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Publish Date : 02-Feb-2015

New defence regulator recommends reduced profit rate for contractors, and launches tighter rules on Ł6 billion of MOD annual spend. The newly established regulator overseeing Ministry of Defence’s (MOD’s) single source procurement of defence assets and services has discharged its first 2 core responsibilities. In its first action, the Single Source Regulations Office (SSRO) proposed a reduction in the 2015 baseline profit rate paid to defence contractors by the MOD in single source defence contracts. The SSRO then published new guidance on what costs are ‘allowable’ under such contracts, following a first principles review of the existing framework.

Baseline profit rate: The SSRO is required annually to review the figures used to determine the baseline profit rate and contract profit rate, which the MOD uses to price its single source contracts with defence contractors. The SSRO must also publish the review and make an annual recommendation to the Secretary of State for Defence on whether the profit rates should be adjusted.

In 2015 Contract Profit Rate, published on 23 January 2015, the SSRO recommends a baseline profit rate of 10.60 % for 2015, a 0.10 % reduction on the rate for 2014. The 2015 baseline profit rate as a percentage of cost of production in 2013/14 is 9.88 %, down from 10.92 in the previous year.

Under the existing ‘Yellow Book’ regime, which the SSRO replaces, the rates were calculated annually by the Review Board for Government Contracts, using the principle of ‘comparability’ with the prevailing profit rate across UK industry as a whole. As the SSRO was not in a position to develop a new methodology for determining the rates in its first months of existence, it agreed that the review board should develop the 2015 baseline profit rate and capital servicing allowances (one of the adjustments to the baseline profit rate). The SSRO Board has endorsed the review board’s recommendation, having received adequate assurance about the process and data used to produce the rates.

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