Defence Business: AWD, LHD cross the dotted line

1 November 2007

By Julian Kerr

With the signing of two major naval contracts worth $11.1 billion, Defence and industry are into the most challenging part of the AWD and LHD projects: delivering these platforms on time and within budget.

With final construction contracts now signed for the Royal Australian Navy’s (RAN’s) new air warfare destroyers (AWD) and amphibious ships, the stage is set for two projects that each break new ground – albeit expensively.

The $8 billion dollar contract for the three Hobart class AWDs will be the largest naval shipbuilding project yet undertaken in Australia. Plus the $3.1 billion dollar contract for two 27,000 tonne landing helicopter dock (LHD) ships will result in the RAN’s largest-ever platforms.

All this comes at a cost. The AWD contract is $2 billion above the highest estimate published in the current Defence Capability Plan (DCP) while the LHD agreement is $1.1 billion more than the top-range DCP estimate.

This pushes the combined cost of the two projects to 38 per cent above figures anticipated in the DCP, before a hull plate has been cut.

Given the escalations prevalent in major defence contracts and the duration of the AWD project – the third ship will not be delivered until mid-2017 – it would not be unreasonable to assume costs will increase in the longer term, although these are likely to relate to capability requirement changes or changes relating to amended or new legislation.

As an example, amendments to the AWD baseline - derived from the latest of the F100 class of Aegis-equipped frigates to enter service with the Spanish navy – have been necessary due to equipment obsolescence, compliance with Australian legislation, and mandated capability changes such as the Nulka decoy system and the MU 90 lightweight torpedo.

Who signed what
The principal AWD contract signed on 4 October was the three-way Alliance-based Target Incentive Agreement (ABTIA) between the Commonwealth represented by the Defence Materiel Organisation (DMO), ASC Shipbuilder Pty Ltd. as the Shipbuilder, and Raytheon Australia Pty Ltd as the AWD Combat Systems - Systems Engineer.

The Platform System Design contract between the Commonwealth and Navantia S.A , the designer of the F100 class, was signed at the same time. The AWD platform design will now be provided by the Commonwealth to the Alliance.

Purchase of the Aegis combat system under the US Foreign Military Sales program is the subject of a separate agreement between the US and Australian governments. The Aegis system forms the core of the AWD combat system.

The ABTIA approach for the AWD project was endorsed by Government in the wake of the 2005 Carnegie-Wylie report into the naval shipbuilding industry, which took the view that more traditional methodology in other naval construction programs had shown only limited success.

The ABTIA terms and conditions were developed by the DMO, in conjunction with ASC and Raytheon, during the recently concluded Phase 2 (Design Phase) of the program.

In this competitive phase the ‘Existing’ platform design based on the latest F100 was selected over the competing ‘Evolved’ design proposed by Gibbs and Cox. This comprised elements of the DDG 51 Arleigh Burke and the Gibbs and Cox International Frigate platform designs.

A source close to the program explained to ADM that ASC and Raytheon Australia as the Industry Participants (IPs) have a primary responsibility for delivering AWDs that conform with the performance specifications, and providing them within schedule and budget.

The Commonwealth is responsible for providing the Aegis combat system, and takes any performance risk linked to it.

The IPs provide financial securities and guarantees to the Commonwealth and there are also step-in rights, allowing the Commonwealth to take over and complete any work unable to be performed by the shipbuilder.

Risk sharing
Generally, pain and gain in terms of schedule and cost is shared within the Alliance, with the Commonwealth taking 50 per cent and ASC and Raytheon Australia 25 per cent each.

Most of the activities undertaken by the IPs are chargeable and reimbursable as direct project costs (DPCs) and both companies have an undisclosed percentage on top of that (described by the source as being in line with industry norms) as their target fee (non-reimbursable DPCs generally benefit one company rather than the Alliance).

The DPCs are used to compile the target cost estimate (TCE), which is essentially the cost of the work to produce the ships. Above that sits the fee component, in many ways equivalent to the profit line in a traditional contract.

Other financial incentives are linked to key performance indicators and early provisional acceptance of the ships.

According to the source, the Commonwealth retains “plenty of levers and buttons” in controlling the fee outcomes.

Any increases or reductions in fees over issues of schedule and/or cost are decided by the AWD Project Board, which includes AWD Alliance CEO John Gallacher, DMO AWD Program Manager Warren King, and Raytheon Australia Managing Director Ron Fisher. A major principle of the Board is that all decisions must be unanimous.

The LHD construction contract signed on 8 October came just one day before the announcement that Tenix Defence was for sale, and will have done nothing to reduce the value of the business.

Although the Australian LHDs will be based on the strategic projection ship (BPE) designed and being built for the Spanish navy by Navantia, in this project Navantia is acting as a subcontractor rather than a principal.

According to Tenix Chief Executive Greg Hayes, the project will provide more than 1,500 jobs, 500 of them new, and indirect work for another 1,000 people around Australia.

The superstructure for both ships will be constructed by Tenix and subcontractors, largely at Tenix’s Williamstown shipyard; combat system integration will be performed in Adelaide; and assembly of the ships will also be carried out at Williamstown after the arrival of the hulls from Navantia’s Ferrol shipyard in northwestern Spain.

The first hull will arrive in Australia in July 2012 and the second in February 2014, allowing about a year to complete assembly and fitout before delivery.

The size of the Canberra class ships was put into context at the contract signing by Defence Minister Brendan Nelson, who pointed out that just one of the vessels will be able to carry the equivalent of Australia’s entire current amphibious capability.