By Paul Emanuelli

This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.

As the largest procurement project in military history, the United States-led F-35 fighter jet initiative serves as a useful case study illustrating the adverse impact of design defects on major projects. The following public audit reports from Canada, the US, and Australia show how design-related project delays significantly increase the risk of cost overruns, particularly when those delays are intermingled with government indecision across a multi-jurisdictional project.

In fact, the ongoing F-35 fighter jet saga, with its cost overruns, project delays, and procedural irregularities, represents one of the highest profile project failures in Canadian procurement history. In its spring 2012 report entitled Replacing Canada’s Fighter Jets, the Auditor General of Canada reviewed the Canadian government’s involvement in the US-led Joint Strike Fighter (JSF) Program and found that Public Works and Government Services Canada (PWGSC) failed to ensure the integrity of the contract award process when it selected the F-35 fighter jets:

When National Defence decided to recommend the acquisition of the F-35, it was too involved with the aircraft and the JSF Program to run a fair competition. It applied the rules for standard procurement projects but prepared key documents and took key steps out of proper sequence. As a result, the process was inefficient and not managed well. Key decisions were made without required approvals or supporting documentation. Information provided to decision makers was incomplete, and no plan was developed for extending the life of the CF-18 fleet in the event of prolonged delays in the delivery of a jet that is still being developed. For its part, PWGSC, in its role as the government’s procurement authority, did not do enough to ensure the integrity—the fairness and transparency—of the procurement process. National Defence did not follow the basics of good management that would be expected for a $25 billion commitment by the government.

This report was one of many high-profile critiques levelled against the Canadian government over the F-35 file, which resulted in the government’s midstream reversal of its prior decision to participate in the program, and to subsequent indecision regarding a long-term strategy for Canada’s next-generation fighter jets.

The F-35 program has also raised concerns in Australia. In its September 2012 report entitled Management of Australia’s Air Combat Capability — F-35A Joint Strike Fighter Acquisition, Australia’s Auditor General reviewed Australia’s participation in the US JSF Program, through which Australia planned to acquire 100 of the F-35A aircrafts to replace its existing 18A/B Hornet aircrafts scheduled to be withdrawn from service by 2020. As the report stated, the estimated $395.7 billion project budget represents the most expensive acquisition in the history of the U.S. Department of Defence.

The Auditor General warned about the “wide-ranging cost, schedule and performance risks inherent in advanced defence technology development and production programs, such as the JSF Program.” As the report notes, these risks are caused by: (i) the need for specific products that satisfy requirements at delivery and are capable of future upgrades to align with changing military requirements; (ii) the need to pay for work products years ahead of the opportunities to verify their compliance with specifications; and (iii) the need for ongoing collaboration across a wide-ranging purchasing group with multinational partners, including the US, UK, Denmark, Norway, the Netherlands, Canada, Italy, Turkey, and Australia.

As the report states, due to the F-35’s advanced stealth technology and fully integrated internal radar and electro-optical sensor systems, U.S. Department of Defence contractors “have encountered persistent difficulties in accurately estimating the time and cost of developing and operating F-35 aircraft and their support systems.” The report also identifies a number of other factors that contributed to the ongoing difficulties in program implementation, including the complexities associated with system data processing, software development, pilot Helmet Mounted Display performance, and structural testing.

The Auditor General also observed that “for technologically advanced systems such as the F-35s, there needs to be an overlap between the system development phase and the production phase” and that overall, the JSF Program “has progressed more slowly and at greater cost than first estimated.” As the report indicated, since almost 80 percent of the testing and evaluation program was not yet complete, “a full assessment as to how effectively that progress can be maintained will be some years off.”

As a result of these delays, the Auditor General determined that Australia would likely have to extend its current fleet of 18A/B Hornets beyond the planned phase-out date in 2020, stating that “should further delay occur in the JSF Program”, Australia’s “capacity to absorb any more delays in the entry into service of the replacement air combat capability to be provided by the F-35 has limits, is likely to be costly, and has implications on capability.” In other words, project delays were already increasing the risk of significantly adverse operational impacts on the Australian military’s defence capability.

