U.K. Seeks Savings by Rewriting BAE, Rolls-Royce Contract Rules

The U.K. government plans to renegotiate 42-year-old rules governing contracts with defense suppliers including BAE Systems Plc and Rolls-Royce Group Plc to save millions of pounds to help cut a record budget deficit.

Companies such as BAE, which builds Astute class submarines, and Finmeccanica SpA’s AgustaWestland unit, which makes Merlin helicopters, may no longer be able to charge the government for part of their office running costs, as they can now under guidelines drawn up in 1968, the minister in charge of defense procurement, Peter Luff, said today.

“It’s a cosy relationship that’s 42 years out of date and ripe for reform,” Luff said in an interview in Birmingham, central England, where he is attending the Conservative Party’s annual conference. “It should have been reviewed much sooner.”

Luff said he wants a “modern commercial relationship” with suppliers. That will require an updating of the “Yellow Book” of rules that sets out the government’s relationship with companies that produce equipment vital to the U.K.’s security. Other companies affected include European Aeronautic, Defence & Space Co., Thales SA, and QinetiQ Group Plc.

The U.K. currently contributes funds to subsidize the management of some defense companies, overheads such as depreciation and pensions, redundancy payments and research and development. This subsidy will be reviewed, Luff said.

‘Value for Money’

“Here is another way in which we can drive down the cost of the Ministry of Defence’s contractual relationship and provide value for money for the taxpayer, but it will take some time to deliver,” Luff said, adding he thought the renegotiation process would take around 18 months.

The government will announce in two weeks’ time the results of the first review of U.K. defense capabilities since 1998, and the ministry wants suppliers to work with it to cut costs. Companies supplying equipment to the armed forces are likely to find out within weeks whether weapons programs will go ahead or be scrapped.

The defense ministry invited 11 of its top suppliers, including London-based BAE, Rolls-Royce and QinetiQ, Lockheed Martin Corp. of the U.S. and Italy’s Finmeccanica, to hold cost-saving discussions following the May 6 election that brought a coalition of Conservatives and Liberal Democrats to power.

Of those invited, only Rolls-Royce refused to take part, Luff said.

“To have had the exchange would have been helpful, and I think Rolls-Royce recognise their mistake and I look forward to engaging with them constantly during the Yellow Book review period,” Luff said.