UK Trying To Renegotiate Aircraft Carrier Contract, Report Says

Queen Elizabeth UK aircraft carrier - Picture Aircraft Carrier Alliance

Sep. 2, 2013 - By ANDREW CHUTER – Defense News

LONDON — The British government is trying to renegotiate a contract with the BAE-led alliance that is building two 65,000-tonne aircraft carriers for the Royal Navy in order to control rising costs, but it says the terms of the deal leave it with little room to maneuver, according to Defence Secretary Philip Hammond.

Responding to a critical Parliamentary Public Accounts Committee (PAC) report into the aircraft carrier program due to be published here Tuesday,, Hammond said in a statement, “We are currently negotiating with industry to seek to secure proper alignment between industry and the MoD over the balance of the project and so bring the costs under control, but we are doing so within the context of a contract that gives us very little negotiating leverage.”

The PAC criticized the contract signed by the MoD and the alliance, saying it was “not fit for purpose as it fails to provide industry with any real incentive to control costs.”

The British lawmakers said that as things stood, the “contractors will continue to make a profit until the 5.24 billion pound target cost has been exceeded by 2.5 billion pounds.”

At one point, the original contract negotiations — which led to the signing of the construction deal for the Royal Navy’s largest-ever warships in 2008 — were targeting a cost of 3.65 billion pounds.

A spokesman for the Aircraft Carrier Alliance declined to comment beyond confirming negotiations with the MoD were ongoing. The alliance includes BAE, Babcock and Thales.

Margaret Hodge, the PAC chairwoman, said in a statement the committee was still “not convinced that the MoD has this program under control. It remains subject to huge technical and commercials risks, with the potential for further uncontrolled growth in costs.”

Senior alliance officials reported to the MoD this summer that the program faced time and cost overruns, said one industry source. He said he did not believe they were significant problems at this point.

Labour were responsible for signing the construction deal, but it is the Conservative-led coalition government that came in for much of the report’s criticism.

The PAC was prompted to investigate the carrier program after the government’s 2012 decision to do a U-turn and revert to the F-35B short takeoff and landing version of the Joint Strike Fighter to equip the carriers.

The British originally selected the F-35B, but the coalition government opted to change to the F-35C conventional carrier variant in a botched decision made as part of the 2010 strategic defence and security review (SDSR).

Two years later, when the spiraling cost of fitting catapults and traps to the two STOVL-designed warships became clear, the government changed its mind again and reverted to the F-35B.

The PAC said the decision to switch to the F-35C was “deeply flawed” on cost grounds and wasted at least 74 million pounds of taxpayers’ money.

Hodge said that “at the time of the SDSR, the MoD believed the cost of converting the carriers for the new aircraft would have been between 500 million pounds and 800 million pounds. By May 2012, it had realized that the true cost would be as high as 2 billion pounds.”

The renegotiations come as the carrier construction program is approaching the halfway mark. The alliance is preparing to fit the last major structural element of the first of the warships around mid-November, ahead of it being floated out of the yard at Rosyth, Scotland, next summer.

The government has committed only to operating one of the carriers and will decide in the 2015 SDSR whether it can afford to operate the second vessel as well or whether it will mothball or sell it.

Negotiations to buy a first production batch of F-35Bs to equip the aircraft carriers are currently underway, and the British hope to start flying from HMS Queen Elizabeth in 2018.

The PAC report said that aside from trying to change the terms of the carrier contract, the MoD was also attempting to renegotiate a wider maritime agreement with UK industry “with a view to incentivise contractors more by transferring cost risk.”

The MoD had aimed to conclude negotiations over the summer, said the PAC.

BAE and Babcock both have terms of business agreements with the UK government that virtually guarantee workload in return for efficiency savings at their ship construction and repair yards.

With two naval shipyards in Glasgow, Scotland, and a third in Portsmouth, southern England, BAE has been in talks with the government for months about reducing its capacity once the aircraft carrier program starts to run down.

A decision on future yard closures had been expected in late 2012, but negotiations with the government over several issues, including a possible stop-gap order to fill some of its yard capacity until the Type 26 frigate program enters production later in the decade, have delayed a decision.

The PAC also criticized the government for delaying an airborne early warning helicopter program that is vital for the protection of the aircraft carrier.

Known as Crowsnest, the program would replace an existing Sea King helicopter-based capability due to be axed in 2016 with an AgustaWestland EH101 rotorcraft system planned to become fully available in 2022 — two years after the first carrier is scheduled to become operational.

Hammond defended the money-saving decision.

“The Crowsnest program is expected to deliver an initial operating capability by the time the first carrier is in operational service. Maritime surveillance will also be provided by other platforms and systems, including the state of the art radar on the Type 45 Destroyers, working together in a layered defence.”