In its related September 2012 report entitled Management of Australia’s Air Combat Capability– F/A-18 Hornet and Super Hornet Fleet Upgrades and Sustainment, Australia’s Auditor General drew attention to the inherent risks associated with managing a fleet of aging military aircraft. It found that overall, the Department of Defence had implemented “sound managerial control over the upgrade and sustainment of its F/A Hornet and Super Hornet fleets”, but noted that maintaining the aging fleet while awaiting the arrival of new F-35s under the joint program with the US would require increased financial investment and would heighten the risk of a capability gap in military defence if delays prove to be protracted.

The U.S. Government Accountability Office (GAO) has also raised serious concerns about the F-35 program. In its June 2018 report entitled F-35 Joint Strike Fighter, the GAO recommended that the Department of Defense (DOD) rectify ongoing development deficiencies in the initial test aircraft before proceeding to full production and advised the government to freeze further production funding until those defects were addressed. As the report states, the “F-35’s current estimated acquisition cost—which includes development and procurement funding— is over $406 billion, making it, by far, DOD’s most costly acquisition program” and that full production was estimated to cost on average more than $10.4 billion a year through to 2044. The report stated that the spending safeguards were necessary to keep production costs from spiralling out of control:

Congress should consider providing in future appropriations that no funds shall be available for obligation for F-35 Block 4 until DOD provides a sound business case for the effort. GAO is making two recommendations to DOD, including that it resolve all critical deficiencies before full-rate production. DOD concurred with both recommendations and cited that it would resolve all critical deficiencies before its full-rate production decision.

According to the report, the cost of rectifying existing design deficiencies and maintaining the existing test fleet have already created a significant risk of overruns, and that the amount could rise exponentially if those deficiencies are not rectified before full-scale production:

Over the past 10 years, the F-35 program has procured aircraft and conducted developmental flight testing at the same time. As a result, the 213 aircraft that the program has already procured and delivered will need retrofits to fix issues found during testing. As the program approaches its full-rate production decision, planned for October 2019, the number of aircraft it procures each year will increase until 2024. Concurrency costs—the costs of retrofitting delivered aircraft—may also change. The program’s total estimated cost of concurrency stands at $1.4 billion, the lowest it has been since 2012. The program office estimates that over 501 aircraft will be procured by the time initial operational test and evaluation is completed. The military services will also incur substantial sustainment costs once they acquire the F-35 aircraft. In October 2017, we found that DOD did not have insight into the program’s total sustainment costs, estimated at over $1.1 trillion over a 60-year life cycle. As a result, we recommended that DOD revise its F-35 sustainment plans to ensure that it has sufficient knowledge of costs. Since then, the program office has created a working group to analyze actual sustainment costs and to incorporate them more quickly into the program’s cost estimates.

As the report cautions, if the government fails to stem the design-related cost overruns prior to full production, those defects would result in an exponential increase in cost overruns and could threaten the available funding for other government priorities:

Given these significant acquisition and sustainment costs, DOD will likely face affordability challenges as it prioritizes the funding needs of the F-35 program with other large acquisition programs, such as the Air Force’s B-21 bomber and KC-46A tanker and the Navy’s Columbia-class ballistic missile submarine, among others. As a result, the Air Force, Marine Corps, and Navy are examining how they can afford their planned annual procurement quantities within their current budgets. According to an Air Force official, the service may have to reduce its total planned procurement quantities to afford the estimated sustainment costs needed to keep the aircraft in operational readiness. Meanwhile, Navy officials are conducting an affordability analysis on its F-35Cs, to be completed in 2018.

As this case study illustrates, design defects can create significant cost overruns that, if left unchecked, can quickly overflow beyond allocated project budgets and put other broader government funding priorities in peril.