Babcock raises Type 31 Frigate cost estimate due to rework

Babcock has reported a GBP 140 million charge on the Type 31 frigate contract after higher than expected rework levels during the outfitting and commissioning phase of the five-ship programme.

Babcock International has posted a £140 million charge against its Type 31 general purpose frigate contract, attributing the cost overrun to design changes and the consequences of out-of-sequence build activity earlier in the programme.

The company floated the first two ships during the financial year ending 31 March 2026, laid the keel of ship three, and formally commenced construction of ship four. However, as structural completion of the lead ship progresses, rework requirements during outfitting have proven more complex and more costly than anticipated, with knock-on effects to ship two also identified.

Babcock said the number of rework events was not entirely unexpected, but that their occurrence in the later stages of completion increased both complexity and cost. The company has completed an engineering maturity review and updated its estimates to complete the programme, incorporating higher production costs and an increased risk contingency. Around £100 million of the charge will be recognised as a revenue reversal in FY26, with the remainder added to the contract loss provision. Cash costs will be spread across the remainder of the programme.

Ships three and four remain in early construction, and Babcock said the extent of impact on those and subsequent vessels was comparatively reduced.

Here’s the full statement:

“During the year we floated off the first and second ships in the five-ship programme, laid the keel of ship three and formally commenced the build of ship four at its steel cutting ceremony.

As we finish structural completion of ship one, the bulk of the remaining work now relates to outfitting and commissioning. During the outfitting stage we have experienced higher than expected levels of rework as a result of changes to the design and the long-term impacts of out-of-sequence build activity earlier in the programme. Whilst the number of such rework events is not entirely unexpected, the work is being performed in the later stages of completion and therefore is more complex and more costly. The ability to enable the work to be performed to support increasing levels of programme productivity has also been impacted. As the build of ship two is close behind ship one, there is also some cross over in the design-related rework necessary to this ship. With ships three and four still in the early construction stages, the extent of impact on these and future vessels is comparatively reduced.  

As a consequence, we have performed an engineering maturity review, and we have updated our financial estimates to complete the programme, given the elevated levels of work due to engineering change and productivity. These re-estimates not only cover the production costs of material and personnel, but also an increased programme risk contingency.

This is reflected in an expected charge on the contract (subject to audit) of £140 million for the revised costs to complete delivery of the Type 31 design and build contract, which is fully recognised in FY26, but the cash costs of which will be incurred over the remainder of the programme. We estimate c.£100 million of this £140 million will be recognised as a revenue reversal in FY26 with the balance increasing the contract loss provision.”

Despite the Type 31 charge, the broader financial results for FY26 point to a business in strong underlying health. Excluding the charge, Babcock reported underlying operating profit of £433 million and an operating margin of 8.2 per cent, ahead of its 8.0 per cent full-year target. Revenue reached £5,273 million, representing organic growth of 10 per cent at constant exchange rates, driven primarily by Nuclear and Aviation.

Nuclear was the standout performer, with revenue growing 14 per cent to £2,070 million and underlying operating profit rising 23 per cent to £197 million. The division’s margin reached 9.5 per cent, meeting the Group’s medium-term target. Aviation also delivered strong results, with revenue up 34 per cent to £431 million, driven by the ramp-up of the Mentor 2 programme in France and a helicopter emergency services contract in British Columbia.

Beyond the financial results, Babcock secured a series of notable programme milestones during the year. The company signed a Letter of Intent for two further Arrowhead 140 frigate licences for Indonesia under the £4 billion Maritime Partnerships Programme, and expanded its partnership with HII to manufacture complex submarine assemblies at Rosyth for the US Virginia Class Block VI programme. In civil nuclear, a joint venture between Cavendish Nuclear and Amentum was selected as Owner’s Engineer for Great British Energy’s first small modular reactor project at Wylfa, a contract worth up to £300 million over 14 years.

Underlying free cash flow increased significantly to £262 million, and net debt fell to £329 million, giving a gearing ratio of 0.2x. The Group completed a £200 million share buyback in April 2026 and has announced a further £200 million programme to commence alongside publication of its full year results.

Babcock said FY27 expectations remain unchanged, with around 70 per cent of forecast revenue already under contract. The company reiterated its medium-term guidance of mid-single digit revenue growth, an underlying operating margin of at least 9 per cent, and operating cash conversion of at least 80 per cent.

Full year audited results, delayed by the Type 31 restatement, are now expected in late June. Harry Holt, who succeeded David Lockwood as Group Chief Executive on 1 April 2026, will join the Board in June.