The Auditor General’s report and Canada’s curious F-35 deal

Some disturbing findings surface in Sheila Fraser’s audit

Auditor General Sheila Fraser’s coruscating report on the slippery way the Department of National Defence handled its recent multi-billion-dollar helicopter purchases is setting off alarm bells about how DND might be managing its even more costly jet fighter buy.

Fraser’s findings from her audit of the $11-billion helicopter deals couldn’t be more disturbing. She said DND officials held back crucial information about the likely escalation in the cost of 28 Cyclone and 15 Chinook choppers, which led to Treasury Board approving the purchases based on off-the-shelf cost estimates that were ridiculously optimistic.

And Fraser drew a rough parallel between the helicopter fiasco and the planned procurement, announced last June July, of 65 F-35 fighter jets for an estimated $9 billion, plus another perhaps $7 billion in maintenance costs. “I hope no one is assessing [the F-35 procurement] as low risk,” she said today.

That warning sounded only prudent, and led to opposition salvos in Question Period. Still, I doubt the real risks involved in the F-35 arrangement are widely understood. In fact, there’s not much similarity between the way DND went about buying those helicopters and its rather unusual arrangement for acquiring the jets.

One of Fraser’s main points about the helicopters is that DND presented the Chinook purchase without explaining to the government’s Treasury Board bean counters that upgrading Boeing’s basic model to meet Canada’s particular needs would inflate the cost. That’s what happened, in a big way—boosting the price of each aircraft by about 70 per cent.

That raises an obvious question about the F-35s: Could costs involved in bringing the jets to market and adapting them for Canada’s military purposes drastically raise their price too? In other words, should the Canadian taxpayer brace again for sticker shock?

I pursued this question a few weeks ago with DND officials for a Maclean’s story. The explanation I got then from Michael Slack, DND’s project manager for the so-called Joint Strike Fighter, was greeted with no small degree of skepticism by some politicians, critics of the F-35 purchase, and journalists. Today’s blast from Fraser isn’t likely to do anything to reduce that widespread wariness about DND’s claims.

Still, Slack couldn’t have been more emphatic and categorical in stating that Canada is protected against any increase in the costs of designing, developing and testing the Lockheed Martin F-35 Joint Strike Fighter. Back in 2002, he said, Canada contributed $100 million in cash and $50 million in R & D services to the development of the aircraft, on the express agreement that any future cost escalation was not our problem.

The deal was that the U.S. would shoulder the burden if design and development costs ending up ballooning—as they predictably have. Despite those overruns, Slack said, the price Canada will pay is limited to the actual cost of manufacturing the jet in the year we take delivery. He said that “average unit flyaway cost” is currently projected to be $70-$75 million per jet, with delivery of Canada’s jets slated to begin in 2016.

The U.S. government  includes those soaring development costs in their price-per-jet estimates, and so published projections from Washington put the U.S. cost up over $100 million for each F-35. “The system design and development phase costs have mushroomed,” Slack said. “That’s reflected in some of the cost evaluations the Americans are doing. But the only thing that’s relevant to Canada is the average unit flyaway cost.”

Two other points about the cost of the F-35s bear keeping in mind.

Firstly, Canada apparently won’t have to place a firm order until the fall of 2012, and won’t have to agree to a contract until 2013. So it seems that if the cost to Canada spins out of control, despite Slack’s assurances, there’s still a chance to back out.

Secondly, there remains a key variable that might yet increase Canada’s per jet price. Consider what we’ve agreed to pay—the average per unit flyaway cost. That means our price depends on how many F-35s in total are sold. More sales, we pay less. Fewer sales, we pay more.

On that point, Slack told me he saw potential for some of the core partner countries involved in the development of the F-35 (U.S., Britain, Italy, the Netherlands, Turkey, Australia, Denmark and Norway) to buy fewer than originally expected. But, at the same time, he argued that risk is offset by the likelihood of new buyers to coming forward from outside the Joint Strike Fighter project group.

The latest news on the total sales front isn’t promising, though. As of this week, the austerity-minded government of Prime Minister David Cameron has signaled it will dramatically scale back Britain’s order for F-35s from 135 to some much lower number. So the question looming over the F-35 project, it seems to me, is less about the cost of bringing the jet into product, as about how many of the fighters Lockheed Martin manages to ultimately sell.




