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HISTORY: National Defence Capital Projects


Close Support Artillery Weapon

9.62 Background. The Close Support Artillery Weapon project addresses part of the need for artillery to fulfil the operational requirements and commitments of the Canadian Forces. Specifically, the project has provided 26 155mm self-propelled howitzers, 44 tracked support vehicles and 4 armoured recovery vehicles for transporting disabled howitzers.

9.63 The need for this project was defined in large part by the deteriorating condition of existing howitzers and their inability to meet previously defined levels of operational activity. Other factors included the desirability of standardizing equipment and calibre of ammunition used by Canadian and allied forces.

9.64 The total approved budget for the project is $73 million, not including ammunition. The actual expenditure will be $59.7 million, due partly to a departmental decision to acquire rebuilt armoured recovery vehicles at a lower price than new ones, and because contract prices were lower than original estimates.

9.65 Observations. The Department initially planned to procure ammunition in accordance with the departmental policy that full operational stock plus two years' training ammunition must be purchased with the weapons. However, ammunition costs initially calculated at $40 million were deleted from the project, and the Department decided to fund this item from the Land Recurring Ammunition Project by depressing other ammunition stocks. This permitted the Department to manage the project outside the major Crown project category, which is more demanding in terms of approval and reporting requirements. Furthermore, the Department identified that the action carried a risk that restrictions on training or operational activity could result.

9.66 The early planning documents identified requirements for the acquisition of 32 105mm towed howitzers and 63 155mm towed howitzers. Later, the quantity of 155mm towed weapons was increased to 80. The final quantity of 26 155mm self-propelled howitzers was considered as satisfying only the most urgent operational commitments. We found no documented risk analysis with regard to the reduction in quantity. There was no documented evaluation of the operational impact.

9.67 The contracting process used in acquiring the equipment followed approved procedures. However, down payments made under the three principal contracts amounted to $26.8 million. This is more than half of the total price of the contracts which amounts to $45.8 million.


Small Arms Replacement Project (SARP)

9.68 Background. This major Crown project covers the acquisition of new rifles, carbines and light machine guns (designated as C7s, C8s and C9s respectively), weapon accessories, repair parts and ammunition. These weapons fire the 5.56mm calibre ammunition agreed to by NATO nations. They replace C1 rifles, C2 light automatic rifles and the SMG CIAI sub-machine guns now in service. The total approved budget for the project is $349.1 million.

9.69 Canadian Forces' trials resulted in selecting an upgraded version of the M16 rifle to be built under licence in Canada and the Minimi machine gun to be purchased from a Belgian manufacturer. The carbine is a shorter version of the rifle, also purchased from the rifle manufacturer.

9.70 A contract for the supply of the rifles and carbines was awarded to a Canadian firm with which DSS had entered into a sole-sourcing agreement for small arms work. The additional cost of pursuing strategic sourcing objectives is considered to be about $16 million. Manufacture of rifles and carbines has been progressing on schedule. The contract for the light machine gun was awarded to a Belgian manufacturer, partly as an offset for the Belgian purchase of Iltis trucks from the Canadian manufacturer of these vehicles. Deliveries of the machine guns have been on schedule.

9.71 Project scope has been increased to include optical sights for the rifles and for the light machine guns. These are required to overcome deficiencies in sighting effectiveness discovered during the trials. The cost increase will amount to $34.1 million. The Department considers that this can be paid for within the approved budget. The optical sights were the subject of a separate project until it became evident that the cost could be covered by the SARP budget.

9.72 The new 5.56 mm ammunition is being provided under a sole-source agreement between DSS and another Canadian manufacturer, as part of the government's Munitions Supply Program. An initial contract for 14 million rounds was signed in 1984.

9.73 Observations. A serious quality problem affects about 12 million rounds of ammunition valued at $7.5 million. Investigation by DND has revealed that a standard test that would have detected the problem was not carried out by the manufacturer or enforced by the Department. Introduction of the new weapons to Canadian Forces Europe has been delayed one year as a result of the deficiency. The Department has reported that the ammunition is once again in production under improved manufacturing processes and more rigorous testing and inspection. Delivery of 12 million rounds of new, acceptable ammunition has been made on schedule under a new contract. The matter of payment for the replacement ammunition is still under negotiation.

