Defence secretly considered walking away from the $50 billion French submarine deal during protracted and at times bitter contract negotiations, and started drawing up contingency plans for the new fleet.

Key points: Advisory group told Defence to consider alternatives

Advisory group told Defence to consider alternatives Extending the life of the Collins-class submarines was one suggestion

Extending the life of the Collins-class submarines was one suggestion Future governments have the option to walk away from the current deal if it is delayed

The revelations are contained in a new report by the auditor-general that also confirms the program is running nine months late and that Defence is unable to show whether the $396 million spent so far has been "fully effective".

According to the report, the Federal Government's handpicked advisory group told Defence in 2018 to "consider alternatives to the current plan", when negotiations over a key contract appeared to be breaking down.

The Commonwealth and Naval Group, chosen to build Australia's future submarines, were at loggerheads over the Strategic Partnering Agreement, which would provide a framework for the complex and costly project.

Behind the scenes, the Naval Shipbuilding Advisory Board told Defence to start drawing up alternatives should the negotiations fail.

According to the auditors, Defence began examining whether it could extend the life of the existing Collins-class submarines and "the time this would allow to develop a new acquisition strategy for the Future Submarine if necessary".

Christopher Pyne, Scott Morrison and French Armed Forces Minister Florence Parly signed the strategic partnering agreement in February. ( Department of Defence )

Concerns were so great that the board asked Defence to consider "whether program risks outweighed the benefits of proceeding" and questioned whether it was still in the national interest to go ahead with the project.

The Strategic Partnering Agreement was eventually signed, with much fanfare, in early 2019 and notably, it gives future governments the ability to walk away from the project if it's delayed or fails to deliver what it promised.

Already, two key milestones have been missed and work on the design phase is nine months behind schedule.

In the report, Defence expressed a "deepening concern over a number of matters", which in its view "were a risk to the Future Submarine Program".

'The alarm bells are ringing'

Opposition defence spokesman Richard Marles said the report was "deeply concerning".

"On all three measures of this program — on time of delivery, on the cost of the project, and on the amount of Australian content — the numbers are all going the wrong way," he told the ABC.

Crossbench senator Rex Patrick, who is a former submariner, said Defence needed a "fallback" plan if the project continued to face delays.

"The alarm bells are ringing," Senator Patrick said.

"If the Minister is not hearing them they need to be turned up.

"Defence's view that they can recover the schedule is naive at best."

Despite the persistent problems, Defence maintains construction of the submarines is still on track to begin in Adelaide in 2023.

Minister for Defence Linda Reynolds said the program was complex.

"I welcome the important ANAO [Australian National Audit Office] findings that the Federal Government has established a fit-for-purpose strategic partnering agreement with Naval Group, and that there are appropriate risk management strategies in place to deliver the Future Submarine Program," Senator Reynolds said in a statement.

"The first Attack Class submarine is scheduled for delivery to the Royal Australian Navy in 2032. The ANAO report confirmed there has been no change to this delivery timeframe or budget.

"The program is highly complex and requires a long-term focus.

"Whilst the Future Submarine Program is still in the early design phase and there have been some delays, it is essential to get the design right."