Baseline Profit Rate 2022-23: Single Source Defence Contracts

I am today announcing that I have set the baseline profit rate (BPR) for single source defence contracts at 8.31%. This differs from the SSRO’s recommendation of 8.07%.

The SSRO calculate the BPR by taking an average of the methodology of profits earned by comparable companies, usually over the preceding three years. This year’s calculation therefore includes profits reported by firms in the comparator group for the year ending March 2021, which was the year when covid-19 had its largest economic impact. The SSRO recommended reducing the immediate effect on the BPR by using a four year average rather than the usual three. While I believe this was a sensible approach, and I support the principles of the SSRO approach, I have decided that it would be fairer to remove the effects of covid-19 completely from the calculation by using the average of the three years prior to 2021.

My reason for this is that while this BPR will be used to calculate the profit payable on single source work contracted in 2022-23, much of the work will be undertaken several years in the future, given the long-term nature of many Defence contracts. I believe it would be unfair to include in this rate the effects of an event that is as extraordinary as covid-19. In reaching this conclusion I have drawn on the analysis produced by the SSRO on the extent to which last year’s rate was unusual, and by my officials on its potential long-term effects.

I have asked the SSRO to engage with industry and my officials in returning—next year—to a market-based benchmark based on their established methodology that reflects my intention to remove the impact of covid-19. For the same reasons, I am also using the figures calculated by the SSRO for the last year before covid for the three capital servicing rates.

Last year I introduced a net zero Baseline Profit Rate for Government-to-Government Contracts. The SSRO has incorporated this into their recommendation this year. I have accepted this recommendation. I am also announcing that I am accepting the SSRO recommendation for their funding adjustment. Neither of these figures are significantly affected by wider economic factors.

These rates will also be published in the London Gazette, as required by the Defence Reform Act 2014.

All of these new rates will come into effect from 1 April 2022.

Recommended Rates agreed by the Secretary of State for Defence

Element

2021 Rates

2022 Rates

Baseline Profit Rate (BPR) (% on contract cost)

8.31%

8.31%

Baseline Profit Rate to apply to contracts between the Secretary of State and a company wholly owned by the UK Government and where both parties agree (% on contract cost)

0.057%

0.046%

Fixed Capital Servicing Rate (% on Fixed Capital employed)

3.27%

3.27%

Working Capital Servicing Rate (% on positive Working Capital employment)

1.33%

1.33%

Working Capital Servicing Rate (% on negative Working Capital employed)

0.65%

0.65%

SSRO

0.057%

0.046%

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