BAE Systems own Royal Ordnance and has been in negotiations with the MoD over the contract for two years.
The 15-year contract will allow BAE to invest in the royal Ordnance factories, which date from the Second World War.
Having secured the future of the unit, BAE may look to sell the division.
Government sources suggest that BAE chief executive Mike Turner has been in contact with rival companies that may be interested in the division, however, it is not for sale at present.
Royal Ordnance was bought by BAE in 1987 and forms part of their land and armaments business.
Since the purchase, Royal Ordnance has lost money and closed factories, leaving only three in the UK.
BAE Systems threatened to close the business if the MoD did not offer a long-term contract that would allow it to upgrade facilities and make a profit.
By Daniel Garrun.