Babcock International PLC has announced a significant £90 million loss on its Type 31 warship contract, impacting its financial results for the fiscal year 2024, according to a trading update.
Despite this setback, the defence contractor reported stronger-than-expected cashflow and a 34% increase in underlying operating profit to approximately £238 million for the year ending March 2024.
The Type 31 contract, signed in 2019, involves the construction of five ships and represents the last major legacy onerous contract managed by Babcock. During the fiscal year, Babcock made progress on the programme, with the superstructure of the first ship nearing completion and significant advancements on the second ship.
The company also settled a Dispute Resolution Process with the customer, enabling a restructuring of the programme to drive efficiency and protect the in-service date.
According to the trading update, “The outturn over the lifetime of the contract has deteriorated by £90 million, which has been fully recognised in FY24. The cash impact of this loss is expected to be realised over the remainder of the contract.” The update further explained that “the programme has been restructured following a detailed operational review to protect the in-service date.”
The overall estimated programme costs have increased due to the maturing of the design and rising labour costs. The cost increases, exacerbated by labour market conditions in Rosyth, led to the £90 million deterioration in the total contract outturn. Babcock noted, “The increase in the cost of labour in the market available to Rosyth is forecast to be higher than CPI, the indexation within the Type 31 contract.”
Babcock initiated an operational improvement programme during the year, supported by external consultants, to address cost drivers and financial modelling. This programme, led by a new management team, aims to restructure the contract and enhance productivity. The mature design of the Type 31 has facilitated these efforts, although it has also increased the volume of work required.
“During the year we initiated an operational improvement programme to challenge all aspects of the contract, including a significant focus on cost drivers and financial modelling,” the update stated. “Our operational improvement programme is facilitated by the fact that the design is now more mature. Although this has increased the volume of work, the design maturity has allowed us to target improvements in productivity and ongoing support costs as well as benefitting prospective export sales of our Arrowhead 140 design.”
The Audit Committee has reviewed plans to deliver additional programme benefits from productivity improvements and the continuation of the Type 31 contract. However, some expected benefits have not been accounted for in the loss due to the high evidential bar required to recognise future gains.
In addition to the £90 million loss on the Type 31 contract, the company reported a £17 million profit from the disposal of a property. Excluding these items, Babcock’s underlying operating profit for FY24 was £311 million, compared to £265 million in FY23, which included a £100 million loss on the Type 31 contract and a one-off accounting credit of £12 million.
“The Audit Committee has reviewed the programme team’s plans to deliver additional programme benefits from improvements in productivity and further work relating to the continuation of the T31 contract,” the update mentioned. “Some of these benefits have not been taken into account in the loss given the evidential bar required to recognise future benefits, although we do expect the benefits to be delivered over the course of the programme.”
The restructuring and improvement initiatives are expected to mitigate future risks and potentially benefit the prospective export sales of Babcock’s Arrowhead 140 design. The external audit of Babcock’s financial results is substantially complete, with the company planning to announce its FY24 preliminary results on 26 July 2024.
Overall, Babcock International remains committed to delivering on the Type 31 contract and enhancing its operational efficiency, despite the financial challenges faced in the current fiscal year.
“ following a detailed operational review to protect the in-service date.”
Simultaneous translation into dates please?
More vacuous waffle – Sir Humphrey would be proud.
I think in CE it’s something like “We have really screwed up, we have never built a ship hull from scratch, nor outfitted one at Rosyth. So far we have lost £190 on the contract, we can’t ask HMG for more money as it’s our fault. But unless we want to seriously annoy our biggest customer we have to figure out how to deliver these ships on time and try to mitigate any further losses.” IMHO this is where the apparent lack of pre outfitting in build could really come back to sting them, but Babcock has other resources than… Read more »
There was an elliptical comment from Babcock a while back that the increased load of T23 work would affect other things.
Being Babcock on both side of that equation the workforce would almost certainly be used to best effect.
If there is no T23 work what will they be doing? T31 I would suggest…….
