Each year, the Secretary of State for Defence receives a recommendation of the profit rate (known as the baseline profit rate or BPR) from the SSRO. This rate is used in the following year to set profits for contracts that the MOD awards without competition. The BPR has been applied to contracts worth over £105 billion since 2014, including over £8 billion of estimated contract profit.
The BPR is the starting point for the agreement of contract profit rates and adjustments can be applied to tailor the rate to suit the specific contract in question.
As part of determining the annual baseline profit rate, we use benchmark profit data of companies who undertake activities that are comparable to those that contribute to the delivery of single source contracts.
In July, we consulted on proposals for changes to the way we select those companies. Stakeholders responded and we have updated our methodology to rationalise the activity types and refine the scope of the activities used in our analysis.
The improvements published today further strengthen the robustness of our assessment methodology. The BPR - currently 8.24 per cent - is the first in a series of steps used by the contracting parties to derive the contract profit rate, which is typically higher than the BPR. In 2023/24 contractors reported completed contracts earning 11.57 per cent profit on average. The majority of those completed contracts achieved a higher rate than was originally agreed when pricing, as a result of good contractor performance or successful risk mitigation during the contract.
We appreciate everyone who participated in the consultation and shared their opinions with us. We continue to gratefully receive any feedback and comments on further suggestions to enhance the baseline profit rate assessment process.
