LONDON — Babcock International is in a dispute with the British Ministry of Defence over who is responsible for rising costs on the Royal Navy’s Type 31 contract, a case that may end up in arbitration if the two sides fail to resolve the problem.

The British shipbuilding and support company told investors in a pre-results statement April 20 that the argument with the MoD could require the firm to make a one-off provision of between £50 million and £100 million ($62 million-$124 million).

The two sides have been in negotiation for months over exactly who should pay for program cost increases.

“We have been unable to reach agreement with our customer as to who is responsible for the additional costs under the contract. As a result, a dispute resolution process (DRP) under the contract has commenced,” the company said.

A spokesperson for the MoD said they would not comment on the contract discussions.

Babcock has chalked up the issue to “material macroeconomic changes not foreseen at the time of contract inception,” the shipbuilder said.

The company declined to go into detail, but it’s a possible reference to the impact high inflation has had on the British economy over the last 12 months.

The MoD awarded Babcock a deal in November 2019 to build five of its Arrowhead 140 frigates at the company’s Rosyth, Scotland, shipyard at an average cost of £250 million per ship.

Failure to recover the additional costs from the government would put the build contract into the red, said Babcock.

“To date, we have recognized over £600 million of revenue but no profit on the program,” reads a company statement.

Babcock said the dispute would have no impact on the progress or profitability of existing Arrowhead 140 export contracts.

The frigate, a variant of the Danish Navy’s Iver Huitfeldt design, has already scored export sales successes with Poland and Indonesia, and the company said it is in active discussions with other potential customers.

Two of the five multi-purpose warships destined for the Royal Navy are already in construction, with the delivery of the entire fleet, known as the Inspiration class, set for 2028.

Babcock said the program remains on schedule with the first-in-class ship, HMS Venturer, due to be structurally completed in December.

Andrew Chuter is the United Kingdom correspondent for Defense News.

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