My thinking precisely, if there is one overarching lesson to learn from the recent History of U.K marine History it’s the need for sustainment. No private company is going keep a highly skilled and expensive workforce stood idle and then regeneration costs a fortune. Long term planning of Budget, Design and Build in accordance with the NSBS is the key to long term efficient Ship building. So if Babcock at Devonport have the capacity and skills why not utilise them, split the build process and get the Frigates delivered. I’ve actually been looking at how the original IH Frigates were… Read more »
just thinking outside the box for a moment, could a frigate be built in the frigate hall in devonport? the closed palliion yard in Sunderland still has one of Europes largest covered building halls in it.the skills needed for operating the yard still exists but it would require a substantial investment to make it able to build ships again
Nope and Nope, the Frigate Refit facility is too small and not equipped for ship building. As for the Pallion yards it’s a tragedy but it’s presently being converted to a film study and all the supporting facilities and land is all redeveloped.
Being out by £90m on a project that size isn’t terrible given what happened to energy, labour and general inflation due to COVID and Mad Vlad deciding he needed a bigger country.
On reflection I’m surprised they are not further out.
So you think this T31 effect influenced the decision on Argyll?
How so? Argyll had pretty much completed its refit. if they’d sold Northumberland, that might have been the reason. I now think Argyll was exactly as the Telegraph said (and I didn’t believe a word of at the time). It was due to crew shortages (and short term thinking).
So, if I were Babcock I might be thinking if we had known we were wasting our time refurbishing a ship for which there was no crew we could at no cost, have moved labour to Rosyth and made it much easier to meet T31 project dates. I would have thought, we’re not in business to train our competitors apprentices. Just saying.
Perhaps Chile would be interested in HMS Argyll and/or Iron Duke? Always thought that they would be the most logical follow-on owner.
Ten years ago, maybe. Current T23 are way past their design life & have been worked hard. If you design for 30 years & sell at 20 years, you will find buyers. The reverse is a different question.
We need Iron Duke and apparently Argyll has already been sold to BAE so it’s not the government’s to sell. Lancaster in 2026 could be a fit for Chile.
It may have done.
Without knowing the details of what remained to be done it impossible to know.
If Argyll was really close to going back into fleet she would have been kept to hand to rotated in.
Something we don’t know about happened.
Believe someone credible/knowedgable (forget whom specifically; possibly Deep) stated that the existing frigate refit facility would not physically accommodate T-31? Also understand that there is a current infrastructure redevelopment programme at Devonport. Any possibility that T-31 build schedule is compatible w/ upgrades at Devonport? 🤔🤞
You mean thinking ahead? Well there’s a first time for everything, but not really. You are right that the three dry docks that service the T23s in the frigate refit complex are too narrow for T31s and unsuitable for easy expansion. There was an interesting article in Navy Lookout a couple of months ago on Devonport’s future. Apparently only two dry docks will take the future frigate fleet (T26s and T31s), No 8 and No 11. It is planned that number 11 dock will be upgraded in the early 2030s and become the primary frigate dry dock in Devonport. So… Read more »
Looks to me like when they set the costs for the contract (2019) they could not have predicted COVID plus the Russians setting off inflation to 10-11%. On the plus side they have found more efficient ways of working which might save them some money during the rest of the delivery cycle. They have taken the hit of the losses so far and will await any savings or residual costs and post them as (and if) they arise. Sounds very sensible to me.
Exactly you don’t post futurology in your accounts…..unless you are a government department!
Some “future” follow on T31/A140 orders would be well received too.
😁👍
Did they lose £90M or expect to make £90M less profit?
Probably the latter.
They mean… ‘Due to bureaucratic nonsense at an institutional level, we’ve been unable to get f*ck all done on price, while hundreds upon hundreds of Middle Management and Package Managers, are all w*nking each other off on teams calls and duplicating work of zero value’.
They are a shit show. End of chat.
I frankly wouldn’t let them build a kinder egg surprise. Never mind complex warships.
The best bit is they’ll no doubt claim a ‘compensation event’ to the new Labour Government, who’ll happily dish out the shortfall in the name up upholding British industry.
Let’s reward mismanagement! Hurray!!
And the 20% rise in inflation over two years since signing?
Long lead items and contracted materials won’t be affected by that. Not at this point. Not when they are initially contracted on LTA’s. Labour costs will be affected, but that’ll be moving forward as the program matures when the wage rises are baked in. That doesn’t account for the current overspends. This is most likely mismanagement at quotation and early production stages. Hence why they have an improvement program underway – with EXTERNAL consultants. Take note of the external bit. hence my comment of it being a shit show. They are currently around +7% adrift from where they expected to… Read more »
You are sort of ignoring the fact that we have had significant wage inflation in the private sector and the fact we have had an unstable ship building industry/order book always increases labour costs in a boom bust cycle…I think the fact the rest of The business is showing a profit despite this contract means the organisation is healthy.
