A project which is over budget and running late to build three state-of-the-art destroyers for the Australian Navy is putting doubt on the future of Australia's domestic shipbuilding industry.

Smaller businesses supporting the defence sector are becoming worried about their own prospects.

On and off for more than half a century, family-owned Adelaide business J & H Williams has relied on the Australian Defence Force dollar, says its managing director Craig Williams.

“[The] first Defence contract we secured was some time back in the mid [to] early 1940s repairing war-torn ships that came back from World War II,” he said.

Mr Williams is the third generation of his family to take the reins at his company.

"My father came in in about 1966 and he retired somewhere around 2002. I've been here since '91 and I took the company over and ran the company from 2002 until current," he said.

But the hive of industrial activity might not last much longer.

“Defence has been up to 80 to 90 per cent of our turnover in the last five years. That's changed now. We've seen a downturn in the defence industry with a pretty bleak outlook for where it's going to go as well,” Mr Williams said.

The business supplies welded parts to some of the defence industry's most ambitious projects, the latest being the much-maligned Air Warfare Destroyer (AWD).

The three AWDs combine a Spanish hull design with an American weapons system and are being assembled in shipyards across Australia.

Questions about value of building locally

The top-shelf technology has a $8.5 billion price tag.

But problems with the project have tarnished the reputation of the domestic shipbuilding industry and caused the Federal Government to question its value.

Defence Minister David Johnston has been far from impressed.

“The definition of trouble is, very simply, it's unproductive, it's costing us much more, there's schedule delays and cost blow-outs with the program. Now, that's what we've had to confront,” he said.

Senator Johnston says an audit has found the project to be running nearly two years late and hundreds of millions of dollars over budget.

“International benchmarks were 60 man hours per tonne. We set the target at about 80 man hours per tonne. The project is running at 150 man hours per tonne. Now the Government's not prepared to put up with that,” he said.

The Federal Government has sent in new managers to get performance up to global standards.

Defence Minister David Johnston is demanding improvement.

“If we can't get the program back on the rails then it will be very, very difficult for me or anyone else to advocate a long-term naval shipbuilding enterprise in Australia,” the minister said.

Back at Craig Williams' Adelaide workshop, the message is sinking in that this might be the last big defence project the company gets.

“It is a huge amount at stake and I have defined it as a cliff's edge because I now know what it's like to freefall,” he said.

“Our great frustration in industry is not having firm plans that governments stick to and that's what we need to do is to get a bipartisan agreement to the [defence construction] plan.”

At Port Adelaide, defence industry suppliers are on tenterhooks.

The Government recently announced it will spurn domestic suppliers for two resupply ships and two icebreakers, a decision which has cast a cloud over the next two big projects for frigates and submarines.

Mark Thomson of the Australian Strategic Policy Institute says there are risks for the next round of projects.

“The submarines are going to be more risky and more expensive than any of the surface vessels that we've built in the past and there's also been a lot of promises made, certainly in the past, about the vessels being built in South Australia,” he said.

“Nonetheless, in the current environment I don't think we could exclude the possibility that, if the Government lacks sufficient confidence in Australia's naval construction sector, that even the future submarine project could go offshore.”

Gaps in construction schedules a worry

Defence Teaming Centre CEO Chris Burns says the defence industry can find it hard to remain competitive when there are big gaps between major defence contracts, something which has been termed "the valley of death".

He says the risks are that skills and knowledge disappear and companies then have to retrain workers when contracts eventually arrive.

"It's because the contracting by the Government is done in peaks and troughs. If we took on the attitude of every other country in the world that builds ships, where we have a continuous build program, there wouldn't be a valley of death,” he said.

He says some allowance needs to be made for the learning curve facing the defence construction industry in Australia.

“We're just learning how to do it. It would be a loss of investment if, having learnt it all again, we then threw it away and let the workforce dissipate so the next time we want to build something we have to go through the whole learning cycle again,” he said.

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 6 minutes 25 seconds 6 m Closer ties with Japan sow uncertainty for Australia's naval shipbuilders ( Alex Mann )

South Australia is reeling from the impending demise of Holden manufacturing and the mothballing of the Olympic Dam mine expansion.

SA Defence Industries Minister Martin Hamilton-Smith says any collapse of shipbuilding would be a devastating blow.

"We've seen the Olympic Dam expansion not proceed: strike one. We've seen the automotive industry collapse from underneath our feet: strike two. If naval shipbuilding is exported off overseas, well, that will be strike three," he said.