(Bloomberg) -- Babcock International Group Plc said its contract with the UK government for five war ships is deteriorating in value amid rising labor costs at the Rosyth shipyard in Scotland where the frigates are being assembled.
The increase in labor costs means the contract value will decline by £90 million ($117 million), which the company will book in its full-year earnings, the shipbuilder said in a statement. Babcock said it had previously estimated labor costs at Rosyth to be within the consumer-price index, which the company had applied as the index for the contract.
The London-listed company signed the Type 31 frigate contract with the Ministry of Defence in 2019, but the program has since then been mired in disputes and cost overruns. Babcock fell as much as 4.4% in London trading after the contract update. The stock has gained 36% in value this year.
Babcock said the main structure of the first ship is almost complete, with work progressing on the second vessel. The company said it’s initiated an savings program to “challenge all aspects of the contract.” It reported an adjusted operating profit of £237.8 million for the full year that missed estimates of £292.8 million, according to Bloomberg Consensus.
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