Babcock International Group PLC on Thursday said it has begun a dispute resolution process regarding its Type 31 contact with the UK Ministry of Defence.

Babcock is an aerospace, defence and nuclear engineering services company based in London. Shares in firm were down 2.4% at 285.00 pence on Thursday morning in London.

In November 2019, Babcock was awarded a Type 31 contact by the UK Ministry of Defence to deliver five Inspiration Class frigates for the Royal Navy at an average production cost of £250 million per ship. To-date, the company has recognised over £600 million in revenue on the programme but no profit.

Babcock said, throughout financial 2023, it has been in talks with the customer regarding additional forecast costs resulting from ‘material macroeconomic changes’ that were not foreseen at the inception of the contract.

These changes have led to an increase in the actual and projected programme costs to deliver the programme as planned, the company said. The programme is expected to conclude in 2028.

Babcock explained it has been unable to reach an agreement with the customer as to who is responsible for these additional costs. Consequently, a dispute resolution process has begun.

‘If the contractual position remains unresolved, the lack of recovery of these additional costs would need to be reflected in the group’s [financial 2023] year end results,’ Babcock said.

‘Without recovery of the additional costs, the contract would be loss-making and our preliminary assessment, subject to finalisation and audit, is that a one-off provision of between £50 million and £100 million would be required to cover the duration of the contract. The related cash impact would be of a similar amount, realised over the remainder of the programme. Any settlement or arbitral award would reverse the provision in part or in full.’

More positively, the company noted on Thursday that cash flow in the year ended March 31 was ‘significantly’ ahead of expectations, reflecting a strong operational performance and the conclusions of its disposal programme.

Meanwhile, its underlying profitability in financial 2023 was in-line with expectations when excluding the potential one-off impact of the Type 31 contact.

Babcock added that, given the stronger than expected cash performance, it now expects to reinstate a dividend in financial 2024.

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