Procurement: March 12, 2003


British defense manufacturer BAE took a major fiscal hit when they agreed to fixed price contracts for designing and building three new nuclear subs (the Astute class) and three new naval recon aircraft (Nimrods). The 1990s era contract was originally worth $7.6 billion. The first sub and aircraft were to be in service by 2001. But now the first sub is not expected until 2008 and the first Nimrod won't enter service until 2009. BAE will eat $1.2 billion in cost overruns, but will get another billion dollars to complete the projects, and an incentive plan if they come in under budget, and protection from most losses if they go over budget. The problem with this contract is an old one. Both the sub and aircraft projects involved developing a lot of new technology. But it was politically expedient a decade ago for BAE to offer a fixed price deal. That was fine if they were dealing with predictable risks. But they weren't, and no one at the top in BAE or the government were willing to admit that these fixed price contracts rarely work. And it's not just because of the uncertain cost of new technologies, but because the government usually tries to change the specifications, without wanting to pay for the extra work. As a result, many firms refuse to undertake defense work, or will only do so on contract terms that are practical and fair, not political and hopeless. 


Article Archive

Procurement: Current 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 



Help Keep Us Soaring

We need your help! Our subscription base has slowly been dwindling. We need your help in reversing that trend. We would like to add 20 new subscribers this month.

Each month we count on your subscriptions or contributions. You can support us in the following ways:

  1. Make sure you spread the word about us. Two ways to do that are to like us on Facebook and follow us on Twitter.
  2. Subscribe to our daily newsletter. We’ll send the news to your email box, and you don’t have to come to the site unless you want to read columns or see photos.
  3. You can contribute to the health of StrategyPage. A contribution is not a donation that you can deduct at tax time, but a form of crowdfunding. We store none of your information when you contribute..
Subscribe   Contribute   Close