Baseline profit rate (step 1)

2.1

Section 17(2) of the Act, and Regulation 11(2), set out the requirement for the baseline profit rate as the first step in determining the contract profit rate to be applied in the pricing formula:

“Take the baseline profit rate which is in force at the relevant time”.

2.2

The relevant time should be the time of agreement, as defined in regulation 2(1). The SSRO has provided separate guidance that will assist the contracting parties to determine the time of agreement for a particular QDC or QSC.

2.3

The calculation of a contract profit rate must begin with a baseline profit rate.

2.4

Section 19(1) of the Act requires the Secretary of State to determine the baseline profit rate for each financial year.

2.5

The SSRO is required annually to review the figures used to determine the contract profit rate for pricing single source contracts. Section 19(2) of the Act requires that, for each financial year, the SSRO must provide the Secretary of State with its assessment of the appropriate baseline profit rate for QDCs. The SSRO has published information on its methodology to aid those who may wish to scrutinise or replicate the approach taken.

2.6

Section 19(4) of the Act states that the Secretary of State must publish the baseline profit rate for each financial year in the London Gazette, no later than 15 March in the preceding financial year. The baseline profit rates in force for the financial year commencing 1 April are:

2.7

The Baseline proft rate to apply to contracts between the Secretary of State and a company wholly owned by the UK Government and where both parties agree ("government owned contractor rate”) will only apply to qualifying defence contracts where:

1. the contract is between Secretary of State and a company incorporated under the Companies Act that is wholly owned by the UK Government; and
2. both parties to the contract agree that it should apply.

2.8

The guidance in this document pertaining to steps 2 to 6 applies irrespective of which baseline profit rate is taken. The SSRO intends to consult on whether any further revisions are required to its guidance and will publish an update in due course.