Minister for Defense Stephen Smith and Minister for Defense Materiel Jason Clare signed the Increment 3 Project Arrangement with the U.S. Navy, Australia's Department of Defense said.
The deal "formalizes Australia's participation in the development of the Increment 3 P-8A Aircraft and marks Australia's continued commitment to the $5 billion project to acquire a new manned maritime patrol aircraft," a defense department statement said.
The Increment 3 Project Arrangement is the first planned upgrade to the Australian P-8A fleet.
The project aims to upgrade the capability of the original order, the Increment 2 aircraft, and includes a networked maritime strike weapon, air-sea rescue kit and enhanced target tracking.
Australia will phase in the Poseidon from 2016 and withdraw from service its 19 turbo-prop AP-3C Orion fleet around 2019, after nearly 30 years of service.
This month the department of defense also announced that two of its Orions which have been on operational service in the Middle East for a decade will return home, along with 90 personnel, within several months.
The two Orions are working with Operation SLIPPER conducting overland intelligence, surveillance and reconnaissance tasks in Afghanistan and Iraq.
The overseas-based Orions also have been flying maritime patrols off the Arabian Gulf and North Arabian Sea and more recently, counter-piracy missions in the vicinity of Somalia, working closely with the U.S.-led Combined Maritime Force and other international task forces.
Australia's replacement P-8A aircraft is based on the Boeing B737 commercial airliner.
Like the Orion, the P-8A has advanced sensors and mission systems, including multi-mode radar, a high-definition electro-optic camera and an acoustic system that has four times the processing capacity of the AP-3C Orion's system, the government statement said.
The P-8A has a range of more than 4,000 nautical miles or the ability to remain on station conducting low-level anti-submarine warfare for over four hours at a range of more than 1,200 nautical miles from base.
The P-8A is also air-to-air refuelable from the boom of tanker aircraft such as the KC-30A.
Air-refueling will push the P-8A's endurance to around 20 hours, making it possible to patrol Australia's isolated Southern Ocean territories.
The Increment 3 Project Arrangement falls under the Production, Sustainment and Follow-on Development Memorandum of Understanding between Defence and the United States Navy, which was signed in March this year and provides the framework by which the P-8A will be acquired, sustained and developed thought it service life.
In July, Boeing announced that two Australian companies -- Lovitt Technologies and Ferra Engineering -- will manufacture parts and assemblies for the P-8A Poseidon.
Lovitt Technologies will manufacture mission systems parts and assembly fabrications for the P-8 aircraft, while Ferra Engineering will supply internal and external airframe parts and assemblies to support P-8 flight and mission systems.
Boeing said both companies hold a number of contracts with it for component manufacturing. Lovitt supplies parts for the Bell Boeing V-22 Osprey and Boeing F/A-18E/F Super Hornet. Ferra manufactures spare parts for Boeing Commercial Aviation Services and the F/A-18E/F Super Hornet program.
Lovitt Technologies Australia and Ferra Engineering were identified as possible suppliers by Boeing's Office of Australian Industry Capability, which is part of the Defense Materiel Organization's Global Supply Chain Program.