Competing cost estimates add to F-35 confusion

The auditor general's April 3 report breathed new life into the debate over the true cost of Canada's joint strike fighter program. But comparing all the available numbers can be difficult.

At the heart of the current dispute are the government's explanations for two Defence Department estimates for the cost of the program – one that was public, and another that was not.

The auditor general's report included a table with the two sets of estimates from the Department of National Defence (DND):

• One that was presented to Parliament and the public in response to a report on F-35 costs by the Parliamentary Budget Officer in March 2011, and
• A second, earlier estimate by DND, not previously released, from 2010. This internal estimate totals more than $10 billion higher than the 2011 estimate, released two months before the May 2 election.

As the table above shows, the public estimate did not include three costs that are included in the confidential estimate:

• Operating costs
• Personnel
• Contingency

Together they total $10.43 billion. (Contingency costs are included under the acquisition estimates, as the table shows.)

The auditor general criticized the department for not including those costs in the public estimate. DND has since pledged "to [make] the estimates and actual costs of the F-35 available to the public."

But even before the auditor general's report, these cost estimates were required by existing Treasury Board guidelines, by DND's own costing handbook and by the department's agreement to a previous auditor general's recommendation from a 2010 report on the department's purchase of helicopters. The department's internal estimate includes those costs.

The Parliamentary Budget Officer (PBO) studied the costs of the F-35 program and reported back to Parliament in March 2011. Compared to the numbers DND had released at the time, the discrepancy was significant. The discrepancy between the internal estimate and the PBO's figures is much smaller.

Differences between the three estimates

The chart below adds the estimates from the PBO report to the two sets of DND estimates in the auditor general's report.

Notes:

1. DND estimates use billion Canadian dollars; the PBO uses billion U.S. dollars for 2009.
2. The PBO estimate includes a cost for "overhaul and upgrade." DND says those costs are included in their estimates under "acquisition costs" and "operating and support."
3. The additional costs in both DND estimates are for initial project management, the initial weapons buy, facility upgrades and acquisition contingency costs. The PBO estimate does not include these costs, according to their report.
4. The March 2011 DND estimate for total personnel, operating and maintenance costs only includes the cost of what the auditor general terms "contracted sustainment." DND says the $5.7 billion covers the cost of in-service support, logistic support, software reprogramming and annual sustainment. The PBO report uses the term "operating and support" to describe similar costs.

The estimates for simply acquiring the F-35 vary dramatically.  The DND estimates use an average unit cost of $75 million per jet, while the PBO uses $148 million. The PBO arrived at that estimate through a complex calculation based on U.S. acquisition cost estimates, the delivery schedule, the aircraft's weight and other factors.

The U.S. Defence Department estimates for 2011 show their average procurement cost will be $137 million for one F-35, according to the GAO.

That difference in the unit costs results in the dramatic difference in total acquisition costs, with DND at $6 billion and the PBO at $9.7 billion.

The DND estimates of acquisition costs also include Canadian modifications to the jets, two block upgrades, plus exchange rate and inflation adjustments.

The cost of keeping F-35s flying

The biggest difference between the three estimates stems from the cost to keep the F-35s flying.

The 2011 public estimate from DND is much lower than their 2010 estimate because it does not include all the same costs. Only "contracted sustainment" is included in the 2011 estimate (see notes to above chart.)

The two DND estimates provide the costs over 20 years. Auditor General Michael Ferguson criticizes DND for not fully presenting the costs "in relation to the life of the aircraft."  In other words, DND provides costs for just part of the planes' lifespan.

"This practice understates operating, personnel, and sustainment costs, as well as some capital costs, because the time period is shorter than the aircraft's estimated life expectancy," Ferguson's report states.

The report also notes the expected life expectancy for an F-35 is 36 years, based on a predicted 8,000 flying hours, and that DND has received the projected sustainment costs for 36 years.

The PBO estimates include operating and support costs for 30 years.

For comparison purposes, the next chart increases the two different DND estimates of the total cost for personnel, operating and maintenance of the F-35s on a pro-rata basis to match the 30-year lifespan the PBO estimate uses. (The average per-year costs for the 20 years is multiplied by 30.)

**The PBO includes a cost for "overhaul and upgrade." DND says those costs are included in their estimates under "acquisition costs" and "operating and support."

Accurately estimating costs that far into the future is a difficult task. DND and the PBO used different methods for doing so.

The PBO estimate of $14 billion for "operating and support" is a percentage of the estimate of acquisition costs, so as that number changes, the estimate would also change. The $14 billion includes personnel, operating and maintenance costs.

On this second chart, the PBO number is more comparable to the 2010 DND estimate on the left, since those estimates include personnel, operating and maintenance costs.