# The Single Source Contract Regulations 2014, Regulation 11: Steps in determining contract profit rate


(1) The contract profit rate for any qualifying defence contract or component of such a contract must be calculated by taking the following ... steps.
Step 1 – baseline profit rate
(2) Take the baseline profit rate in force at the time of agreement, which is—
(a) until 31 March 2015, 10.70%;
(b) on or after 1 April 2015, the rate published in the London Gazette in accordance with section 19(4).
Step 2 – cost risk adjustment
(3) Adjust the baseline profit rate by an agreed amount which is within a range of plus or minus 25% of the baseline profit rate, so as to reflect the financial risks to the primary contractor of entering into the contract or component, taking into account the particular type of activities to be carried out by the primary contractor under that contract or component.
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Step 3 – incentive adjustment
(6) Where the Secretary of State determines that the amount resulting from step 2 should be increased so as to give the primary contractor a particular financial incentive as regards the performance of provisions of the contract or component specified by the Secretary of State (the relevant provisions), increase that amount by an amount (“the incentive adjustment”) specified by the Secretary of State, that amount not to exceed ten percentage points.
(6A) In specifying the relevant provisions, the Secretary of State must also specify an outcome that must be achieved in order for the incentive adjustment to be payable, and that outcome must—
(a) be capable of objective verification; and
(b) relate to the performance of the relevant provisions.
(6B) If assessing the outcome or the performance of the relevant provisions includes any element of judgement by one or both of the contracting parties, or any person associated with the primary contractor, that element must be capable of being determined by a suitably qualified independent person.
(6C) In determining the amount of the incentive adjustment, the Secretary of State must be satisfied that it is reasonable in the circumstances, having regard to the potential public benefit arising from its use.
Step 4 – capital servicing adjustment
(7) Take the amount resulting from step 3 and add to or subtract from it an agreed amount (“the capital servicing adjustment”), so as to ensure that the primary contractor receives an appropriate and reasonable return on the fixed and working capital employed by the primary contractor for the purposes of enabling the primary contractor to perform the contract or component.
(8) In agreeing the capital servicing adjustment, the primary contractor and the Secretary of State—
(a) must have regard to the capital servicing rates in force at the time of agreement;
(b) must not apply any adjustment in respect of any costs of the fixed and working capital employed by the primary contractor which are allowable costs under the contract or component; and
(c) may use an average fixed and working capital for any business unit which is likely to be performing the primary contractor's obligations under the contract or component.
(9) The capital servicing rates are—
(a) until 31 March 2015—
(i) for fixed capital, 6.20%;
(ii) for positive working capital, 2.07%;
(iii) for negative working capital, 1.25%;
(b) on or after 1 April 2015, the rate published in the London Gazette in accordance with section 19(4).

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Source: https://www.legislation.gov.uk/uksi/2014/3337/regulation/11 (the official version)
Page: https://openlegislation.uk/single-source-contract-regulations-2014/regulation-11
Contains public sector information licensed under the Open Government Licence v3.0. Source: legislation.gov.uk, The National Archives.