Research and analysis

Capital servicing adjustments in qualifying defence contracts

The Single Source Regulations Office has published analysis of the capital servicing adjustments included in the contract profit rates for qualifying defence contracts (QDCs) and qualifying sub-contracts (QSCs).

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When agreeing a contract profit rate for qualifying defence contracts, contractors and the MOD must follow a six-step process. The sixth step is the capital servicing adjustment (CSA), which aims to ensure that the primary contractor receives ‘an appropriate and reasonable return’ on the fixed and working capital it employs in contract delivery. This bulletin presents analysis of the contract profit rates and CSAs reported by contractors for QDCs and QSCs agreed between 1 April 2015 and 30 September 2016.

The analysis shows that in 2015/16 the average reported contract profit rate was 11.52 per cent. In the first half of 2016/17 the average reported contract profit rate was 10.97 per cent some 2 percentage points above the baseline rate of 8.95.

On average, the CSA is the largest adjustment made to the baseline profit rate when calculating the contract profit rate. It increased the average contract profit rate by 1.10 percentage points in 2015/16 and 1.55 percentage points in the first half of 2016/17. Of the 46 contracts examined, 11 had a CSA of zero. The other 35 had CSAs ranging from 0.30 percentage points to 3.67 percentage points.

The values reported are those agreed at contract signing, and may not reflect those at contract completion.

Published 25 October 2016