Kellogg, Brown & Root, the Halliburton subsidiary, has won a controversial £5 million contract to manage the construction of two Royal Navy aircraft carriers, Geoff Hoon, the Defence Secretary, announced today.

The contract has become the subject of a fierce row between the Government and executives from BAE, the formerly state-owned defence giant.

BAE executives, led by chairman Dick Olver, last month threatened to withdraw from the consortium formed to build the carriers if KBR was appointed to manage their construction.

The two carriers will be the biggest warships ever built in Europe. BAE executives have complained that KBR has not been heaviliy involved in shipbuilding before.

In a bid to keep BAE in the alliance and avoid potentially embarrassing job losses so close to a general election, the Government was reputed to have guaranteed that KBR's role in the project would be strictly limited and that the American company would not hold control of the programme.

Mr Hoon told MPs this afternoon: "Further discussions will take place with all alliance participants, including the MoD, building on progress to date to develop the build strategy for the carriers."

In a statement, the MoD said that due to the size of the proposed carriers "no single shipbuilding facility in the UK has the infrastructure, skills or capacity to build the two ships on its own.

"The carriers will need to be constructed at a number of different sites before transportation to a final integration facility which will both create and sustain thousands of jobs in dockyards across the country."

One senior defence executive told The Sunday Times this week that the wounds opened by the carrier row would be difficult to heal. "BAE’s basic point is that KBR has no track record — it has not built ships before, and yet is being asked to oversee the construction of the largest and most complex warships built in Britain."

However, MoD sources said BAE’s recent slip-ups with large contracts — particularly with the Nimrod maritime-surveillance aircraft and the Astute nuclear submarines — had encouraged the ministry to seek an external project-management company.

The wrangle has stalled another set of negotiations on "Newco", a single British warship company created from the merger of dockyards owned by BAE, VT Group, DML and Babcock.

There are four shipbuilding yards that could participate in the carrier project: BAE System’s Govan, Swan Hunter in the North East, VT Group’s facility in Portsmouth and Babcock International’s at Rosyth.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive