London Defence company BAE Systems has warned the British government that it cannot build two new aircraft carriers to budget based on the current designs, according to a report in the Financial Times yesterday. Britain's biggest defence contractor has told the defence ministry that it would cost up to £4bn to construct the ships, compared with an estimate of £2,8bn made in January, the paper said.

The report, which cited unnamed defence ministry officials, said the government might have to accept a sharp reduction in the size of the aircraft carriers, which were due to be the biggest and most powerful yet built for the Royal Navy.

BAE won the role of lead contractor in the deal in January after a fierce battle with French rival Thales, whose designs were selected for the ships.

The navy has been told there are no extra funds available. So to meet the original budget, planners have been asked to consider designing smaller and less sophisticated ships, the paper said.

One defence ministry official said: "The choice is bleak. We either find more money or we build smaller carriers."

BAE and the defence ministry sought to play down the report, noting that a final decision on the cost of the project is not due until early next year. "We are in the assessment phase of the contract, which is designed to optimise the balance between performance, the time and costs, and be sure that we deliver the most cost- effective capability on time," said a defence ministry spokesman.

"Various options are being investigated as a routine task of this process but nothing will be fixed before the major investment decision to be made next year."

With acknowledgement to the Business Day.