Jonathon that same inflation has hit BAe just the same as Babcock, but perhaps they pitched their bid at a more “Realistic” price point. 🤔
The fact that Babcock are accepting the financial impact just screams out inexperience !
Babcock just wanted in to MILSPEC naval ship building.
Only route in was T31.
What the article didn’t say is what the yield of the other , non RN, A140 contracts is?
Yes indeed, I agree they pitched their contract to tight, but they wanted the contract and let’s be honest the inflationary pressures were completely left field…who yes you build risk into a contract..but covid, war in Europe and a liz truss incompetent all in 3 years…Ive been a profoundly cautious risk manager in my time…but not even I would have put all three in my risk assessments for a contract. To be honest I was more answering the poster who seemed to think the entire Babcock organisation was incompetent…but as I pointed out it’s still an in profit British shipbuilder…… Read more »
BAEs came in with a much improved price for #4 -8 T26?
Babcock learned a lesson…..that many learned…..
In construction clients were having to work with contractors as contractors couldn’t shoulder all the burden of wage explosion, slow builds and material rocketing. Everyone would have gone bust and I mean everyone.
Wasn’t the price point set by HMT, not Babcock?
Babcock have lost money before. So has BAE. Owning your own mistakes does get noticed. BAE knows this. Hopefully Babcock does as well.
but we are STILL WAITING FOR OUR SHIPS
Wiki still says Venturer will be delivered next year.
Delays and cost overruns, business as usual I guess ! Seriously though, how do you lose £190 million already given that no hull has even left the shed ?
rank institutional incompetence
They got Simpler lean management and then Newtons in at DSG Babcock , productivity fell after original managers were replaced and cost cutting modernisation . Centralisation of stores caused frequent part delays, they had a culture of never u turning any bad decisions . Yearly talks by operations director were stopped as he did not like staff asking questions about decisions that had not worked!
It’s a project over spend not a ship overspend!
As someone who is in middle management and has Teams calls most days, it seems I need to make sure no one is W*nking me off as it might get in the way of my duplication of work, otherwise my zero value is in danger of rising. Is that some sort of virtual reality plug-in App to Teams, to enable the w*nking?
🤣
could be a part of Baldricks next cunning plan.
it’s all a cunning plan to prevent the use of the phrase ‘cluster**k.
Plus Covid delays and inflation. They are actually doing a pretty decent job with T31. But don’t let a few real world problems get in the way of a good rant.
Am I reading this right that in addition to losing £90 million this last accounting year but they also lost £100 million the year before ? Surely big questions need to be asked of those responsible for costings and who bares this financial hit, surely not HMG or the Tax payer ? 🤔
Yep and they are standing the cost nor us. Just for one someone at HMG has really nailed down that contract and grown a pair.
Gosh 🤷🏼♂️
Well it does make me wonder just why they bid ?
As others have said, they wanted into military shipbuilding and this got them there. Second they didn’t expect the war in Ukraine and the knock-on effect on inflation. They probably should have put inflation and foreign exchange risk higher in their thinking for a fixed price contract. They’ll know better for next time.
I think your “They” should have gone through all the possible scenarios personally. It seems a crap business plan by all accounts. Heck a loss of £190 million at this early stage almost equates to one of the 5 T31’s, almost.
Yes to be honest, that’s one of the hardest contracts I’ve seen from HMG outside of the NHS ( we are really nasty) …even in the NHS we will allow renegotiation if we know our providers are suffering really significant inflationary or over activity pressures and if we need that provider not to go into administration ( if we think we can find another victim…um provider we will let them fail) ..and to be honest we always knowingly under-cost our contracts by pretty significant amounts…so our contract providers are always losing money or going into financial meltdown..to the extent I’m… Read more »
If you had read it correct you would have read Babcock are picking up the overspend and accounted for it in its accounts. It’s a fixed price contract RN will get there 5 ships for they monies agreed. Babcock don’t seem to be Bae just ask for more cash. How much have the T26 increased in cost? More than the total cost increase of T31?
In my experience no major defence contract is ever delivered on time, to spec or makes a profit for its prime contractor. This is all down to the conspiracy of optimism prevalent across all major projects, not just in defence, where both buyers and sellers over promise and underestimate and undervalue the task in hand. If either side applied honesty and realism to the task, no major contracts would ever get let in the first place. That unfortunately is my experience of 35 years in the field
The B-21 Raider is reportedly ahead of schedule and under budget. it has nothing to do with the British military, but it shows not all hope is lost. CAMM also appears to have gone quite well.
