The Single Source Regulations Office (SSRO) has published new guidance on how companies and the Ministry of Defence should calculate the profit allowed on single source contracts.
This follows the announcement by the Secretary of State for Defence last week that, for qualifying contracts signed from 1 April 2016, the baseline profit rate will be 8.95 per cent. The equivalent figure for 2015/16 was 10.60 per cent.
Single source procurement represented around 53 per cent of new MOD contracts in 2014/15 and the MOD spent approximately £8.3 billion on single source contracts that year – a figure which is expected to increase as a result in the additional investment in equipment set out in the November 2015 Strategic Defence and Security Review.
The baseline rate is the starting point for agreeing the profit rate for each contract – it is not the actual profit rate which will be achieved. For each individual contract, adjustments can be made to take account of factors such as risk, performance incentives and capital servicing rates. The new guidance published today sets out the process for calculating those adjustments.
Across the contracts which were examined by the SSRO by March 2016, the average profit rate actually achieved was 12.48 per cent compared with a baseline rate at the time of 10.60 per cent.
Marcine Waterman, Chief Executive of the SSRO, said:
“Setting a fair baseline profit rate and being clear about what adjustments can be made is critical to maintaining the credibility of single source procurement. When considering the profit rate, with single source defence contracting there is no procurement risk, there is no credit risk, and it comes with a government backed guarantee.
The 8.95 per cent rate announced by the Secretary of State is a three year rolling average: assessing profits across three years smooths out the impact of any year-to-year changes. Comparable defence companies in Western Europe made an average profit of 7.26 per cent in 2014 and those in North America achieved 8.28 per cent.”