Baseline Profit Rate assessment: Proposed methodology updates
Source: gov.uk (2025-06-30)

We are proposing to update the baseline profit rate (BPR) methodology in response to two external factors changing and to conclude on the two proposals suggested during the BPR activities review phase 2 consultation in 2024.

As part of determining the baseline profit rate (BPR) for non-competitive qualifying defence contracts and subcontracts, we identify benchmark comparable company profits using criteria stated in the published BPR methodology. Keeping this methodology accurate, up to date and reflective of appropriate comparators to ensure a fair and reasonable profit and contract price is critical to industries’ role in delivering the objectives of the Strategic Defence Review as well as ensuring value for money (VfM) for taxpayers. We are proposing amendments to the criteria used to select these companies in response to two external changes (detailed below). We are keen to hear our stakeholders’ views.

Each year we are required to provide the Secretary of State for Defence with an assessment of the BPR. The BPR is the first step of the four-step process in determining the contract profit rate (CPR) that applies in determining the price of Ministry of Defence (MOD) contracts let without competition, known as Qualifying Defence Contracts (QDCs) and Qualifying Sub-Contracts (QSCs): more commonly known as single source contracts. The BPR is only the starting point for agreeing contract profit rates, and 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. This structure can be applied to provide a strong incentive for suppliers to control risks and improve productivity to capture the gains of cost reduction as additional profit.

To arrive at the BPR, we have a robust BPR methodology - available on our website (https://assets.publishing.service.gov.uk/media/67c881a875d7505462fc65ec/Single_source_baseline_profit_rate_and_capital_servicing_rates_methodology_March_2025.pdf) - which has been developed through stakeholder use and feedback over the past decade. We keep this BPR methodology up to date to ensure it remains appropriate and relevant: the BPR is a vital building block to delivering fast paced defence procurement of the most strategically significant capabilities for the nation, whilst ensuring value for money for taxpayers as well as providing a fair and reasonable price for contractors.

The methodology relies on selecting comparable companies to undertake the benchmarking that forms part of establishing the BPR, using codes from a classification system called NACE (Nomenclature of Economic Activities) which categorises businesses based on their economic activities. The NACE database has been updated recently, meaning the BPR methodology must be updated accordingly. Similarly, the BPR methodology has a company size threshold which filters out small companies and it is proposed that this aspect of the methodology is updated to remain consistent with the new UK regulations which revise the company size thresholds. We are also looking to conclude on the two remaining proposals from the previous BPR activities review phase 2 consultation from 2024 which were deferred pending further investigation.

We are consulting on these changes to keep the BPR methodology representative, up to date, and relevant to ensure we can produce a baseline profit rate which supports our aims of ensuring value for money and fair and reasonable prices whilst supporting the nation at this critical period.

Responding to the consultation

The consultation runs until 5pm Monday 11 August 2025. Written responses should be sent:
- to: xxx@xxx.xx (mailto:xxx@xxx.xx) (preferred).
- Baseline profit rate consultation, SSRO, G51/G52, 100 Parliament Street, London, SW1A 2BQ.
If you would like to discuss any aspect of the consultation during the consultation period, please contact us on xx-xxxx-xxxx.