Pricing - Government Profit Formula

This page is an extract from the full topic guidance on Pricing - Government Profit Formula (GPF) [86KB PDF]. It details any Constraints associated with pricing with reference to the Government Profit Formula, provides a summary of the Authoritative Guidance and lists any essential reading, further reading or associated documents.

If you have any queries on this topic, please contact the Sponsor by email: DGDC CS-2A-Asst-Hd.

Constraints

None.

Authoritative Guidance Summary

By agreement between MOD and industry the Government Profit Formula (GPF) is used to determine the profit included in the price of non-competitive contracts (and non-competitive amendments to contracts placed by competition).

The objective of the GPF and associated arrangements is that fair and reasonable prices shall be agreed. The latest profit rates are those agreed in the 2010 General Review of the GPF, effective from 1 April 2010, at Annex A [21KB PDF].

The total allowance for profit is the sum of a Baseline Profit Allowance and Fixed and Working Capital Servicing Allowances. The level of Baseline Profit Allowance varies according to whether the contract is a non-risk (i.e. cost-plus) or risk priced contract. Where it is a risk-priced contract there are two different rates to select from, according to the value of the contract: Standard Baseline Profit Allowance (SBPA) when contract costs are under 50m or Adjusted Standard Baseline Profit Allowance (ASBPA) when contract costs are over 50m. For firm/fixed priced contracts over 5m the SBPA or ASBPA may also be subject to a negotiated adjustment of +/-10%, to further reflect the degree of risk being taken by the contractor.

The Fixed and Working Capital Servicing Allowances (CSAs) are expressed as 'returns on capital' and must be converted to 'returns on cost' before being applied to the contract cost base. MOD commercial officers will usually need to engage with accountants from MOD's Cost Assurance and Analysis Services (CAAS) to do this.

CAUTION - Do not simply add together the SBPA, the FCSA and the WCSA shown at Annex A [21KB PDF] and then apply that total percentage to contract costs - this would give an inflated and incorrect profit allowance. The FCSA and the WCSA must be converted to a return on cost on an individual contractor basis before they can be applied to contract costs. If CAAS are unable to carry out this work, because the contractor is not one they deal with and the contact value is too small, contact the policy sponsor for advice.

There is a strong presumption that MOD pricing teams will use the GPF allowances when pricing non-competitive work, flexing them when appropriate by the negotiated +/-10% risk/reward mechanism agreed with industry. However, circumstances may arise where different pricing arrangements are agreed, not involving the application of published GPF allowances. Such an approach is not forbidden by MOD pricing policy although commercial officers will need to demonstrate (through appropriate assurance procedures) why the use of non-GPF profit rates is preferred.

Non-competitive contracts (and competitive contracts where future non-competitive price amendments are likely) should include the appropriate conditions from a suite of DEFCONs giving the parties rights to price fixing and post-costing data, as well as arrangements to share unconscionable profits or losses or refer contracts to the independent Review Board for Government Contracts, for arbitration on a possible contract price adjustment. These DEFCONs are 643, 648 or 648A, 650 or 650A, 651 or 651A, 652, 653, 653A, 695 and 696