The Treasury and the Ministry of Defence (MoD) have agreed a £3.9 billion budget to build two Royal Navy aircraft carriers, The Times has learnt.

An announcement is expected before Easter after long talks between the consortium that will build the carriers — led by BAE Systems and Thales UK — and the Government.

The budget includes incentives to lower the price, with the shipbuilders taking a share of any cost reductions. This is seen as a key change in defence procurement and is likely to set the standard in future.

Under terms of the contract, the top price for the two ships will be £3.9 billion and it is hoped that savings will eventually cut that to £3.6 billion.

A further incentive programme will encourage the shipbuilders to share costs with France, which is also preparing to build a carrier. This could save a further £300 million.

Apart from BAE Systems, the consortium includes VT Group and Babcock. Thales UK is responsible for design.

The Future Carrier Alliance, as the consortium is known, is an attempt by the MoD to pool industrial talent and get away from the procurement culture of cost overruns and production delays.

Although Lord Drayson, the Defence Procurement Minister, is expected to confirm the decision to go ahead with the carriers by Easter, a formal contract is unlikely to be signed before the autumn.

The ships will be called HMS Queen Elizabeth and HMS Prince of Wales and will form the backbone of the Royal Navy for 30 years. They are due to enter service in 2012 and 2015. BAE joint venture, page 53

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