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The Auditor General’s report and Canada’s curious F-35 deal

  1. Secondly, there remains a key variable that might yet increase Canada's per jet price. Consider what we've agreed to pay—the average per unit flyaway cost. That means our price depends on how many F-35s in total are sold. More sales, we pay less. Fewer sales, we pay more.

    This is the part that I'm most skeptical about. But it's a good talking point.

    How many jets do you have to build before you reach economies of scale – or you travel down the learning curve and can assemble them faster/more efficiently? Is it in the tens, hundreds, thousands?

    Of course, if you are allocating fixed up front costs against production – the average cost will decline with volume. I'm skeptical.

    • How many jets do you have to build before you reach economies of scale

      I dunno. How fast do you want them?

      That's the end reality of the question you've posed because it runs into that old adage of "Fast, cheap, good: pick two". The current planning is for initial orders in the range of 3000-3200 units IIRC. That's a large number for multiple customers who are all going to expect to take delivery in relatively – within the scope of such things – short order. Which means larger production facilities – across multiple products; remember, the engines, avionics, etc, are coming from multiple vendors aside from the airframe – and more up front costs than if you were to lengthen out the delivery period and push through with fewer lines. To a certain degree, you can mitigate that as orders back down but certain up front costs like land acquisition (for new factories), factory maintenance for existing mothballed facilities expected to be put back into production, and the equipment which has been pre-ordered as part of the retooling process to be ready for when the lines start up in full are all sitting there waiting to explode as the numbers you expect to produce go in reverse.

      • I dunno. How fast do you want them?

        That's the end reality of the question you've posed because it runs into that old adage of "Fast, cheap, good: pick two"

        Actually, its a bit more complex than that. Each plane will have its own schedule for production, and critical path http://en.wikipedia.org/wiki/Critical_path_method – ie the min amount of time required from start to finish. Say it's one year in the shop for each plane. So, if you require 100 planes per yr, then you will have 100 planes in various stages of completion. If the work task at one phase requires 2.5 days, then that crew will essentially be employed full time (finish one stage – move to the next. 250 days of constant work per yr) If the plant only has a throughput of 50 planes per yr, then at a simple level – that crew will only work 50% of the time.

        If you require 200 planes per yr then you are essentially duplicating your production facilities – not really economies of scale. though there may be some.

        I know it's not that simple – very complex -but at a basic level kinda what I was getting at.

        "On a project there are three things – quality, cost and schedule. You can have two, but not all three. Which two would you like?"

        • Actually, its a bit more complex than that. Each plane will have its own schedule for production

          Which is essentially my point as well: the costs and how they scale back are directly related to the speed at which the grand total needs to be provided in terms of resources demanded and initial outlays based on those projected demands. To take your number, 100 planes a year is X resources, 200 is X*2, 300… *

          Which is why big money multi-item projects tend to collapse upwards in unit cost when cut back rather than down – especially when multiple vendors are factored in because they're all going to want to make back the money they've spent setting up tooling and any up front internal investments of resources as well. To them, fewer units and/or longer time frames means not just that they've got to charge more per unit to make back those costs or charge more per unit to service debt from the development/production cycle as money comes in "slower" either way but that they've also now got a factory running at 50% capacity they've got to maintain and staff – with the kinds of employees you don't want to risk losing in a market where good tool and dies, millwrights, and manufacturing trades people are gold because no one wants to learn those professions anymore.

          *purely before factoring in fun stuff like the resources to support those resources.

          • In other words:

            "Of course, if you are allocating fixed up front costs against production – the average cost will decline with volume. I'm skeptical." :)

  2. Doesn't sticker shock come when you know how much it costs?

  3. Why is Afrron Wheely hiding from Canadians? What is he hiding?

    • Dear arturolexo</> sir or madam;

      Mr. Wherry, in my view, earns the approbation of being compared to Boswell.

      For your own comparatives I suggest you google the name; Bozo.

      • Excuse me, Mr Pirate, but I believe you're missing an 'i'. May I recommend an i-patch?

        (laughs long at own joke, feels slight twinge of shame)

        • I'm laughing too; html tags are not my forte. Obviously.

          And I'm a terrible typist on top of that.

  4. Stay classy now, conservatives.

    • Actually, I am a green party guy.

      • No you're not.

  5. The F-35 is like a jack of all trades but master of none.

    The new F-18 Super Hornet is more suitable to Canada's needs.
    The hornet has the ability to carry more fuel plus work as a tanker for those long arctic missions.
    The short range F-35 is more dependent on mid-air refuelling, which is a challenge in remote locations. In parts of Canada's Arctic, it can take eight hours for a C-135 Hercules tanker to arrive.

    The new F 18 twin engine super hornet out performs the single engine F-35 and at a much lower purchase cost then the F-35.

    The US and some allies commissioned the building of a fighter jet to replace the teens era. Canada contributed as a tier 3 which gave us essentially option to buy.
    What they come up with is the F-22, which few Governments can afford, and besides the US cut off exports. Told to go back to the drawing board, they came up with the jack of all trades but master of none, F-35.

    • The JSF project was always independent of the F-22. The Canadian government was never a part of the F-22 project development, unlike its role in the F-35 project.

      While the super hornet is a capable aircraft, its superiority over the F-35 is not as clear-cut as you suggest, if at all. Beware of relying on sales brochures from aircraft manufacturers.

      . The F-35 is, as you suggest, a multi-purpose aircraft – and since Canada cannot afford to buy more than one type of combat aircraft it makes sense to buy one that is multi-purpose, and which has the capacity to be competitive for the next thirty to forty years. The F-35 has that capacity. The Super Hornet is based on a design that is already nearing forty years old. If we were buying an interim aircraft, as the Australians are, or buying it in conjunction with plans to buy true fifth-generation fighters, as are the Indians, it would be a possible alternative. We are not going to do either. There are no other fifth-generation aircraft available for purchase within the time frame in which we will have to replace the CF-18.

  6. It's fine for the USA, France, GB to sport those fancy new fighter jets, but Canada's military needs have always been, close, down and dirty air to ground troop support. The F 35 is totally unsuited for this purpose.

    We should have long range fighter and bomber capabilities. Canada can have that for &frac12; the cost of the F 35 by purchasing the off the line, new twin engine F 18 Super Hornets.
    Wars are won on the ground add a couple of squadrons of A-10 Thunderbolt 11 “warthogs” for close down and dirty troop support.

    You could toss in a couple an ice breakers and 50 drones and still be under the 16 billion plus costs of F35 fighter jet toys.

    • And where do you suggest we buy A-10s? Or, since your seem nostalgic – perhaps we could get Hawker to re-open the Typhoon production line?

  7. The F-35 is third-generation stealth aircraft. It is multi-purpose: air-to-ground and air-to-air. If someone were looking for an aircraft to protect one's claims to territorial seas from a neighbor who might not be averse to claiming those same seas, the F-35 might offer the right combination of survivability against surface-to-air and air-to-air threats and striking power against surface targets to make it a good, long-term investment.

    On the other hand, it may be a diamond-plated rogue machine that no one can afford.

  8. How does shamwari get the wordage count so high? I used to think if you registered you'd get extra words, but shamwari isn't registered. If I tried to post a similar length comment it would 4 or 5 entries. Is there some kind of trick geeks can use? (no offence to shamwari's entry which sounds both informed and credible)

  9. What is remarkable about the Canadian government decision to pursue the F-35 is that it occurred during a period where the failure of the F-35 Joint Strike Fighter is patently obvious, well documented publicly, and provable by reading a myriad of US and non-US public documents. While Australia's dysfunctional Canberra DoD bureaucracy wedded itself to the F-35 program in 2001 – 2002, primarily through the actions of a small internal cabal of civilian and some uniformed senior bureaucrats, when only the failure of the F-35 JSF definition could be proved, Canada's DND bureaucracy has improved upon this by doing exactly the same when the failure of the program's implementation is also provably obvious.
    http://www.ausairpower.net/APA-NOTAM-191010-1.htm

    One of many there are more ….. hello lets have a good debate …. remember we did not have on moving Canada to the front lines in Afghanistan and look where that got us> Same man in charge by the way ( Mr. sole source contract)

  10. As an American, I am sorry for the woeful armaments afflictions caused by the war-mongers of America. CANADIANS, DON"T DRINK THE KOOL-AID !!!

    We have idiocy enough in the U.S. !

    If I could persuade my lovely spouse to move to Canada, I would crawl on my knees to be in your beautiful country.

  11. Why not place DND on strict rules that once approval has been signed, they can't make any alterations of orders if those alteration would cost extra to what was originally sought? They seem to make a habit of hoodwinking ruling governments to pay much more than what was applied for and approved.

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