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19 Feb 03. BAE Systems said Wednesday that it and the U.K. MoD have agreed changes to the contract structure for both the Nimrod MRA4 maritime patrol aircraft programme and the Astute attack submarine programme.

The agreement enables the company to recognise the cost to complete these programmes under the new contract terms. As a consequence, exceptional costs of £750m (£572m after tax) will be charged to the 2002 accounts comprising £500M for Nimrod and £250m for Astute.

These charges cover in full the company’s residual exposure to higher development costs up to maximum level established for the company by this agreement.

The cash consequences of these charges, after tax, are expected to comprise £225m in 2003 and £100m in 2004 with the balance of £250m expended in 2005 and beyond, BAE said.

These new terms mean that these programmes can be completed by the company with financial certainty.

On Feb. 20 the company will announce its Preliminary Results for the year ended Dec. 31.

The results will reflect the generally stronger performance, envisaged at the time of the company’s 2002 interim results, through the second half of the year before taking account of the exceptional charges for the Nimrod and Astute programmes described.

In 2002, the company’s North America business group and Customer Solutions and Support continued their good performance. The anticipated performance in the second half of the year was delivered in the Avionics business group. As indicated previously, the performance in the International Partnerships business group was impacted by losses last year in the Astrium space systems activity that the company agreed to sell to EADS in January this year.

BAE said Airbus contributed a good performance given the difficult market conditions. In December 2002, BAE said additional issues had arisen in relation to these programmes and that it had become apparent that there were substantial schedule and cost implications. Under the terms of Wednesday’s agreement, the current contracts for design, development, production and support on each of the two programmes will be revised.

These revisions will separate the Design and Development phase of each programme from the Production phase, BAE said.Design and Development will be completed under new Target Cost Incentive Fee (TCIF) arrangements.Both programmes will be placed on a firm footing for the delivery of the Astute and Nimrod capabilities into service.

BAE said it and the MoD have established new Target Costs and Fee levels for both programmes, and have high levels of confidence of delivering the programmes within these new target levels.

Up to the Target Cost level, cost saving will be shared by the customer and company as an additional Incentive Fee for the company. Any cost overruns above the Target Cost will be shared by the customer and the company, up to the maximum level established for the company by the agreement.These new arrangements will place a significant economic incentive on the company to perform. The company has reviewed its project management of these programmes, consistent with Wednesday’s best practice, and is taking actions based on lessons learned.BAE said pricing of the Production phase of each programme will be concluded following achievement of sufficient risk mitigation from the Design and Development phase to enable production costs to be established with confidence.

The difficulties in the Astute programme stemmed principally from moving the design of the submarine to a fully electronic CAD (Computer Aided Design) design basis – a process that neither party understood would be as difficult as it has turned out to be.

Production work on the Astute Programme will only be resumed after design maturity has been established, BAE said.Design and Development, which include

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