The SME Guide to Single Source Contract Regulations (SSCR) & QDCs

For defence suppliers operating in non-competitive markets, securing contracts directly with the UK Ministry of Defence (MOD) or Tier-1 Primes requires strict compliance with the Single Source Contract Regulations (SSCR) and the statutory oversight of the Single Source Regulations Office (SSRO).

When an MOD contract is awarded without competition and exceeds statutory financial thresholds (typically £5 million for contracts and £50 million for sub-contracts), it becomes a Qualifying Defence Contract (QDC) or Qualifying Defence Sub-contract (QSC).

For Small and Medium Enterprises (SMEs), negotiating a QDC can feel overwhelming. The SSCR framework enforces strict transparency rules, cost reporting obligations, and a mandatory 6-step formula for calculating contract profit rates.

This comprehensive guide breaks down the Single Source Contract Regulations, explaining how SMEs can determine Allowable Costs, negotiate baseline profit adjustments, and protect commercial margins during QDC capture.

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1.Core Framework of the Single Source Contract Regulations

The SSCR was established under Part 2 of the Defence Reform Act 2014 to achieve two primary objectives:

1. Ensure the UK MOD obtains value for money in non-competitive defence procurement.
2. Ensure defence contractors receive fair and reasonable prices, including a reasonable rate of return on capital.

┌────────────────────────────────────────────────────────────────────────┐
│             SINGLE SOURCE CONTRACT REGULATIONS (SSCR)                  │
├───────────────────────────────────────┬────────────────────────────────┤
│       Allowable Costs (AAR)           │   Statutory Contract Profit    │
├───────────────────────────────────────┼────────────────────────────────┤
│ • Appropriate in nature               │ • Step 1: Baseline Profit Rate │
│ • Attributable to the contract        │ • Step 2: Cost Risk Adjustment │
│ • Reasonable in amount                │ • Step 3: Profit ON Capital    │
│ • Verified via Open-Book Audit        │ • Step 4: Incentive Adjustment │
└───────────────────────────────────────┴────────────────────────────────┘

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2.Qualifying Defence Contracts (QDCs) & Thresholds

A contract is classified as a QDC if it meets all of the following statutory criteria:

• Non-Competitive Award: The MOD awards the contract without genuine competition.
• Value Threshold: The contract value equals or exceeds £5 million.
• Excluded Categories: It is not an excluded contract (e.g. contracts for land acquisitions or foreign military sales).

Qualifying Defence Sub-contracts (QSCs)

If an SME acts as a sub-contractor to a Prime (e.g. BAE Systems, Babcock, QinetiQ) under a QDC, their sub-contract becomes a Qualifying Defence Sub-contract (QSC) if its value equals or exceeds £50 million (or lower threshold if specified by the Prime under flow-down provisions).

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3.The 6-Step Contract Profit Rate Formula

Under the SSCR, profit cannot be arbitrarily negotiated. It must be derived using the statutory 6-step Contract Profit Rate (CPR) formula published annually by the SSRO:

Contract Profit Rate (CPR) = Step 1 + Step 2 + Step 3 + Step 4 + Step 5 + Step 6

Step-by-Step Profit Rate Calculation

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4.Understanding Allowable Costs: The AAR Principles

In a QDC, contract price equals Allowable Costs + Contract Profit Rate. To be classified as an Allowable Cost, an expenditure item must satisfy three statutory principles (AAR):

1. Appropriate: The cost must be of a type suitable for inclusion in a defence contract (e.g. direct labor, materials, approved overheads). Entertainment, legal disputes, or unapproved marketing costs are strictly non-allowable.
2. Attributable: The cost must be directly incurred for the performance of the specific contract, or allocated through a fair, audited overhead structure.
3. Reasonable: The amount must not exceed what a prudent business person would pay in a competitive market under similar circumstances.

Open-Book Accounting & MOD Audits

Under the SSCR, contractors must provide MOD cost auditors with Open-Book Accounting access. Bidders must be prepared to submit detailed cost breakdowns, labor rates, supplier quotes, and overhead allocation methodologies.

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5.Strategic Advice for SMEs Negotiating QDCs

1. Establish Clear Overhead Allocation Models: Ensure your accounting software separates direct contract costs from non-allowable corporate expenses before MOD audit teams initiate cost verification.
2. Use Parametric & Bottom-Up Cost Estimation: Combine bottom-up engineering estimates with parametric pricing models to substantiate cost reasonableness during Single Source negotiations.
3. Leverage Step 2 Risk Adjustments: If your contract carries high technical or schedule risk (e.g. firm fixed-price development work), fight for the maximum +25% Step 2 Cost Risk Adjustment.
4. Prepare Annual Reporting Schedules: QDC contractors must submit statutory reports (Contract Reporting Plan, Cost Analysis Report, Contract Completion Report) to the SSRO DefARS system. Factor compliance administration into your cost baseline.

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6.Summary & Key Takeaways

• SSCR Enforces Transparency: Non-competitive defence contracts over £5m (QDCs) are governed by statutory profit formulas and cost audits.
• AAR Principles Govern Costs: Allowable Costs must be Appropriate, Attributable, and Reasonable in amount.
• Profit Is Formulaic: Contract profit rates are calculated via the SSRO 6-step formula, balancing baseline rates, risk adjustments, and capital servicing.

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