In 2014/15, the Ministry of Defence (MoD) placed new contracts worth £11.5 billion. Of these, £5.4 billion were “single source” or non-competitive contracts for military goods works and services.
There are some contracts that can only realistically be given to one company (eg the Successor Programme) so in the absence of competition to reduce prices, profit rates are regulated. The body tasked with this is the Single Source Regulations Office (SSRO).
For many years, profit rates on single source contracts have been based on the average profit margins of a range of manufacturing companies. But over time the range has become too broad and includes companies irrelevant to defence. Pharmaceutical firms with margins of 20 per cent, tobacco companies with margins of 30 per cent and food companies with margins of 3 per cent were all included in the calculation. Companies who now enter single source contracts receive a fixed profit rate of 8.95 per cent.
The fact that the same profit rate has been applied to contracts for highly complex weapon systems and cleaning barracks has meant taxpayers have often received poor value for money.
As the Chairman of the SSRO says ‘some contracts carry little risk and we argue should not be rewarded with high profit margins’. Currently, the lack of discretion between those who ‘build a missile or submarine’ and those who ‘clean an office’ is wasting the taxpayer millions by ignoring the complexities of certain tasks and rewarding routine jobs.
The SSRO now recommend replacing the current single profit with the introduction of six profit rates more sensitive to the value of the job being asked of contractors. The potential savings are significant.
In one single source agreement, potential savings of £8.4 million could have been made if a 4 per cent “construction” profit rate had been awarded rather than blanket 11 per cent.
Because such a large proportion of the defence budget is spent procuring equipment under single source rules, it’s vital that taxpayers are not ripped off by contractors or inefficient regulation. The SSRO’s proposals seems like a step in the right direction to ensuring this doesn’t happen.