Key contract signed for new frigates

The federal government has signed an interim contract with BAE Systems Australia for construction of the navy's $35 billion Hunter Class frigates.

Defence Minister Christopher Pyne says the Advanced Work Arrangement will cover the ongoing work on the frigate program ahead of an agreement on the head contract.

"The AWA is an interim contract which enables BAE Systems to continue to mobilise its workforce and progress the critical work required to ensure the project remains on track to start production in 2020," Mr Pyne said on Thursday.

The minister said Adelaide-based defence shipbuilder ASC was currently transitioning to become a wholly-owned subsidiary of BAE Systems, with negotiations between the two companies and the department of finance making good progress.

He said work was also continuing on the head contract for the program with the signing expected later this year.

BAE Systems was announced in June as the government's pick to build the nine frigates with the company beating out rival bids from Italian and Spanish groups.

Spokesman Nigel Stewart said the interim contract would allow the company to mature its design and engineering plans.

This is a very important and early milestone in the development of an enduring world-class naval shipbuilding industry in Australia," he said.

"The AWA demonstrates a commitment by both BAE Systems and the Australian government to ensure timely progress on this critical defence program."

The new frigates will give the navy its highest levels of lethality and deterrence to hunt and kill submarines while the construction program will create 5000 direct jobs nationally and 10,000 indirectly through the supply chain.

They are expected to begin entering service in the late 2020s as replacements for the ageing Anzac-class ships.

The design will be based on BAE's Type 26 frigate, which the company is constructing in Glasgow for the British Royal Navy.