A German shipbuilding company has won the $3.5 billion contract to design and build Australia's next fleet of 12 Offshore Patrol Vessels (OPVs), with construction to be shared between shipyards in Western Australia and South Australia.

Key points: Up to 1,000 Australian workers will be employed for the offshore patrol fleet project

Up to 1,000 Australian workers will be employed for the offshore patrol fleet project Austal's shipyard near Perth will be used for 10 OPVs, but its bid partner was ignored

Austal's shipyard near Perth will be used for 10 OPVs, but its bid partner was ignored The WA and SA Governments have welcomed the deal as a "great" outcome

The first two Luerssen-designed ships will be built in Adelaide by the Government-owned ASC Shipbuilding from the end of next year.

The remaining 10 OPVs will be built at the Austal shipyard at Henderson, south of Perth.

The project is expected to employ up to 1,000 Australian workers, including 400 direct jobs and 600 in the supply chain.

The surprise twist in the announcement is that the appointment of Luerssen will require Austal to break ties with its bid partner, European shipbuilder Fassmer.

But Defence Industry Minister Christopher Pyne said the structure of the contract would not add time, cost or risk to the project.

"We are using all the resources that are available to us," he said.

The West Australian Government welcomed the appointment of Luerssen and its commitment to jobs in the State.

But the WA Minister for Defence Issues Paul Papalia expressed surprise in the decision to split Austal and Fassmer as tender partners.

"It is an interesting process," he said.

"Not what you'd expect from the request for tender process normally, but all I've got to say is for Western Australia it's a great outcome," he said.

'Unalloyed good news': Weatherill

South Australia's Premier Jay Weatherill said the Federal Government had made the right choice.

The first two OPVs will be built at ASC Shipbuilding in Adelaide. ( ABC News: Michael Coggan )

"There are 400 families [in South Australia] that were going into Christmas wondering whether they had security," he said.

"Now we will see a pipeline of work that can bridge the gap between the end of the Air Warfare Destroyer project and the beginning of the Future Frigates project.

"This is unalloyed good news today and I'm not going to criticise the Federal Government for making this decision.

"This is exactly what we've been asking for and it's a great decision."

The new OPV fleet will conduct intelligence and surveillance missions, search and rescue, humanitarian assistance, disaster relief and border protection patrols.

The Federal Government said the ships would be larger and more capable than the current Armidale-class vessels.

Bid partner 'disappointed': Austal

Austal said the announcement provided certainty for local jobs and the shipbuilding industry.

"The important thing about the jobs is not only the number, it's the longevity," Austal chief executive David Singleton said.

"1,000 jobs is great. 1,000 jobs for 15 years, that's really worth something to everybody," he said.

Mr Singleton said he had spoken to representatives from Fassmer.

Austal CEO David Singleton says the jobs created by the deal will be long-lasting. ( ABC News: Andrew O'Connor )

"Obviously they're disappointed that they're not involved but they — like us — bid [on] a lot of programs around the world, and you win some and you lose some," he said.

"They're used to winning and they're used to losing."

Mr Singleton said the terms of the contract with Luerssen were yet to be negotiated.

He added it was not yet clear how much federal infrastructure funding would be provided for the project.

"We're not expecting for Austal to have to fund large swags of capital investment," he said.