Defence Secretary, Sir Michael Fallon, has announced that the baseline profit rate for contracts under the Single Source Contract Regulations will be reduced from 8.95% to 7.46% from 1st April 2017.
The intention is to give better value for money to taxpayers and fairer profits for industry, with all savings being reinvested to provide new equipment to the Armed Forces.
Single Source Contracts have been used by the MOD since 2014 following the Currie Review, which was designed to ensure non-competitive tenders still delivered the best value to the government and taxpayer, whilst giving fair profit to industry. Due to the nature of defence and national security, and also the specialist nature of many suppliers, the MOD can often be in the position of awarding contracts without competition.
By lowering the baseline profit rate, the UK taxpayer can be assured the government is getting the very best deal, even without tender competition.
The Government is keen to foster industry and innovative suppliers, but it is essential that industry contributes to savings to the UK budget. The new rate will still provide business with a fair return, whilst freeing money for vital equipment.
Defence Secretary Michael Fallon said: “Taxpayers can be confident that this reduced profit rate will deliver better value for money on contracts as our defence budget rises and we deliver our £178bn equipment programme.
“The defence sector is important for our prosperity, supporting high skilled jobs, and this rate provides a fair return comparable with that in other international markets.”
The figure of 7.46% is the starting point for calculating the profit on each contract before taking into accounts factors such as risk and the amount of their own money suppliers invest. The new rate is similar to profits earned by government defence suppliers in Western Europe and North America.
The Written Ministerial Statement on the new rate is available here
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