2025 contract profit rate assessment
Source: gov.uk (2025-03-14)

2025/26 baseline profit rate, capital servicing rates and government owned contractor rate

The Secretary of State for Defence has announced his determination of the rates to be used for 2025/26, and we are delighted that the Secretary of State has accepted the SSRO’s assessment. The baseline profit rate for 2025/26 is 8.56 percent which is a 0.32 percentage point increase from last year and the capital servicing rates have on average increased by 1.19 percentage points to 3.85 percent. These rates will apply to qualifying contracts entered into from 1 April 2025 and can be found in The Gazette (https://www.thegazette.co.uk/notice/4838461) and in the SSRO’s guidance on the baseline profit rate and its adjustment (https://www.gov.uk/government/publications/guidance-on-the-baseline-profit-rate-and-its-adjustment-version-82).

The baseline profit rate and capital servicing rates continue to serve as the key points for agreeing contract profit rates for qualifying single source contracts. Our assessment provides the flexibility for the Ministry of Defence 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. Where contractors take on risk and perform well through the life of the contract, they can achieve considerably higher contract profit rates whilst those who fail to perform can earn less. Overall, our approach supports a stable contracting environment, which lays the foundations for investment, in line with the government’s growth agenda and the aims and intent of both the Defence Industrial Strategy and the ongoing Strategic Defence Review.

This robust methodology and the associated processes provide a consistent and stable starting point for the Ministry of Defence to agree globally competitive contract profit rates with its suppliers to suit the specific circumstances of the qualifying contract. At a time when the efficient and effective delivery of the UK’s critical defence capabilities has never been more important, this aspect of the SSRO’s work helps to provide a reasonable and fair basis for contract negotiations whilst protecting value for money for the taxpayer.

Transparency is at the heart of the SSRO’s principles, and so we continue to publish our methodology which has been updated to reflect the outcomes from the 2024 public consultation and explains the process undertaken. We have also published factsheets detailing the results achieved and a supporting pack of information which combined will help those wishing to scrutinise and/or replicate the approach. We continue to publish a list of key questions and answers on this year’s rates assessment which includes further explanatory information on the changes made from the outcomes of the public consultation.

The SSRO’s well established methodology has been enhanced this year by those consultation outcomes which recommended streamlining the two activity groups ‘Develop and Make’ and ‘Provide and Maintain’ into a new single activity group called ‘Develop, Make and Support’ and also through removing rental and leasing type companies from that comparator group. This has simplified the process and ensures the methodology incorporates feedback from our stakeholders.

As in previous years, we considered current economic conditions, such as the performance of the benchmark companies underpinning the baseline profit rate and the changes to borrowing costs. We have taken measures to ensure these are reflected fairly in the recommended rates. This has resulted in higher capital servicing rates that reflects the higher costs of borrowing ensuring a fair and reasonable return on capital for investors.

We believe our assessment is both robust and appropriate and supports the SSRO’s aims to ensure good value for money in government expenditure and fair and reasonable prices for contractors.

In line with last year, the SSRO recommended a baseline profit rate of zero to apply to contracts between the Secretary of State and a company wholly owned by the UK Government, where both parties agree to this. This rate was introduced in 2021 by the Secretary of State and the reasons for its introduction can be found here: https://www.thegazette.co.uk/notice/4579528.