New Fighter Aircraft (CF-18)
9.107 Background. In April 1980, Cabinet selected the CF-18 as Canada's new fighter aircraft to
replace the fleet of CF-101 and CF-104 aircraft and those CF-5 aircraft committed to NATO. A
budget-year ceiling of $5.19 billion was approved for the procurement of 138 aircraft and associated
logistic support including spares, maintenance and training equipment.
9.108 In 1984, we reported on the needs identification, planning, and the early stages of the
acquisition of the CF-18 aircraft.
9.109 Since 1984, the Department has been heavily involved in introducing the aircraft to its bases
in Cold Lake, Bagotville, and Baden. Activities have focused on taking delivery of new aircraft,
training pilots and servicing staff, establishing second line support capability, and contracting for
third-line maintenance support.
9.110 A contract was awarded to a consortium of Canadian companies in October 1986 to establish
in Canada a system engineering support capability and airframe repair and overhaul services for the
CF-18. Cabinet gave approval of expenditures up to $104 million. This is based on estimates of the
activities expected during the first four years of the contract.
9.111 Installation of a weapons software support facility is nearing completion at the Canadian
Forces Base at Cold Lake, Alberta. This is the first of two software support facilities identified by the
Department as being essential to supporting the CF-18 weapon system. The Department has
estimated the cost of each facility to be approximately $45 million.
9.112 A design defect that resulted in cracks in the area of the vertical tail assemblies of the
aircraft became evident in 1984. The manufacturer subsequently arranged for the repair and
modification of all aircraft in the field. During that period, the Project Management Office refused to
accept delivery of new aircraft until the necessary modifications were completed at the factory.
9.113 In response to a directive from Treasury Board, the Project Management Office prepared a
revised Project Brief to define more clearly those items that were being procured within the main
project. Treasury Board approved the revised Project Brief in February 1985.
9.114 Delivery of the last aircraft is scheduled for September 1988. The Department estimates that
the project will be completed within the approved budget.
9.115 Observations. The CF-18 Prime Mission Vehicle contract requires payments to be made within
30 days after accomplishment of certain events and the receipt of the contractor's invoices and
supporting documents. Payments to the contractor may be made at a bank in Ottawa designated by
the contractor. This enables the Department to take full advantage of the 30-day payment period.
However, our review indicated that some payments were made in advance of due dates. As a result,
the Crown incurred an avoidable interest cost of approximately $7 million, based on Treasury Board
rates and formulae. The Department told us that, in fact, this frequently occurred in projects of this
type because of a government policy to expedite payments. In August 1985, the government
introduced a different policy of Payment on Due Date, and since then payments have been made on
the due dates.
9.116 The Prime Mission Vehicle contract provides for milestone payments to be made against
approved invoices for 120 per cent of target costs for work scheduled to be completed at the time
of payment. The contract also provides that these payments may be reduced if the payments todate
will exceed the sum of actual costs and allowable profit. We found that payments exceeded
actual costs and profits between April 1980 and August 1984 without any reductions being made in
milestone payments. As a result, the Crown incurred further interest costs of approximately $4
million during this period. Since August 1984, contractor reported costs and profits have consistently
exceeded DND payment amounts.
9.117 In 1984 we also reported on the audit provisions of the aircraft contract, and we expressed
concern about the adequacy of the direction that the Department of Supply and Services had
provided to the United States Defense Contract Audit Agency (DCAA) to verify the validity of costs
recorded by the contractor. We have since found that significant improvements have taken place in
the audit coverage provided for the aircraft contract and in the information reported by DCAA to
DSS.
9.118 We reviewed the planning documents for acquisition of software support. The requirement for
a software support facility was identified in the 1979 CF-18 Project Brief. When funding for this
project was approved, the design and cost for a software support facility was not defined because
sufficient information was not available. Since then, a requirement for a second software support
facility has been developed. The set-up of each facility is estimated to cost in excess of $45 million.
The weapon system software support facility is funded through the CF-18 project budget, but the
electronic warfare software support facility was designated for funding from the departmental
operations and maintenance budget. Projects of this type are capital in nature and proper,
consistent treatment would require both facilities to be funded from the CF-18 capital budget.
Following a departmental review, it was decided to fund the second facility from the departmental
capital budget. We are concerned that projects of this nature are being funded from funds outside
the CF-18 project and that the cost of the CF-18 project is therefore being understated.
