asked the Secretary of State for Defence if he will provide details of the application of the target rate of profit to the pricing of individual Government noncompetitive contracts.
The rate of profit announced by my right hon. and learned Friend the Chief Secretary on 30 April, at columns 97 and 98, will be applied on a semi-CCA basis as follows:
Risk Work
6·55 per cent. on capital employed, plus 2·92 per cent. on cost. On the basis of the average CP:CE ratio of 2·24:1, this produces a return on capital employed of 13·09 per cent.
Non-Risk Work
While the profit formula is established now on a semi-CCA basis, historic cost equivalent rates may be applicable for a transitional period on a company by company basis, in accordance with arrangements agreed between the Government and the CBI. The table gives full details both of the semi-CCA target rates and their historic cost equivalents.5·04 per cent. on capital employed, plus 2·25 per cent. on cost. On the basis of the average CP:CE ratio of 2·24:1, this produces a return on capital employed of 10·08 per cent.
The Structure of the Profit Formula
| |||
Semi-CCA Basis per cent.
| Historic Cost Basis per cent.
| ||
Risk Contracts
| |||
Capital-based profit element | A | 6·55 | 9·28 |
Cost-based profit element | B | 2·92 | 3·09 |
Average CP/CE ratio | C | 2·24/1 | 3·00/1 |
Cost-based profit element, expressed as profit on capital employed (B ×C) | D | 6·54 | 9·27 |
Total profit on capital employed (A + D) | E | 13·09 | 18·55 |
Total profit on cost of production (E + C) | F | 5·84 | 6·18 |
Non-Risk Contracts
| |||
Capital-based profit element | G | 5·04 | 7·14 |
Cost-based profit element | H | 2·25 | 2·38 |
Average CP/CE ratio | I | 2·24/1 | 3·00/1 |
Cost-based profit element, expressed as profit on capital employed (H × I) | J | 5·04 | 7·14 |
Total profit on capital employed (G + J) | K | 10·08 | 14·28 |
Total profit on cost of production (K + I) | L | 4·50 | 4·76 |
Overall Target Rates
| |||
Weighted average profit on capital employed | 12·00 | 17·00 | |
Weighted average profit on cost of production | 5·36 | 5·67 |
Contractors whose CP:CE ratio (on a semi-CCA basis) exceeds 4·48:1 (or 6:1 on a historic cost basis) will receive fixed percentage rates of profit on cost computed on the basis of 4·48:1 semi-CCA (or 6:1 historic cost).
The profit rate for a contractor whose CP:CE ratio (on a semi-CCA basis) is less than 1·12:1 (or 1·5: 1 on a historic cost basis) may be subject to special negotiation.
In accordance with paragraph 14 of the profit formula agreement, the revised arrangements apply to
(a) risk contracts where no price arrangement had been agreed by 1 May 1985, and (b) non-risk work carried out after 1 May 1985 for which no arrangement for profit had been agreed by that date.