UK Gov Sets Profit Rates for Key Defence Deals
The Secretary of State for Defence has announced his determination of the baseline profit rate and capital servicing rates for 2025/26.
The Secretary of State for Defence has today (14 March 2025) announced his determination of the baseline profit rate and capital servicing rates, in line with the SSRO’s recommendation. These rates are used in the process for agreeing the contract profit rate on defence contracts awarded by the Ministry of Defence (MOD) in the absence of a competitive process.
The SSRO welcomes his decision to accept our recommendation. The baseline profit rate for 2025/26 is 8.56%. This has risen from the 2024/25 rate of 8.24% predominantly due to higher profits in the benchmark companies we use in our assessment.
The SSRO has also published analysis of non-competitive contracts that fall within the SSRO’s oversight . The graph below provides an illustration of the rates of profit available in the single source regime. It shows that currently, contract profit rates agreed at the outset of a contract can typically be between 6% and 17% and are on average 9.47%.
Contractors can, and do, earn significantly higher profit rates when they take on risk and perform well throughout the contract duration, but they can also earn less when they fail to perform. For 2023/24, contractors reported on average going on to earn a higher rate of profit than was originally agreed, earning or forecasting to earn a profit rate of 11.57%.
Our assessment provides the flexibility for the MOD to agree contract profit rates which are globally competitive, based on relative risk sharing, whilst ensuring there remains the incentive for contractors to seek opportunities to outperform or increase efficiency and productivity, in return for higher profits.
The range of contract profit rates is comparable to those earned by the MOD’s main suppliers on their broader portfolio of business and to those offered by the MOD’s counterparts in other countries. In addition, the capital servicing rates approved today help ensure a fair and reasonable return on capital for investors.
In making this year’s assessment of the rates, the SSRO has considered current economic conditions, such as changes in the cost of borrowing, and the performance of the companies used in benchmarking comparable activities akin to those undertaken in non-competitive defence work, which underpins the baseline profit rate.
The SSRO’s assessment of the appropriate rates to be used in calculating the contract profit rate for qualifying non-competitive defence contracts during the 2025/26 financial year are both robust and appropriate supporting the SSRO’s aims to ensure good value for money in government expenditure and fair and reasonable prices for contractors.
The SSRO continues to work with the MOD – including as part of the current Strategic Defence Review and development of the new Defence Industrial Strategy – in considering how the single source contracting regime should evolve to deliver better outcomes for defence and the wider UK economy. This work is informed by the SSRO’s engagement with those utilising the regulatory framework, both MOD and industry, and the feedback they provide.
The rates will apply to qualifying non-competitive defence contracts that use the pricing formula, entered into from 1 April 2025 and can be found in can be found in this written ministerial statement in Hansard and in the SSRO’s guidance on the baseline profit rate and its adjustment . The official public record will also be available in The Gazette at a later point today (14 March) and will be linked to.
https://www.gov.uk/government/news/starting-point-for-agreeing-profit-rates-on-crucial-defence-contracts-announced-and-contract-profit-rate-analysis-published