9.74 The quality problem found in the ammunition leads to a concern about who pays for the mistake, given the sole-source contract. There is difficulty in the Crown penalizing a firm that the Crown has paid to set up and is prepared to subsidize in order to sustain production.


Canadian Towed Array Sonar System (CANTASS)

9.75 Background. The primary objective of the CANTASS project is to provide improved anti-submarine warfare capability for use on the new Canadian Patrol Frigates under construction, and on the existing destroyers of the DDH265 class.

9.76 Improvements in submarine weapon systems have resulted in the need to detect submarines at much greater distances than the range of earlier detection devices. For these extended distances, the towed array passive sonar systems are now recognized as the most reliable shipboard system. These systems detect the sounds generated by the source as opposed to sound reflection employed in active sonar systems.

9.77 The Department weighed the options and decided to use some system components available from the U.S. Navy combined with electronic signal processing and display equipment to be developed in Canada. Thus CANTASS was initiated in 1982 as a phased development and acquisition project.

9.78 The budget approved for CANTASS is $216 million. It includes $71 million for equipment for the Canadian Patrol Frigate. Procurement and development contracts are progressing on schedule.


Region Operations Control Centres (ROCCs)

9.79 Background. This project started in 1973 when the North American Air Defence (NORAD) Command decided to update the existing communications and control equipment in the regional control centres. These centres provide detection and identification of impending air attack. The old equipment was vacuum tube vintage and was becoming very difficult to maintain.

9.80 The American technical programme was expanded to include a reconfiguration of NORAD regional boundaries. In 1974, Canada and United States agreed to a reconfiguration that provided for two regions in Canada, four in the continental United States and one in Alaska. Each region would have a command and control centre.

9.81 In developing the requirements for modernizing and expanding the system, several equipment alternatives and siting options were studied. It was decided that Canada would work jointly with the United States to develop and acquire state-of-the-art technology that would be common for all seven Control Centres. Based on a cost analysis, it was also decided to co-locate both Canadian centres at North Bay. The total estimated cost of the project was $95.8 million. Despite the fact that the project was less than $100 million, the Department decided to manage it as a major Crown project, and to accept the increased control and visibility that this requires.

9.82 The requirement for common equipment did not permit Canada to pursue competitive bids. The United States Air Force contracted with an American company to provide the required computer equipment and software. Through a negotiated Letter of Agreement, Canada participated in this contract for the supply of the same type of equipment for the two Canadian Regional Operations Control Centres.

9.83 The communications facilities to connect the centres to the radar installations in Canada are provided by the Trans-Canada Telephone System, with Bell Canada acting as the co-ordinator and system manager. This is covered by a separate communications contract. There was a major delay with the communications contract because the American supplier of the communication switchgear could not deliver until three years after the required date. As a result of initiatives taken by the DND project manager, a solution was found and suitable replacement equipment for the Canadian centres was obtained on time and within the budgeted costs.

9.84 The project was completed on schedule and under budget in late 1982. An evaluation test was conducted by the Tactical Air Command of the United States Air Force in 1983. This test demonstrated that the centres can fulfil their operational requirements.


North Warning System

9.85 Background. In April 1982, DND and the United States Department of Defense agreed on an Air Defence Master Plan that called for a perimeter surveillance system covering all approaches to North America. One segment of this system is the North Warning System (NWS), consisting of approximately 11 staffed long-range radar sites and 36 unstaffed short-range radar sites in Canada, with an additional 2 long-range and 3 short-range sites in Alaska. Wherever feasible, the long-range radar sites are to be situated at or near the existing Distant Early Warning (DEW) sites and extend southward at three new sites along the east coast to overlap coverage with the American Over The Horizon -Backscatter extra-long-range radar site in Maine.

9.86 Threat assessment studies established that an early warning system covering the northern boundaries of the continent is essential. Accordingly, the North Warning System was designed to meet the need for contiguous surveillance coverage to ensure detection of unfriendly bombers or cruise missiles. The existing DEW line, because of the smaller number of sensors and the basic design of the equipment, cannot provide contiguous surveillance, and the CADIN-Pinetree radars are obsolete and, in most cases, no longer needed.

9.87 A study of the options available for the defence of North America concentrated on how to react to an attack. All these options included the NWS as the only practical surveillance system in the north.

