Babcock confirm £90m loss on Type 31 contract at Rosyth

The defence company described the £1.25 billion contract - to deliver five warships for the Royal Navy - as "onerous" and pointed to higher than expected labour costs and inflation as reasons for the deficit.

On the plus side the long-running row with the Ministry of Defence, over who should stump up the extra money to meet rising costs on the project, has been resolved while the financial picture, in general, is good.

A trading update from Babcock said: "Signed in 2019, the Type 31 contract for five ships is the last material legacy onerous contract the group is managing.

"During (the financial year) FY24, we have made progress on the programme with the superstructure of the first ship almost complete.

"Work is also progressing on the second ship with the keel laid and the first double bottom blocks in the build cradle.

Inside the shipbuilding hall at Rosyth Dockyard. (Image: Barry Wheeler)

"In addition, during the year we have settled the dispute resolution process with the customer, which has enabled the restructuring of the programme to drive efficiency and to protect the in-service date."

It continued: "Overall estimated programme costs have increased due to the maturing of the design and increase in the forecast cost of labour.

"The increase in the cost of labour in the market available to Rosyth is forecast to be higher than CPI (consumer prices index), 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."

Work began on the programme in the Autumn of 2021 and all five ships are due to be delivered by 2028.

In March, Babcock announced plans to create 1,000 jobs at Rosyth over the next four years.

HRH Princess Anne visited Rosyth Dockyard in April. (Image: Barry Wheeler)

The following month Princess Anne toured the first frigate, HMS Venturer, at Rosyth while the second, HMS Active, is taking shape.

Next on the production line will be HMS Formidable.

CEO David Lockwood said: "The truth of Type 31, as we've said repeatedly, is the terms are not terms that we would not take, but where we've taken onboard risks we can't easily manage or in some cases, manage at all."

The estimate of what the ships would cost to build "hasn't really moved that much" and he added: "But the cost of getting to the price has undoubtedly gone up. There obviously still remains risk."

Babcock said the operational improvement programme has specifically focused on cost drivers and financial modelling.

Mr Lockwood said that "while it's causing us pain", the Type 31 contract only involves around six per cent of their revenue and six per cent of the workforce.

He said: "It's really important we shouldn't judge the company by that programme."

The trading update also reported strong revenue growth, up 11 per cent to £4.4 billion with underlying operating profit - which includes the £90m loss on the Type 31 programme - up 34 per cent to £238m.

Free cash flow of £160m was also "significantly ahead of expectations" and net debt at the end of March was down £129m to £435m.

On the Type 31 issues, Mr Lockwood said: "We're not taking it lightly.

"But if you look at the results, actually, we've made significant progress, generated significant free cash despite Type 31. So we need to keep it in context."