Aircraft carriers' costs soar £1bn
A £1bn cost over-run is threatening the future of the publicly funded project to build Britain's biggest ever warships.
I have obtained a memorandum written by the lead contractors for the two 65,000 tonne aircraft carriers, HMS Queen Elizabeth and HMS Price of Wales, known as QE Class carriers.
Written earlier this month, the memo says:
"The MOD [Ministry of Defence] will publish its annual report and accounts in July; these will show c£1 billion of QE Class cost growth and the project will come under severe pressure through the opposition and the media".
It continues: "this is a very real fight for the programme's survival".
The original budget for the two carriers was £3.9bn. That was the price when the MoD signed the contract for the project with the Aircraft Carrier Alliance last July.
In other words, in just 12 months the cost of these enormous ships - which will be 280m long and 70m wide, or the size of almost three full-size football pitches - has risen by 25% to around £5bn.
This massive inflation in costs will be widely seen as alarming, especially at a time when there are intense pressures on the government to cut public spending.
The memo, written for the chief executives of companies participating in the project - who are collectively called the Alliance Management Board or AMB - attributes the cost increase to "a combination of direct costs, inflation and accounting adjustments".
The paper then discusses possible measures to reduce costs, including the possibility of "substantial redundancies", of the order of 400 to 500. It also says that the future of the Appledore shipyard [which is in Devon and is owned by Babcock] would be under threat.
The Aircraft Carrier Alliance is a consortium consisting of BVT Surface fleet, which is itself a joint venture between BAE and VT Group, together with Babcock, Thales and the MoD (which describes itself as a partner and a client).
In December, the MoD announced a delay of up to two years in the schedule for bringing the new carriers into service. That has caused much of the increase in costs, according to an executive at one of the companies involved in the project.
However work has continued, and the first steel for the ships is scheduled to be cut in Govan on the Clyde on 7 July.
If the worst fears of the Aircraft Carrier Alliance's board were realised and the project was scrapped, the knock-ons would be serious.
For example, some 80,000 tonnes of steel worth £65m has been ordered from Corus, the beleaguered Anglo-Dutch steelmaker.
And it could also put in jeopardy plans for BAE to acquire VT Group's stake in BVT, which employs over 7,000 and was created to be a near-monopoly in the construction of warships in the UK.
However official sources say there is little prospect of the project being dropped, because 40% of contracts relating to the carriers have already been placed and ministers are said to be impressed with the way it has been managed so far.
Here is a statement from the MoD in response to my story:
"The MoD took the decision to delay the two future aircraft carriers in December 2008. We did this in order to reprioritise investment to meet current operational priorities and to better align the programme with the Joint Strike Fighter aircraft. We acknowledged at the time that there would be a cost increase as a result.
"We are currently re-costing the programme. The MOD accounts published next month will present an initial estimate and the formal costing will be available later in the year."
Here is a statement by Babcock, one of the members of the Aircraft Carrier Alliance:
"The increase in cost of the Queen Elizabeth Class aircraft carriers is a direct result of the Equipment Examination review carried out by the MoD earlier this year. The review sought to balance the spend profile on major defence projects over the next few years and in the case of the new carriers it was decided to extend the length of time taken to complete the build programme. This has the effect of reducing the spend in the next four year period but will result in an increase in the overall cost of the project."
A Babcock spokesman said that this increase in cost was purely the result of an internal MoD "resource re-profiling exercise" and was not due to design or manufacturing cost escalation. The spokesman went on to stress that the Alliance industrial partners, BAE, BVT, Thales and Babcock continued to work closely with the MoD and were fully committed to achieving the lowest possible cost outturn for the project.