Canada calls F-35 purchase into question due to cost overrun

Posted: 03/10/2011
Government of Canada Parliamentary Budget Officer
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On 16 July 2010, the Government announced its intention to acquire 65 F-35 Lightning II Joint Strike Fighter (JSF) aircraft for an estimated C$ 9 billion, with maintenance and support costs estimated at C$ 250–300 million per year.1 These figures have been reported to result in a total ownership cost for the program of approximately C$ 16–18 billion.

This PBO report is in response to a request from the Member of Parliament from Vancouver South and the Member of Parliament from Beausêjour in relation to the Government’s proposed acquisition.

The request was in two parts. The first asked the PBO to identify the premium Canada might pay as a result of the decision to procure aircraft from one source (otherwise known as sole-sourcing) rather than run a competition among potential suppliers. The second was a request to provide an independent forecast of the acquisition and sustainment costs of the F-35.

As to the first question, some relevant data exists indicating that costs can be more than 20% higher for equipment acquired on a sole-source basis versus equipment acquired on a competitive basis. Nevertheless this data is insufficient for the PBO to render a definitive opinion relating to the F-35. As to the second question, the PBO was of the view that a reasonable forecast of the acquisition and long-term sustainment cost could be calculated given the significant historical data available on fighter jet procurement.
There is a risk that costs may increase as a result of the distribution of the costs associated with research, development, testing, and evaluation (RDT&E), the threatened elimination of the alternate engine program, the possible elimination of the Short Take-off Vertical Landing (STOVL) variant, the possible integration of weapons systems, potential delays and reductions in US and international purchases, the unique cost of operating and support associated with a 5th generation strike/fighter jet, and the circumstances prevailing at the time of mid-life upgrades and overhauls.

Furthermore, the program has been subject to significant delays and cost overruns in the development and design phase. The JSF development phase is reported to be 5 years behind schedule and US$ 21 billion dollars over budget.14 Should this translate into an increase in acquisition cost, overall production volume may be threatened.
The JSF program has been fraught with problems and delays. In 2004, three years after the start of the development phase, the program was re-baselined due to airframe weight problems, causing a Nunn-McCurdy breach.17 In 2007, the program was re-baselined,18 and, in 2010, further delays and cost overruns resulted in another Nunn-McCurdy breach and a complete program restructuring, resulting in an extension of the development phase.19 In January of 2011, a further restructuring was announced.
F-35 development is now five years behind the schedule set at the outset of the program, and total SDD overruns are projected to exceed US$ 21 billion—60 per cent above the original goal. The relevant milestone for Canadian purposes is the point at which the A variant attains Initial Operational Capability (IOC). The Department of National Defense (DND) requires the achievement of IOC in order to de-commission the current fleet of CF-18s. In addition, significant cost overruns for development may have an impact on the availability of funding for production. While it is true that the US government is substantially paying for the SDD phase, overruns in this phase can lead to a reduction in the number of planes.