Royal Navy: MoD Type 31 shipbuilding dispute with Babcock resolved amid £90m loss - may disrupt HMS Active?

Babcock International plc, which is delivering the Type 31 programme in Rosyth, Scotland, has lost £90m on the project. This was confirmed in a published financial update ending on March 31, 2024.

They also reported an operating profit of £237.8m for the same term, with revenue growing to £4.4bn. In the update, Babcock said “the cash impact of this loss is expected to be realised over the remainder of the contract”.

The company added that the programme has been restructured “following a detailed operational review” to make sure the ships will be completed on time. They said benefits from some planned productivity efficiencies and expected continuation of the Type 31 programme have been excluded from the loss.

A total of five Inspiration-class ships - HMS Venturer, Active, Formidable, Bulldog and Campbelltown - are being constructed by Babcock. They are set to be equipped with advanced weaponry, a deck to host helicopters and room to have 187 personnel on board. The key bridge system has been completed for HMS Venturer, and she is expected to be commissioned in 2025.

Two major blocks for HMS Active, which are part of its modular construction, have been lifted and turned ahead of being added to the superstructure in the Venturer building. Her keel was laid last September. Babcock said the financial loss is due to a variety of factors.

“Overall estimated programme costs have increased due to the maturing of the design and increase in the forecast cost of labour,” they said. “The increase in the cost of labour in the market available to Rosyth is forecast to be higher than CPI, the indexation within the Type 31 contract. These cost increases cause the total contract outturn to deteriorate by £90m, which has been fully recognised in FY24. The cash impact of the loss is expected to be realised over the remaining five years of the programme.”

Babcock said the operational improvement programme was made to “challenge all aspects of the contract”. With the design more mature, this has increased the amount of work for shipbuilders, they added, and has allowed the company to target improvements in productivity and ongoing support costs. The company also confirmed they “settled the Dispute Resolution Process with the customer” - the Ministry of Defence (MoD) - which led to the project being restructured.

A row started between both parties after concerns were raised about whether the project will be completed on time, and to cost. In The Infrastructure and Projects Authority’s Annual report on Major Projects for 2022-23, the Type 31e programme was rated as amber. This means the scheme could feasibly be completed, but significant issues exist.

As reported in the Daily Telegraph in April 2023, construction was initially halted to due industrial action by shipbuilders, though this was resolved following a pay deal. Insiders at Babcock told the national publication the ships will be finished on time, but the fixed cost of £250m each – excluding weapons – was under threat.

The MoD said It would be inappropriate to comment further on the commercial details of the dispute. A spokeswoman added: “The Royal Navy Type 31 frigates will begin entering service from the late 2020s and the build of the Type 31 is progressing at pace. Having cut steel for the first ship in 2021, there are two warships currently in build side-by-side. The Type 31 programme will deliver a maritime security capability to the Royal Navy at an affordable price, in a timescale that beats other international ship procurement programmes.”