U.K. Renegotiating Aircraft Carrier Contract

The British Government is renegotiating a deal for two 65,000-tonne aircraft carriers with BAE systems in order to control rising cost, but the terms of deal suggests otherwise, Defense Secretary Philip Hammond was quoted by Defense News.

Hammond said in a statement issued in a critical Parliamentary Public Accounts Committee (PAC) report, “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 report criticized the contract signed by the British MoD and BAE systems, saying it was “not fit for purpose as it fails to provide industry with any real incentive to control costs.”

But “contractors will continue to make a profit until the 5.24 billion pound target cost has been exceeded by 2.5 billion pounds.”

Earlier, 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.

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.

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