The contract profit rate for single source defence contracts and subcontracts is determined through a clear and transparent four-step process which helps to ensure that value for money is obtained for taxpayers on qualifying contracts and that contractors are paid a fair and reasonable price under those contracts. This guidance explains how to apply those four steps.
The four-step contract profit rate applies to contracts that use the pricing formula and sits alongside a range of permitted alternative approaches to pricing contracts. Together these support the MOD and industry to price contracts within the regulatory framework appropriately with speed and simplicity.
This guidance has been updated to reflect the changes to the incentive adjustment that were announced by the Minister of Defence Readiness and Industry and come into force on the 5 June 2026. Written statements – Reforms to the Single Source Contract Regulations. The guidance changes reflect amendments made by the Single Source Contract (Amendment) Regulations 2026 which come into force on 5 June and are intended to deliver against the commitments made in the Defence Industrial Strategy 2025 and the Strategic Defence Review 2025. By increasing the potential profit available for achieving faster delivery and greater productivity, the changes aim to drive innovation and accelerate capability to the frontline, maximising value from defence spending.
The incentive adjustment (step 3 of the contract profit rate calculation) allows the Secretary of State to apply additional profit to single source defence contracts to provide financial incentives linked to specified aspects of contract performance. The revisions to the Regulations introduce a strengthened and more flexible approach to the use of incentive adjustments for qualifying defence contracts.
In particular:
- The maximum incentive adjustment for qualifying defence contracts has increased from two percentage points to ten percentage points. The maximum incentive adjustments for qualifying subcontracts remains at two percentage points.
- New safeguards governing the design and operation of incentive adjustments have been introduced
- The SSRO’s power to give formal opinions in relation to pricing has been clarified to include consideration of the appropriate incentive adjustment.
The updated guidance provides a principles-based framework for designing and applying these new provisions in practice.
The SSRO also issues pricing guidance on allowable costs, alternative pricing, contract amendments and covering the final price adjustment, the latest versions of which should be read in conjunction with this document:
- Guidance on alternative pricing types – Version 1.4
- Guidance on contract amendments Version 1
- Final price adjustment – Version 1.1
Those with an interest in the regulatory framework should familiarise themselves with these documents. The SSRO is always interested to hear about the experiences of users of its guidance to help inform further improvements.
This guidance applies to qualifying defence contracts and qualifying sub-contracts entered into or amended on and after 5 June 2026.
The SSRO publishes its Responses to Commonly Asked Questions on a quarterly basis. These will be added to the guidance periodically where appropriate.
Independent and authoritative advice on any matter related to the interpretation and application of the regulatory framework for single source defence contracts can be provided to either contracting party or both through the SSRO’s non-referral advice service. Alternatively, referrals to the SSRO can be made for an opinion or determination on such matters. Guidance queries, non-referral advice requests and referral requests should be addressed to helpdesk@ssro.gov.uk.
