2024 contract profit rate assessment
2024/25 baseline profit rate and capital servicing rates
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The baseline profit rate and capital servicing rates continue to be the most significant determinants of contract profit rates and help ensure pace and agility in the way that single source contracts can be priced. The Secretary of State for Defence has now announced his determination of the rates for this year and we welcome the Secretary of State’s decision to accept our assessment. The baseline profit rate for 2024/25 is 8.24 per cent, 0.05 percentage points down on last year and the capital servicing rates are on average up by 0.96 percentage points to 2.66 per cent. These rates will apply to qualifying contracts entered into from 01 April 2024 and can be found in The Gazette and in the SSRO’s guidance on the baseline profit rate and its adjustment.
This year’s assessment uses the SSRO’s established methodology, which provides a predictable and stable basis for the MOD and its suppliers to agree profit rates for single source defence contracts. This process has been further streamlined this year, lowering the steps from six to only four, reducing complexity and increasing the accessibility of the regime. The baseline profit rate is the first of four steps that together determine the rate of profit on a contract, and from which a range of contract profits can be agreed to suit the specific contract in question, at rates comparable to those earned by the MOD’s main suppliers on their broader portfolio of business.
We continue to promote transparency about our rates assessment and have again published information on our methodology and its application to help anyone who may wish to scrutinise or replicate the approach we have taken this year. Further details of the SSRO’s assessment and the impacts of the amendments to the regulations can be found in the SSRO’s key questions and answers on this year’s rates assessment.
In making this year’s assessment, we have also considered current economic conditions, such as higher inflation and interest rates, and have taken measures to ensure these are reflected fairly in the rates. For example, we have recommended higher capital servicing rates to reflect the higher borrowing costs for industry. Limited change in the BPR this year supports a stable ongoing position that helps industry plan and promotes investment, consistent with the defence and security industrial strategy. We believe that our assessment is both robust and appropriate and supports the SSRO’s aims to ensure good value for money in government expenditure and fair and reasonable price for contractors.
In addition to the standard baseline profit rate, the SSRO has recommended a baseline profit rate of zero to apply to contracts between the Secretary of State and a company wholly owned by the UK Government, where both parties agree to this. 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/4579528. The step 4 SSRO funding adjustment from the list of rates that the SSRO is required assess and it will no longer feature in the determination of profit rates of QDCs or QSCs.