SSRO reviews single source defence contracts’ profit rate calculations

Image courtesy SSRO

Each year, the SSRO undertakes a robust process to assess the appropriate baseline profit rate (BPR) for single source defence contracts using the published BPR methodology.

The BPR is the first step of the four-step process in determining the contract profit rate that applies in determining the price of Ministry of Defence (MoD) contracts let without competition, known as Qualifying Defence Contracts (QDCs) and Qualifying Sub-Contracts (QSCs). It is a vital building block to delivering fast paced defence procurement of some of the most strategically significant capabilities for the nation.

The BPR is only the starting point for agreeing contract profit rates and contractors can and do earn significantly higher rates when they take on risk and perform well throughout the contract duration but they can also earn less when they fail to perform.

SSRO are proposing amendments to the criteria used in the BPR methodology to select comparable companies in response to two external changes:

• The methodology relies on selecting comparable companies to benchmark their profits using codes from a classification system called NACE (Nomenclature of Economic Activities), which categorises businesses based on their economic activities. The NACE database has been updated, meaning the BPR methodology must be updated accordingly.
   
• The methodology has a company size threshold which filters out small companies and it is proposed that this aspect of the BPR methodology is updated to remain consistent with the new UK regulations which revise company size thresholds.

SSRO are also looking to conclude on the two remaining proposals from the previous BPR activities review phase 2 consultation from 2024.

SSRO are consulting on these changes to keep the BPR methodology accurate, up to date and reflective of appropriate comparators. This will help us to produce a baseline profit rate which supports our aims of ensuring value for money for the taxpayer and fair and reasonable prices for contractors in support of the delivery of essential defence capabilities in the UK.

The consultation will run until 5pm on 11th August 2025. 

For more information, and details of how to respond, please see the consultation webpage.