Babcock BAB.L, a British engineering company, has warned that it may face a loss of up to 100 million pounds ($124 million) on its contract with the Royal Navy to

build frigates due to inflation causing an increase in costs since the project began in 2019. The contract, known as Type 31, has impacted Babcock's positive update, where it stated that profits for the year ending in March would meet expectations and it aims to resume dividend payments in 2024.

Babcock is currently seeking to recover the extra costs from its customer, the UK's Ministry of Defence (MoD), due to "material macroeconomic changes". Babcock has initiated a resolution process that may lead to arbitration, after talks with the MoD failed to reach an agreement.

The UK's inflation rate remains in double digits, with industrial companies facing challenges from the rising costs of steel and energy. The demands of replacing weapons and ammunition sent to Ukraine, along with inflation, have put the UK's defence budget under pressure. In March, Prime Minister Rishi Sunak pledged an additional 5 billion pounds for defence.

Babcock warned that without the recovery of costs, the contract, which involves building five frigates at an average cost of 250 million pounds per ship, could be loss-making. The company has recognised 600 million pounds of revenue but no profit on the program that runs until 2028. The first ship, HMS Venturer, is expected to be completed in December. Babcock said that the ship design remained attractive, and it was in active discussions with prospective export customers. In the worst-case scenario, Babcock would need to take a one-off provision of between 50 million pounds and 100 million pounds, which would be recognised in its 2023 results. Photo: LA(Phot) Abbie Gadd/MOD, Wikimedia commons.