BAE Systems won $45bn contract to build Hunter-class frigates without effective tender process

British defence giant BAE Systems was selected to build the navy’s Hunter-class frigates ahead of preferred rivals without an assessment of its bid’s value for money.

An artist’s impression of a Hunter-class frigate. Picture: BAE

British defence giant BAE Systems was selected to build the navy’s $45bn Hunter-class frigates ahead of preferred rivals without an assessment of its bid’s value for money.

An explosive auditor-general’s report found the Turnbull government failed to conduct an effective tender process for the massive procurement – one of the nation’s largest ever – and warned the troubled program was facing further cost blowouts and delays.

The audit found the procurement process “lacked a value for money focus”, and that “key records, including the rationale for the procurement approach, were not retained”.

“The value for money of the three competing designs was not assessed by officials, as the Tender Evaluation Plan proposed,” the Australian National Audit Office said in its report, tabled in parliament on Wednesday.

“Contract expenditure to date has not been effective in delivering on project milestones, and the project is experiencing an 18-month delay and additional costs due in large part to design immaturity.”

It said the cost of the program was set to exceed its $45.6bn government-approved budget “by a significant amount”, and that the first of nine frigates now wasn’t due to be delivered until mid-2032.

The audit found a February 2016 meeting of a key Defence committee believed Italy’s FREMM and Spain’s modified F-100 frigate “were considered the two most viable designs”.

The findings come as the Albanese government considers the future of the Hunter-class program amid soaring costs and a push to get new capabilities faster than BAE’s two-decade build schedule.

The government’s surprise five-month review of the navy’s surface fleet requirements follows last month’s defence strategic review, which considered calls to slash the number of Hunter-class frigates.

Defence’s offshore patrol boat program is also under a cloud, amid concerns the 12 Arafura-class ships will be too lightly armed for a potential conflict.

The audit follows warnings by Defence engineers – revealed by The Australian – that the ship would be “substantially” slower, have a shorter range than originally intended.

The Defence “Engineering Team Assessment” set out an array of problems with the “immature” British design, which is being substantially modified to meet Australian requirements, and warns that the government’s contract with shipbuilder BAE Systems provides “very limited means … to influence contractor performance”.

Confirmation of the botched frigate tender follows the Morrison government’s cancellation of the French Attack-class submarines, which cost taxpayers at least $3.4bn.

But slashing the Hunter-class frigate tender order will be politically difficult, as Britain and BAE Systems are key partners in the AUKUS submarine project.

Defence Minister Richard Marles last month defended the need for a further review, describing it as a “short condition check at this moment in time about the future shape of our surface fleet”.

“Now that we are going to be operating a nuclear powered submarine, that is a dramatically different capability, and it obviously has some implication in terms of the overall structure of the navy…as we think about the next three decades,” he said.