How many VLS do they have ? Should we just buy 5 of them instead ?
The B-21? I’m going with 0 unless you mean Gravity Assisted VLS?
It was a joke based upon Louis G giving a comparison of the progress and under budget performance of a Bomber V’s a Frigate. ✈🛥🚀
It was a joke based on Bomb Bays being VLS cells that point downwards. 🙂
Touche 😂
How have these contractors managed to survive?
There Is one notable exception but it doesn’t get mentioned very often. The Tide class Tankers came in £50 million under budget at £550 million for all 4 ships, to spec and just 4 months late. That was for something out of anyone’s control, the cabling regulations were changed mid out fit and had to be restarted.
But not too popular as built by DSME in South Korea.
Challenger 3 seems to be going ok !
I think we can all agree that the Initial and Revised price points for these Ships were completely unachievable.
Yeah, lets underbid to look good. I am also curious on the numbers for Indonesian T31.
Indonesia isn’t buying the T31 (honestly no-one would). They are building A140 in country by PAL. They have bought the right to build the design & a construction support package from Babcock et al. Unless some design fault surfaces, it’s money in the bank.
T-31 is A140, it’s just a specific fit out of the design.
And there’s also the three Polish A140 frigates.
Here we go again, HS2, Cross rail and numerous others.
How much will the Labour Government secretly hand them? in the name supporting British industry? I get that costs have gone up in the years since they got the contract.
Have Babcock built a whole hull this size before?
Nope nothing, never built a complete ship from scratch and at a Yard that hasn’t either. The QE’s were assembled from largely pre outfitted Mega Blocks from other Yards (Mainly BAe on the Clyde).
What could possibly go wrong ?
They will be fine, i am sure ‘Carry on ship build’ will have a happy ending. ?
Carry on up the Cl, I mean Forth..
See my fav one is Carry on up the Khyber. How these people get contracts when its clearly way past their expertise level?
😀
In Engineering, Innovation is by definition beyond the organisations competence, and how the competence is built within acceptable limits…
To technical for me i’m old
So as a company they made a profit. I really see no point in “reporting” waffle like this.
But surely given this site’s interest in all things defence related and given this “waffle” is specific to the T31 Build, it makes absolute sense ? I’m interested in this even if you aren’t.
So according to Babcock the only reason for this £190 million loss is down to “maturing of the design” and Labour costs in the Rosyth area. l can’t say I’m too surprised as no ship has ever been fabricated, built or outfitted at Rosyth nor anywhere else by Babcock before these. It’s a huge task to undertake and it’s pretty obvious they massively underestimate just what was involved and how much it would cost. But they seem to have accepted that will absorb the loss, they are taking steps and deliver on their contractual obligations, specifically the in service dates.… Read more »
Facts they have fabricated units from scratch Sponsons and bow for carrier, they have had final assembled/built of 2 carriers, have outfitted many ships and subs in refit which is far more complex than build.
“According to the trading update, “The outturn over the lifetime of the contract has deteriorated by £90 million, which has been fully recognised in FY24. The cash impact of this loss is expected to be realised over the remainder of the contract.”…” Does that necessarily equate to a £90m loss (as in negative profit) or does it include some element of expected profit not now going to be realised? If Babcock went into the contract expecting the outturn over the lifetime of the contract to be break-even i.e. expecting it to generate no profit, then yes a deterioration of £90m in… Read more »
If you do some digging Babcock admitted last year after the £100 million loss and renegotiation with HMG they would make zero profit on this contract.
So yep its heading toward £190 million loss oa.
I don’t understand this. Aren’t you double counting? The “£100m loss” was a renegotiation number when they said they were going to lose £50m-£100m going into talks with HMG. It reads to me like they didn’t get a renegotiation top-up, so this year they put £90m on the books as the latest estimate of losses. If so, you can’t add the two numbers together!
Oh not just me then. I was wondering originally if it were a calculated 100m loss over contract life estimated last year and 90m estimated this year which would look like an improvement overall which might have accounted for the improved processes they talk of, but other comments around worsening don’t seem to support that. So what is it, a 100 m actual loss last accounting year but a 90m loss estimate for the rest of the contract now? Seems a strange way of doing it but I suppose could be taken as an improvement.
