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19 Mar 04. Two announcements last week may give indications as to the UK’s defence industrial base increasing its resistance to the current fixed price contracting regime. The FT reported below that BAE is expected to lose the Prime Contractorship for CVF and Lockheed Martin (UK) Ltd announced its withdrawal from the DII competition citing shareholder priorities. But do these announcements also indicate the arrival of the inflation spectre in the overall economy. For BAE to be expected to keep its fixed price on CVF when, due to Chinese influences, the price of steel alone has risen by as much as 30% over the past three months – 65000 tonnes represents a lot of steel. At the Commercial Vehicle Show in Birmingham this week, there were indications that European producers such as MAN were poised to raise their commercial vehicle prices in the Uk by as much as 15% in the coming months, how will this affect the company’s bid for the Support Vehicle Contract, it certainly leaves little room for maneuver when the U.S. competitors currency movements have gone the other way from 1.66 at time of bid to 1.82 pound to the dollar today.

If the DPA takes over the Prime for the carrier supported by AMEC this will certainly suit BAE who has already told the DPA that the budget for the carriers is too low for the tonnage required. They would then be freed from the shackles of a fixed price Prime Contractorship, with all the risks that entails and get a market price for the shipbuilding activities. But, the question must be posed, if the DPA Prime goes over budget, there is only one organisation meeting the bill, the UK taxpayer, not this time, industry’s shareholders.

The UK’s Ministry of Defence is expected to finalise the make-up of the industry team that will build the Royal Navy’s two new aircraft carriers next week – a structure that will leave BAE Systems out of the role of prime contractor, people familiar with the decision said on Friday.

When the ministry announced the winner of the carrier competition last year, BAE was named as the “preferred prime contractor” in a partnership with the UK arm of French defence contractor Thales. But in a decision expected to be published in a letter to the industrial partners next week, neither Thales nor BAE will be named as prime. The exact structure of the team is still being ironed out, and, according to people close to the industry, it is the subject of internal disagreement within the MoD. Some senior officials within the MoD’s defence procurement agency (DPA) are pushing for the prime contracting role to be taken in-house, with the government managing the project on its own, industry sources said.

Alternatively, a third company with expertise in large project management could be brought in to take over the lead role. Under such a scenario, the contract could be broken up into pieces, with one company taking the lead on shipbuilding and another taking on the ship’s internal systems.

“They believe this is such a large, complex programme, that they feel uneasy about it and they need a new way to go about doing it,” said one person familiar with the MoD’s thinking. Talks over the carrier contract have dragged on for a year and a half. There has been a struggle between the RN and the DPA, with the RN pushing for additional capabilities and the DPA warning that costs could balloon well over the original £2.8bn ($5.1bn) budgeted for the ships. Industry officials say carriers with the RN’s desired capabilities could cost £3.5bn.

A BAE spokesman declined to comment, and an MoD spokesman would not discuss the decision-making process.

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