Austal receives approval as Australia's strategic shipbuilder
Austal has finalised its "strategic shipbuilding agreement" (SSA) with the Australian Government, which will appoint a newly created special purpose vehicle and Austal subsidiary, Austal Defence Shipbuilding Australia, as the government's "strategic shipbuilder" for the so-called "tier II" surface combatants at Henderson, Western Australia.
Austal said the government has now approved the terms of the SSA. Following this approval, the formal SSA and related contract documentation are currently being prepared and will be executed imminently.
This follows Austal’s announcement to ASX of the heads of agreement to establish the SSA on November 23, 2023.
Under the SSA, Austal Defence Shipbuilding Australia will become the prime contractor for the build and delivery for the landing craft medium (LC-M; expected to be 18 vessels) and landing craft – heavy (LC-H; expected to be eight vessels) programs previously announced as the pilot shipbuilding programs under the SSA.
Austal and the Australian Government are currently in discussions to finalise contractual arrangements for each of the two pilot programs. Subject to conclusion of those discussions, details of each pilot program will be announced separately.
The SSA will establish a management framework and common terms through which Austal Defence Shipbuilding Australia will deliver the tier II surface shipbuilding programs in Western Australia under shipbuilding contracts, using a variety of key contractors and suppliers including, but not limited to, Austal’s other shipbuilding entities.
Shipbuilding programs under the SSA will generally be structured on a "target cost incentive" basis, which will provide reimbursement of the SSA entity’s allowable costs plus a profit margin subject to "painshare/gainshare" adjustments.
The SSA will also seek to develop a supply chain in the Henderson shipbuilding precinct to deliver the government's continuous naval shipbuilding capability in Western Australia and meet strategic objectives for the development of Australian sovereign shipbuilding capability.
Although details of the SSA pilot programs are still being determined, Austal anticipates that Austal Defence Shipbuilding Australia will generate significant revenue from the SSA (for its management and delivery of the LC-M program) over the eight-year term of the proposed LC-M contract, in addition to the construction revenue that will be accrued by Austal Ships.
Vessel construction outline
The revenue earned by Austal Defence Shipbuilding Australia for management and delivery of the LC-H project, if awarded, remains to be determined although it is noted that this would be a substantially larger project than the LC-M project.
The design and construction of the LC-M is intended to be the first program to be awarded and delivered under the SSA.
The government and Austal expect contracts for the LC-M program to be finalised in Q1 FY2026 and that these will provide for the construction of 18 vessels for the Australian Army over eight years for a price of AU$1 billion to AU$1.3 billion (US$650 million to US$840 million). The final vessel is expected to be scheduled for delivery in 2032.
Subject to resolution of contractual discussions, delivery of the eight LC-H vessels for the Australian Army, announced by the government in November 2024, is expected to follow the LC-M, with the government and Austal expected to be under contract by the end of the 2025 calendar year.
Operation of the SSA
As the prime contractor, Austal Defence Shipbuilding Australia will be ultimately responsible for all aspects of the design and integration, construction, installation, integration, testing, delivery and acceptance of the nominated vessel programs, while ensuring that each is conducted in a cost-effective manner while implementing, "progressive cost reductions and efficiency improvements in the build process," according to Austal.
The conditions of deed establishing the SSA will have an initial maximum term of 15 years.
Austal Defence Shipbuilding Australia will be established and resourced to be committed to defence shipbuilding for the Australian Government. However, Austal and its other subsidiaries will continue to carry out other shipbuilding and sustainment activities across Australia, Asia and the USA.
Austal Defence Shipbuilding Australia will employ its own workforce, primarily transferred from existing Austal corporate group entities or recruited as needed.
It will be responsible for activities such as design assurance, design engineering, strategic procurement, supplier engagement, construction management, design integration and testing and delivery.
Austal said the subsidiary will also conduct these activities in a manner that is aligned with other existing Australian Department of Defence programs, such as sustainment of the Collins-class submarines and the surface fleet in Western Australia.
