All naval building contracts in the Asia Pacific include a clause to use local workers, except Australia, the head of a major international shipyard says.
A Senate inquiry is investigating the economic future of a shipbuilding program following a leaked document in August stating foreign companies were allowed to use overseas companies.
The $35 billion future frigate program is expected to begin construction in Adelaide in 2020 but there are fears hundreds of local jobs could be lost without the guarantee.
The Asia Pacific director of the Dutch Damen Shipyards Group, Roland Briene, told the committee on Friday it was irregular.
"The experience we have worldwide is that more and more countries are instructing us to use local shipbuilders," he said.
"They are all basically directing us to use local shipbuilders to build their off-shore patrol vessels and frigates."
It is a "scandalous" political decision which has the potential to stunt the creation of an export-orientated industry, South Australian Senator Nick Xenophon said.
He said local builders Austal and the Australian Submarine Corporation (ASC) were internationally renowned builders who should have been given the contract.
"In other developed countries it would be unthinkable and unforgivable," Senator Xenophon told AAP.
"The fact they will not tell us when the decision was made to insert those fatal words about excluding Australian shipbuilding is just not good enough."
But Liberal Senator David Fawcett pointed to later evidence given by the ASC chairman Bruce Carter that they never expected to be the prime builder.
Senator Fawcett, also the chair of the joint standing committee on foreign affairs, defence and trade, said Australia does not yet have the design capabilities for the future frigates.
And any delay in the contract risks Australian employment being pushed back.
"Defence has again confirmed that scrapping the future frigate tender would only expand the so-called 'valley of death' by up to two years, costing hundreds of South Australian jobs," Senator Fawcett said.