9.119 We reviewed the contracting process for awarding the implementation contract for the
weapon system software support facility. We found that the management practices employed were
satisfactory.
9.120 In December 1983, Treasury Board directed that the 1979 CF-18 Project Brief be updated
because the Ministers had expressed concerns about the visibility and accountability for the total
cost of acquiring the entire CF-18 weapons system and about the clarity of the baseline against
which the performance and costs of the CF-18 project are to be measured. In our 1984 Report we
also expressed concerns that the 1979 Project Brief did not specifically and clearly define the
requirements to be purchased from the project budget and those to be purchased from operations
and maintenance. In February 1985, the Public Accounts Committee also expressed concern over
this.
9.121 In February 1985, a revised CF-18 Project Brief was approved by Treasury Board. The revised
Brief further clarified the items to be acquired both inside and outside the project budget. In our
review of the revised Project Brief we noted that the project budget will procure spares to support
the first three years of initial operations and follow-on purchases will be made from the operations
and maintenance budget; the project budget will procure some aircraft maintenance support
equipment for contracted maintenance for the first two years of operations when the manufacturer
was providing contracted maintenance; technical data required for setting up and operating third
level maintenance would be procured from the operations and maintenance budget; and the project
budget would provide for certain stated major construction projects but would not include possible
construction of additional quarters, or for modifications or facilities except for those located at the
three main operating bases for the CF-18 aircraft.
9.122 In our 1984 Report we noted that the Department had identified a number of associated
capital projects related to but not included in the CF-18 purchase. We also noted that these range
from items considered indispensable to those classed as highly desirable for procurement if funding
permits.
9.123 The explanation of the need for these projects, as stated in the revised CF-18 Project Brief
approved in February 1985, confirmed our 1984 Report assessment of the priority of these projects.
This Brief also identified that the costing data provided for most of these projects would be subject
to amendment as the projects move through the departmental approval process. Our review of the
acquisition status of these projects indicated a number of minor additions and deletions.
9.124 The Department has updated the costs of these associated capital projects, and has taken
steps to identify those that should have been included in the original life-cycle costs. These
essential related projects would have cost $2.1 billion in 1984; largely because of inflation, we now
estimate these additional costs to be $2.7 billion. To date, less than $500 million has been approved
by Treasury Board and another $2.2 billion has departmental planning approval.
9.125 In 1980, the Department initiated a project valued at $368 million to acquire advanced air-tosurface
weapons. These weapons were needed to replace 30-year-old, time expired bombs that
were no longer capable of fulfilling their role. The Department has updated the cost of this separate
project at $3.7 billion. The increase in cost is largely due to increased cost of weapons, and
expansion of the project to include air-to-air and anti-radiation missiles.
9.126 In our review of the contracting process for the system engineering support capability we
found that the technical and financial evaluations of the bid submissions were comprehensive. There
were three consortia of companies participating in the final bid. The interdepartmental evaluation
team rated one bid to be superior in meeting project requirements, and lower in cost than the
second bid. The third bid was judged technically unacceptable. All three proposals satisfied the
single socio-economic criterion stipulated in the Request for Proposal.
9.127 Consequently, the CF-18 Senior Review Board agreed with the recommendation that the
contract be awarded to the leading consortium. This recommendation was then submitted to the
Ministers of the Departments of National Defence, Supply and Services, and Regional Industrial
Expansion. However, after their review, a submission was prepared by the Department of Supply and
Services recommending that the contract be awarded to the group ranked second by the
evaluators. Treasury Board gave its approval to this submission.
9.128 The President of the Treasury Board subsequently explained that the Government had made a
very deliberate choice to favour the selected firm because it was felt that downstream technology
transfer could be better done through the existing facilities of that firm which is a producer of
aircraft as well as being in the maintenance business.
9.129 The terms and conditions of a Memorandum of Understanding signed by the aircraft
manufacturer and the Departments of National Defence, Supply and Services and Regional Industrial
Expansion cover the transfer of technology for use only on the CF-18 weapon system. Similarly, the
Licence and Technical Assistance Agreement being negotiated between the manufacturer and the
selected consortium is limited to the CF-18. Should this consortium wish to use the technology for
other purposes, additional licensing agreements will have to be negotiated with the proprietors of
the technology. The cost of these additional arrangements is not known.
