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MoD sign £4 Billion Defence Contract

Reported by Miles Shepherd in London, UK

UK's Ministry of Defence (MoD) signed contracts worth nearly £4 Bn with a new ship building joint venture. The Future Aircraft Carrier (CFV) programme will replace Britain's aging carrier fleet with 2 ultra modern system build carriers to be delivered in 2014.

The ships, HMS Queen Elizabeth and HMS Prince of Wales, will be the biggest in Royal Navy history, measuring 920 feet long and displacing 65,000 tons. This places them between the USS Nimitz 100,000 ton displacement and the French Charles De Gaulle class carriers at 43,000 tons. The CFV Carriers will be more than 3 times the size of the Royal Navy’s Invincible class Carriers. Delivery is planned for 2014 and 2016 respectively.

"The two aircraft carriers will provide our forces with the world-class capabilities," said Defence Secretary Des Browne. "They will support peacekeeping and conflict prevention, as well as our strategic operational priorities."

In a ceremony held aboard HMS Ark Royal, currently the Royal Navy flagship, MoD placed the order with BVT Surface Fleet Ltd. BVT is a joint venture of BAE Systems, Europe's biggest defence company, and VT Group Plc which came into formal existence on contract award. The contact provides job security for up to 10,000 workers on 4 main sites in Scotland and England while many subsidiary contracts will bring work to work to many other, smaller, companies in UK and overseas.

The contract, which according to reports in Bloomberg, was held up as MoD cut £2.7 billion from defence spending. A U.K. defence review, carried out in 1998 after military operations in the Persian Gulf and Bosnia, judged that the U.K. needed larger carriers to better support its military throughout the world. However, many commentators claim that the real priorities lie elsewhere as troops in Afghanistan and Iraq continue to complain about critical shortages of helicopters and armoured troop carriers. The vessels will be built in four sections, with BVT undertaking construction valued at £1.33 billion at BAE's Govan dockyard in Glasgow and VT's site in Portsmouth. Lower Block 3 will be built BAE in Barrow-in- Furness at a cost of around £300 million while Babcock International Group Plc will construct the bow sections and then assemble the carriers in Rosyth, near Edinburgh, for £675 million. Last year, a £35 million contract was placed by Babcock Engineering Services with Glasgow-based subcontractors Edmund Nuttall Limited to modify the docks in order to accommodate the building of the carriers and widen its direct entrance.

Design and engineering work valued at £425 million is to be completed by the U.K. unit of Thales SA while BAE’s London-based team will design and supply computers and software worth £275 million. Subsidiary contracts and work already performed will take the total value to more than £3.9 billion, said Phil Rood, a spokesman for Southampton-based VT. Southampton-based VT.

BAE Systems act as prime contractor. Other contractors include; Thales Naval Ltd - key supplier; BAE Systems Insyte (formerly Alenia Marconi Systems) - Command, Control, Communications, and Computers Information Systems; BMT Defence Systems - naval architecture; EDS - systems integration, fleet support, through life support; Lockheed Martin - programme management and engineering; QinetiQ - computer modelling and simulation, technology, test and evaluation; Rolls Royce - propulsion, life support; Strachan & Henshaw - waste management, munitions handling; Swan Hunter - construction; VT Group - naval architecture, construction, through life support.

The importance of the build was emphasised by Baroness Taylor Minister for Defence Equipment and Support who said "This is truly a national project, involving companies from the Clyde to the Solent. Construction work will create or sustain around 10,000 UK jobs at the peak of production. I am delighted that we have signed the contracts for manufacture today and I look forward to first cutting of steel for this exciting project later this year"

The venture is critical for the UK marine industry and the supporting management structure is novel. According to the MoD website, it became clear from the competition run after Initial Gate approval in December 1998 that delivering the Future Carrier was beyond the scope of any one company and it was determined that adopting the benefits and skill sets of both BAE Systems and Thales UK project teams was the best way forward. This innovative alliance approach allowed both BAE Systems and Thales UK to share the risks and the rewards, whilst bringing their own skills and experiences to the project. This approach was announced in January 2003. With time, it became clear that an additional participant was required to, among other roles, bring in experience of the alliancing model, and this role was awarded to Kellogg, Brown & Root (KBR) in February 2005. In December 2005, a further commitment of £300M was announced for the Demonstration phase, the first stage of a two-stage incremental approach to Main Gate. At the same time, it was announced that the alliance would be expanded from the original members - BAES, KBR, MOD and Thales UK – to include the shipyards, Babcock and VT. This was followed by the signing of an Alliance Charter by all the company CEOs. It was subsequently agreed that KBR would leave the Alliance on completion of the demonstration phase. Interestingly, MoD remain as client and as a partner.

In addition to the innovative management structure, the contracting arrangements also show a welcome move away from previous approaches of past major capital projects. The commercial arrangements are based on target costs of some £3.9 Billion with a scheme of incentives designed to drive the cost below this figure. The intention is to align all parties to common project objectives. Rewards are geared to the overall project outcome rather than maximising benefits to one supplier or component. It has generally worked well, particularly in the oil and gas industry.

The programme has wide ranging international links since a Common Baseline Design has been supplied to France that meets the requirements for the British CVF and the proposed French replacement carriers (PA2), allowing exploration of commonality which will bring savings in design costs, procurement and possibly support. According to the MoD website, the design incorporates some changes to meet French requirements and France may choose to make its own adaptations to meet additional French navy specific requirements for PA2. The programme is said to be not fully collaborative in that France’s role is limited to exercising ‘influence’ rather than executive authority over the project. MoD claim that co-operation with France has already yielded real benefits, for example in the decision to adopt the stabilisers proposed by France for their version.

The size of the budget, the spread of contracts and the sustainability of work in some of UK's most economically deprived areas ensures that the programme will remain a high profile, politically sensitive programme.