As required by Section 19(4) of the Defence Reform Act 2014, the Secretary for Defence has announced that he has set the baseline profit rate for single source defence contracts at 8.31%, based on an underlying rate of 8.19%. This is in line with the rate recommended by the Single Source Regulations Office (SSRO). It will come into effect from 1 April 2021.

In addition to the main rate the Secretary of State has also announced an additional baseline profit rate of 0.057%. This will only apply to Qualifying Defence Contracts where:

i. the contract is between Secretary of State and a company incorporated under the Companies Act that is wholly owned by the UK Government; and

ii. both parties to the contract agree that it should apply.

The intention is that this rate can be used to set Contract Profit Rates at a rate that does not result in such companies making a profit should it not be appropriate for them to do so. Application of the the five further steps set out in Section 17 of the Defence Reform Act 2014 may result in a rate that is slightly different from zero on additional contracts.

Setting this additional rate diverges from the SSRO’s recommendation. The SSRO has welcomed the intention to bring contracts into the regime where it is appropriate that the contractor does not make a profit. This will enable the pricing and transparency provisions of the regulatory framework to be applied to both the contract and relevant subcontracts, which provisions are intended to assist the Government to obtain value for money and contractors to be paid fair and reasonable prices.

The Secretary of State has also accepted the SSRO’s recommendation on the Capital Servicing Allowance and SSRO funding adjustment to be applied to single source defence contracts. These will also come into effect from 1 April 2021.

Table 1: SSRO’s Recommended Rates agreed by the Secretary of State for Defence