GovWire

Pricing contracts

The Act and the Regulations include provisions for how qualifying defence contracts (QDCs) and qualifying sub-contracts (QSCs) are to be priced. These provisions place controls on the pricing of these contracts to ensure that good value for money is obtained in government expenditure on these contracts and that contractors are paid a fair and reasonable price.

The price of a QDC or QSC must be determined in accordance with the default pricing methods (by applying the pricing formula) or alternative pricing methods. We provide guidance on determining rates of profit and allowable costs when applying the price formula, and guidance on the use of alternative pricing methods that were introduced on 1 April 2024.

Our guidance aims to help contractors and the Ministry of Defence (MOD) to agree the price of QDCs or QSCs in a way that is consistent with the Act and the Regulations.

All guidance provided by the SSRO can be found at this link: Guidance provided by the SSRO

Profit guidance

The SSROs guidance on the baseline profit rate (and its adjustment) explains how to calculate the contract profit rate when using the price formula for a QDC or QSC. The baseline profit rate is the first step in that process. This guidance should be read in conjunction with the SSROs guidance on allowable costs. It is statutory guidance to which the MOD and its contractors must have regard when determining the contract profit rate for qualifying defence contracts.

Guidance on the baseline profit rate and its adjustment - Version 8

The contract profit rate is calculated using a four-step process and relates only to contracts that apply the price formula, which sits alongside a range of alternative and flexible approaches to pricing contracts. Together these support the MOD and industry to price contracts with increased speed and simplicity, whilst ensuring that value for money is obtained on qualifying contracts and that contractors are paid a fair and reasonable price under those contracts.

Allowable costs guidance

The SSROs allowable costs guidance explains how to determine if costs are allowable when using the price formula for a QDC or QSC. It should be read in conjunction with the SSROs guidance on adjustments to the baseline profit rate. It is statutory guidance to which the MOD and its contractors must have regard when determining whether a cost is allowable.

For a cost to be allowable in the price of a single source contract, it must meet the requirements of being an allowable cost. This means it must be appropriate, attributable to the contract and reasonable in the circumstances. It is important that parties understand these requirements and how to judge whether they have been met. Understanding this helps ensure that contractors are paid a fair and reasonable price and that good value for money is obtained on contracts.

Allowable costs guidance - Version 7.

Alternative pricing types

The single source regulatory framework now offers a range of flexible approaches to pricing qualifying contracts. For example, a contract could be priced by reference to a competitive market price, or the requirements of other regulatory framework such as in the case of regulated utilities. These methods offer an alternative to using the traditional price formula, where that method may not be best suited to the circumstances of the contract. Understanding the options available and how to apply them allows the MOD and industry to price contracts with speed and simplicity, ensuing that value for money is obtained on qualifying contracts and that contractors are paid a fair and reasonable price under those contracts.

To support this, the SSRO has issued guidance on the application of the alternative pricing methods, which applies from 1 April 2024.

Guidance on alternative pricing types - Version 1.

Seeking advice on pricing