9.88 Negotiations between Canada and the United States led to a Memorandum of Understanding that provided a cost-sharing ratio of 40 per cent to Canada, 60 per cent to the U.S. As far as possible, this would be accomplished by sharing the work rather than exchanging money. It was agreed that Canada would construct the sites and supply the communication system, and the U.S. would supply the radar equipment. The long-range radars were standard radars already in use. The short-range radars are now in the final development stage.

9.89 The need for this system was well documented and in accordance with the Department's established objectives.

9.90 The total Canadian cost of the system is estimated at $829 million budget-year dollars, with completion scheduled for the end of 1991. Contracts have been awarded for the communications services ($118 million), and design and construction work at three east coast sites ($90 million). All contracts followed the prescribed procedures and are being carefully monitored.

9.91 An interesting variation being used on this project is that project management services have been contracted rather than being provided in-house. This has enabled the project to proceed much faster than usual. It is particularly important because of the short construction period in the north and the urgency being applied to the project. The initial period (14 months) of this contract will cost about $5 million with the full cost estimated to be roughly $35 million for the life of the project.


Tribal Class Update and Modernization Project (TRUMP)

9.92 Background. A programme intended to upgrade and modernize the surface capability of Canada's navy was presented in a discussion paper to Cabinet in 1977. The paper identified, among other things, a need to conduct a major modernization of the four Tribal Class destroyers. This initiative is referred to as the Tribal Class Update and Modernization Project, or TRUMP. It was proposed that the enhanced Tribal Class capabilities should complement those of the Canadian Patrol Frigate, and that these two classes of ships would form the nucleus of Canada's surface naval force in the 1990s. The project involves a mid-life refit and the replacement of old equipment with modern capabilities such as air defence missiles and a new command and control system.

9.93 In July 1983 Cabinet gave approval in principle for TRUMP at an estimated expenditure of $650 million (1983 dollars) and directed that the shipyard portion of the project would be given to a specific shipyard that was not involved in the construction of the Canadian Patrol Frigate. In May 1986 Cabinet announced that this shipyard would be given the shipyard portion of the project for the first two ships, with the last two put to open competition. Discussions with the Project Management Office staff indicated that, if the last two ships were awarded to another shipyard, there could be a cost increase based on the possible duplication of support requirements and the loss of learning curve benefits. The actual cost, if any, will not be determined until the tendering process is completed in early 1988.

9.94 In January 1984, Treasury Board authorized spending up to $17.41 million for the TRUMP Definition Phase. Three bids were received for the contract to undertake the Definition Phase - one of $7.9 million, one of $10.7 million and one of $12.9 million. All three were considered to be in compliance with technical requirements. An evaluation of these proposals was conducted in April 1984, and the evaluation team ranked the proposals in the order shown above. An agreement was signed with the selected (lowest) bidder in June 1984 to begin the Project Definition work right away. Between June 1984 and April 1986, Treasury Board approved three amendments to the contract, the last of which raised the total contract price to $19 million. Part of the rationale for the third amendment was the need to help the contractor retain engineering personnel and technical staff capabilities, presumably to permit carrying out the implementation phase of the project, despite the fact that no agreement had yet been made that that contractor would, in fact, be chosen.

9.95 Following completion of the project definition phase, DND and DSS recommended, and in April 1986 Treasury Board approved, a contract with the same contractor for the implementation phase of TRUMP at a total estimated cost of $1.3 billion budget-year dollars. This contract, signed on 9 May 1986, was awarded without a request for bids from other potential bidders.

9.96 Observations. We have been unable to obtain any financial or economic options analyses for sole sourcing. We are concerned, therefore, that the action to by-pass the competitive bidding process may have been taken with insufficient cost-benefit analyses. We are also concerned that the decision to sole source the implementation contract may not have been in compliance with Treasury Board policy regarding competitive bidding which is intended, among other things, to ensure that the government achieves maximum economy in the purchase of goods and services. By sole sourcing the contract, DND might not have obtained the most cost-beneficial option.

9.97 The April 1986 decision to discontinue the competitive bidding process on TRUMP and award a $1.3 billion implementation contract to the selected contractor was, according to DSS and DND, done in the national interest under section 8(c) of Appendix F of the Government Contract Regulations. The principal reasons given for this action were:


9.98 The objective of Treasury Board regulations and Department of Supply and Services policies concerning competitive bidding is to secure the lowest price from qualified bidders. By not seeking competitive bids for the implementation contract, the project may have incurred additional costs that might offset the benefits achieved. However this could only be determined after careful consideration of the many complex factors involved.