If they anticipate a loss on a long term contract, they have under FRS102 to recognize that in the accounts as soon as the loss looks likely and is properly quantifiable So they now expect to lose £190m by the end of the contract, (unless MoD provides further funding). If they expected an overall profit on such a contract, they could choose to recognise it on a % completed basis or, more prudently, only on full completion of the contract.
The company entered into a dispute resolution process with MOD in April 23. This seems to have been paused- I’m not sure why. The contracts were fixed price. Presumably Babcock factored expected inflation into their costings. But actual inflation in this sector has run higher than CPI. The losses reported are worst case scenario, assuming that no additional funding from MOD will be forthcoming.
” The losses reported are the worse case scenario”, erm actually no, these losses are filed with HMRC. They are factual I think you will find.
Companies are obliged to make a realistic estimate of a loss expected on a long term contract. But it is just that – an estimate – since precise numbers for costs in future years cannot be ” factual” at that stage. Worst case scenario meant assuming that no additional funding from MoD would be forthcoming to mitigate the loss.
As I understood it the dispute resolution was resolved.
Naval technology website still says it is paused. Some changes to the original planned weapons fit may be recoverable through additional funding beyond the fixed design/ cost contract
If it has been resolved, Babcock are still expecting to lose £190m.
NL announced it some time ago,confirmed again with the recent article.
Question, how does the fitting of the mk41 VLS silos to the type 31 frigate factor into all of this??
I would guess that any additional non contractual changes would be HMG funded (Tax Payer Funded) but it still doesn’t have any baring on these losses.
Should have made more 26’s and kept a common hull & majority design.
We’d be waiting more than 10 years for any additional T26s, T31 may have saved costs but its also going to get us Frigates far sooner than waiting for all the T26s
Yup. The only way that additional T-26’s would have come would have been
A) a lot of extra funding, because common hull is all well and good but when the price difference is 3-400 million for a Inspiration and 1billion for a City Class Frigate that means very little.
B) Starting the first City Class Frigate in 2014 when the design hadn’t been finalized somehow.
T26 is a large very very expensive design. As the Hunter class design has shown, there are options that can turn it into a destroyer if you want. A GP T26 is a waste of money any way you look at it.
How is it a waste of money. The Austrlian modifications are compromising its ASW role.
Ignoring that. What radars or AAW missile systems would you even put on a multirole T26 for the UK, we won’t have a future air defence system till T83, that’s a huge cost to add onto our ASW replacements and would more than likely slash numbers
A GP frigate in UK terms has no ASW functionality. How is it not a waste of money to build a specialist ASW hull and then not fit it out for ASW? Unless economies of scale outweigh the extra costs, or you expect to upgrade them in the future, how can you justify the £400m extra over a T31 GP?
I mean ideally GP designs should have some basic underwater detection ability but yes, that’s the main issue I had with the 5 “GP” T26, apart from not having a TAS how much cost could you really save
A GP Type 26 would still be equipped with a Type 2150 Bow Sonar – stick a Merlin in the Hangar and you would still end up with a Capable ASW Ship compared to a lot of others.
So they undercut other bidders to win the work and now they are cwingeing. Shipyards on the Tyne closed because of this. You bid it, such it up.
Not surprising given how high inflation has been since they were first ordered and given how low it had been before their costings would have been out.
Uk used to be leaders in many industries but successive governments of all persuasions aided unwittingly by the unions blinkered thinking , have sought to dismiss the skills of the British worker, and each government is trying to repair the damage by importing foreign labour or by farming out lucrative contracts to other countries. It hasn’t worked. Those skills that our governments have so readily tossed aside and lost will have to be built up again over generations, even with AI. Then perhaps when a company quotes for a project they will be able to build it for the quoted… Read more »
We need to order a second batch. Add the loses to this 2nd batch and deliver another 5.
I do love seeing the stark left and right of arc in this thread, from “HOW DID BABCOCK GET THIS CONTRACT ARGH!” to “LET’S ORDER FIVE MORE!” 😂
All working from home
Lets get european rubber dinghy’s , the ultimate stealth weopon,evades all governments and borders.far cheaper than scottish ferries.just like the vikings a few centuries ago ,the crew members will be welcomed here to rape and pillage our benefits system..Starmer the great ,they will cry as like many before (‘saville,grooming gangs’)they will be the very people the put the great in britain!