Babcock warns on potential £100m hit from UK frigate contract

UK defence engineer Babcock on Thursday said it may have to take a hit of up to £100m on a Royal Navy frigate contract after inflation pushed build costs higher as it argued with the government over who should pick up the bill.

Babcock said it had been “unable to reach agreement with our customer as to who is responsible for the additional costs under the contract” and had started a dispute resolution process which may lead to an arbitration.

However, a failure to claw back the extra costs from the Ministry of Defence meant it would have to take a one-off provision of £50 – 100m.

In November 2019, Babcock was awarded the Type 31 contract by the MoD to deliver five Inspiration Class frigates for the Royal Navy, based on Babcock's Arrowhead 140 hull design, at an average production cost of £250m per ship.

“To date, we have recognised over £600m of revenue but no profit on the programme,” the company said.

Babcock also said group underlying profitability for fiscal 2023 was in line with expectations, excluding the potential one-off impact of the Type 31 contract and expects to reinstate a dividend in full-year 2024 given s strong cash-flow position.

Reporting by Frank Prenesti for Sharecast.com