Destroyer Life Extension (DELEX) Project

9.99 Background. The Destroyer Life Extension (DELEX) Project was designed to extend the operational life of Canada's 16 active steam-driven destroyers pending their replacement by new ships. All the ships have been repaired in critical areas and have had unsupportable equipment replaced or modified to provide continuing "safe-to-go-to-sea" capability. Ten ships have been furnished with updated equipment necessary to maintain approved combat and communication capabilities. The six oldest ships, which are to be replaced by the new Canadian Patrol Frigates, have received no additional work beyond the "safe-to-go-to-sea" package. No deliberate attempt has been made to increase the capability of the fleet through DELEX.

9.100 In 1978, the Department approved the use of $79.9 million from operations and maintenance funds for the "safe-to-go-to-sea" package. In 1980 Treasury Board approved the capital programme for $133.9 million. The project was to be completed by 1986, but the completion date has been set back to 1989-90 because of lack of operations and maintenance funding for refits in 1980-81 and delays in delivery of some equipment.

9.101 We reported in 1984 on the identification, planning and implementation stages of the life cycle. We had found that the identification and planning stages of the project met our audit criteria and that an analysis of available options had been made.

9.102 Observations. In 1984 we were concerned with an issue involving a non-military objective when an unproven radar was bought contrary to the recommendations of the Department's technical experts and against a departmental directive to buy "off-the-shelf" equipment. The radar was ordered from a Canadian company largely to support industrial development and Canadian sourcing objectives. In 1984 we reported that the Department was then estimating that the delivery of proven, militarized radars would be three years late. In response to Public Accounts Committee questions in March 1985, the Department responded that the problem was well in hand and that the radars would be less than three years late. But reliability problems have persisted, and the most recent estimate by the Department is that fully approved radars could be five years late. This creates a significant limitation in the capability of those ships involved during a substantial part of their life extension.

9.103 We noted that a new gun fire control system was failing to provide suitable stabilization data in rough seas. At first the supplier claimed that the problem would be eliminated by modifying system software, and the Department considered that correction of the problem was imminent. However, the stability problem has persisted and the supplier has concluded that its correction now requires installing a new reference sensor so that the contractor can match his system to existing shipboard equipment.

9.104 At the time of contract negotiations, DND dropped an option for a sea-going demonstration of the gun fire control system from the requirements in an attempt to save $400,000 (U.S.). It amended the Technical Statement of Requirements to accept carrying out trials of the equipment on board ships alongside dock rather than at sea. The performance was satisfactory alongside dock but not at sea.

9.105 The supplier has sought additional payment for his work in fixing the problem, and the Department has agreed to pay $800,000 (U.S.) as one-half of the claim. Acceptance of performance is now predicated on trials at sea.

9.106 In the interim, the shortcoming in the new fire control system has reduced the combat capability of the same ships that are affected by the radar problem.


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 to-date 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-to-surface 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.


Navigator Trainer and Transport Aircraft (Dash-8)

9.130 Background. This project was originally part of a larger project established in 1981 for replacing the several types of aircraft in the Department's fleet of medium multi-engined aircraft. It was to be implemented in the mid-1990s. That project also would permit redeploying, to their originally intended roles, four Hercules transport aircraft used for navigator training. No funds were to be provided in the Defence Services Program until 1991.

9.131 A separate project was established in 1984 to purchase Dash-8 aircraft to meet pressing needs of the aircraft industry for sales at that time.

9.132 The need for the aircraft can be clearly related to departmental roles and objectives. The type and level of service and the characteristics of the aircraft were reasonably well defined. But they were generally based on the premise of replacing an equivalent number of aircraft.

9.133 During 1982 and 1983, a number of meetings and informal reviews were held to consider the suitability of Canadian manufacturers' aircraft for various departmental roles. Early in 1984, an Interdepartmental Working Group on the Dash-8 programme was established chaired by the Department of Regional Industrial Expansion. These initiatives resulted in a decision to purchase six Dash-8 aircraft that would permit the redeployment of the four Hercules used for navigator training and replace two Dash-7s used for light transport at Canadian Forces Europe.

9.134 Treasury Board project approval was obtained in August 1984 for a total expenditure of $98 million including spares, maintenance support and training. The navigator trainer aircraft project also included the development of integrated airborne and ground navigator training stations.

