8.95 per cent baseline profit rate for defence contractors

The Ministry of Defence (MoD) has announced a new 8.95 per cent baseline profit rate for contracts awarded without competition, which will be set for the next 12 months.

The figure represents a 15 per cent reduction in the rate applied to ‘single source’ contracts signed during 2015. The move will reduce profits in 2016 on such contracts, with further reductions expected in future years generating significant savings which will be reinvested in defence.

The new rate was recommended by the Single Source Regulations Office (SSRO) and will apply to new qualifying contracts signed from 1 April 2016 to 31 March 2017. The SSRO was formed to ensure that such contracts were charged at a reasonable rate both for taxpayers and the companies involved.

The nature of the MoD’s work means that contracts are often awarded to single source contractors because there is one specialised supplier or to ensure the procurement does not risk national security.

The baseline profit rate acts as the starting point for agreeing the profit rate for individual contracts, taking into account factors such as risk, performance incentives and capital servicing rates.

Defence Secretary Michael Fallon said: “Taxpayers can be confident that we are getting better value for money for single source defence contracts as we deliver our £178 billion equipment programme. This profit rate provides a fair return to industry while delivering savings that will be reinvested in defence.”