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 subcontracts (QSCs). Section 19(2) of the Defence Reform Act 2014 requires that, for each financial year, the SSRO must provide the Secretary of State with its assessment of the appropriate baseline profit rate and
capital servicing rates.
Under the previous ‘Yellow Book’ regime, the baseline profit rate and capital servicing rates were calculated by the Review Board for Government Contracts (the Review Board), an advisory non departmental public board sponsored by the Ministry of Defence (MOD). The Review Board developed these rates for the final time for the 2015/16 financial year.
In recommending the 2015/16 baseline profit rate and capital servicing rates, the SSRO carried out due diligence on the work undertaken by the Review Board. During this review the SSRO signalled its intent to develop a new
approach to calculating the baseline profit rate in future.
As the independent regulator, the SSRO has determined its methodology for calculating the profit rate following statutory guidance from the Secretary of State to maintain a single baseline profit rate for 2016/17.
This paper sets out the SSRO’s methodology which will be used to determine the baseline profit rate and capital servicing rates for recommendation to the Secretary of State in January this year.
The SSRO’s revised ‘Contract Profit Rate Guidance’ provides details on the adjustments to the baseline profit rate.