayers and the companies involved.

Defence Secretary Michael Fallon said:

Taxpayers can be confident that we are getting better value for money for single source defence contracts as we deliver our £178bn equipment programme. This profit rate provides a fair return to industry while delivering savings that will be reinvested in defence.

The baseline profit rate acts as the starting point for agreeing the profit rate for individual contracts, taking into account factors such as risk, performance incentives and capital servicing rates. The new rate is in line with that applying to comparable defence suppliers in Western Europe and North America.