Introduction to the Contract Profit Rate

1.1

Section 15 of the Defence Reform Act 2014 (the “Act”) and regulation 10 of the Single Source Contract Regulations 2014 (the “Regulations”) require that the price payable under a qualifying contract be determined in accordance with the formula:
$(\mathrm{Contract\; Profit\; Rate}\times \mathrm{Allowable\; Costs})+\mathrm{Allowable\; Costs}$

1.2

The contract profit rate (CPR) is expressed as a percentage mark-up on Allowable Costs.

1.3

Section 17(2) of the Act and regulation 11 of the Regulations require that the CPR for any qualifying defence contract must be calculated by taking the following six steps:

1.4

In accordance with section 30 of the Act, Part 2 of the Act and the Regulations “apply to qualifying sub-contracts (and to sub-contractors) as they apply to qualifying defence contracts (and to primary contractors).” This means that the six steps also apply to calculating the contract profit rate for qualifying sub-contracts.

1.5

Section 18 of the Act provides for the Single Source Regulations Office (SSRO) to issue guidance in relation to the steps set out in section 17(2). This document contains the guidance to be used when determining:

1. Step 1 - baseline profit rate;
2. Step 2 - cost risk adjustment;
3. Step 3 - profit on cost once adjustment;
4. Step 4 - SSRO funding adjustment;
5. Step 5 - incentive adjustment; and
6. Step 6 - capital servicing adjustment.

1.6

The SSRO has provided separate guidance that will assist the contracting parties to determine the Allowable Costs of a contract.

1.7

This is statutory guidance issued by the SSRO under section 18(1) of the Act. It applies to all qualifying defence contracts (QDCs) and qualifying sub-contracts (QSCs). This document updates the version published in August 2021 to include the baseline proft rate, government owned contractor rate, capital servicing rates, and SSRO funding adjustment that apply for the fnancial year commencing 1 April 2022.

SSRO guidance: Previous versions of the SSRO's guidance are not reproduced on this website. You can find them on the SSRO's website.

1.8

It is a legal requirement to have regard to this guidance when applying the six steps. This document provides guidance on the adjustments to make to the baseline profit rate when determining the contract profit rate for all QDCs and QSCs in respect of which the time of agreement (as defined in regulation 2(1)) is on or after the date this guidance takes effect. The SSRO has provided separate guidance that will assist the contracting parties to determine the time of agreement for a particular QDC or QSC.

1.9

In relation to any QDC, (or QSC), the primary contractor (or sub-contractor) must provide statutory reports as described in Part 5 of the Regulations. The SSRO has provided separate guidance that will assist defence contractors with preparing and submitting the reports required.

1.10

Regulation 23(1) requires a contract pricing statement be provided for the QDC within one month of the initial reporting date. As stated in regulation 23(2)(d) the contract pricing statement has to describe the calculation made under regulation 11 to determine the contract profit rate. This includes all adjustments that were made under steps 1 to 6 as detailed in this guidance document.

1.11

In relation to a QDC, regulation 20 requires the primary contractor to keep ‘relevant records’. In the case of a QSC, it is the sub-contractor who is so required. Section 23 of the Act defines relevant records as accounting and other records (whether in hard or electronic form) which the primary contractor or sub-contractor, as the case may be, ‘may reasonably be expected to keep’ and ‘which are sufficiently up-to-date and accurate’ for use by the Secretary of State for specific purposes, such as verifying certain matters relating to the price payable under a QDC or QSC. Such matters may include the calculation of the contract profit rate.

1.12

The Act and Regulations make specific provision for opinions and determinations by the SSRO on the appropriateness of a cost risk adjustment (step 2), profit on cost once adjustment (step 3), or capital servicing adjustment (step 6). The Act also makes general provision for opinions by the SSRO on any matter in relation to qualifying contract or proposed qualifying contract on a joint referral. For further information, please refer to the SSRO’s guidance on referrals.