9.135 A contract was negotiated and awarded to the manufacturer in August 1985 for six aircraft plus training and publications at a firm fixed price of $77.5 million. The spares and maintenance were to be contracted separately when requirements were determined.

9.136 The contract provided for a down payment on execution of $23.1 million representing approximately 30 per cent of the total value. The remainder of the payments were based on milestones related to the progress of the work. To accommodate the Department's funding requirements, two of the milestone payments were subject to the additional condition that they were not payable before 1 April 1986 and 1 April 1987.

9.137 Deliveries of the first two aircraft, originally scheduled for April and June 1986, were delayed for almost a year because of the complexity of producing aircraft to meet DND requirements and because of labour and production difficulties.

9.138 Observations. The normal review procedures in the Defence programme Management System for establishing departmental priorities were not followed. Under certain conditions the competitive bidding procedures normally required by the Government Contract Regulations can be waived. The conditions surrounding this acquisition were deemed to fall within these provisions. These aircraft were bought contrary to the Department's planned priorities for equipment acquisition.

9.139 The aircraft selected met the specified needs but the analysis of alternatives was limited to a confirmation that the Canadian product was suitable and that the socio-economic benefits outweighed any potential differences between Canadian and foreign built aircraft.


Challenger Aircraft

9.140 Background. This project was established to acquire 12 Challenger aircraft at an estimated total cost of $211.2 million to meet three separate Department of National Defence requirements. Four of the aircraft were Challenger CL601s, for replacing executive airlift aircraft referred to as administrative flight services. Seven were Challenger CL600 aircraft for use as electronic warfare training aircraft, referred to as electronic support and training systems. One was the Challenger CL600 prototype for use as an avionics test bed aircraft.

9.141 The departmental requirement to replace administrative flight services aircraft was reasonably urgent, given a result of the government decision in November 1984 to consolidate the DND and Department of Transport executive airlift operations. The requirements for seven dedicated electronic warfare training aircraft and an avionics test bed aircraft were on a DND list of unaffordable projects. None of the projects had progressed through the normal review procedures in the Defence programme Management System to a point where funds had been allocated to them.

9.142 At the time, the manufacturer had four unsold Challenger CL601 aircraft nearing completion on its production line and eight used Challenger CL600 aircraft, including the Challenger prototype, in inventory. During this period, the government was in the process of divesting itself of the two Crown-owned aircraft manufacturers.

9.143 Early in 1985, the Department of Regional Industrial Expansion was proceeding with a Supplementary Estimate for $140 million as an equity contribution to the manufacturer. About the same time, DND was proceeding with a Treasury Board submission for the purchase of four Challenger CL601 aircraft for the administrative flight service. A series of high-level interdepartmental meetings on the question of assistance to the manufacturer resulted in a decision by Cabinet on 28 February 1985 to purchase up to 12 Challenger aircraft.

9.144 The characteristics and numbers of the aircraft were subject to detailed analysis and were adequately defined. The selection of the aircraft was generally consistent with the requirements. But a major part of the analysis of alternatives was directed to assessing the suitability of the aircraft available from the Canadian manufacturer.

9.145 Treasury Board project approval was obtained on 8 March 1985 for a total cost of $211.2 million. DND was to be provided with $140 million for the project in Supplementary Estimates for 1984-85. The project was also exempted from the additional Treasury Board project management requirements for major Crown projects. A contract was negotiated and awarded to the supplier on 28 March 1985 for the purchase of the 12 aircraft at a firm fixed price of $183.0 million.

9.146 A down payment of $140 million was paid on the signing of the contract. An additional amount of $7.7 million was payable as CL601 aircraft were delivered to the completion centre for finishing. The remainder of the contract was payable as the finished aircraft and other items were delivered to DND.

9.147 The large down payment was due to the advanced stage of completion of the aircraft and the need to ensure the funds were disbursed prior to 31 March 1985.

9.148 Deliveries of the administrative flight service aircraft, originally scheduled for January to March 1985, were delayed for periods from 7 to 10 months. The other aircraft were also delayed by similar periods. The Crown took legal action in May 1986 under the Breach of Contract provision to force the contractor to exercise better control over the contract.

9.149 An amount of $480,000 was negotiated as a credit for the cost to the Department of the delays. The credit is to be used for purchasing additional spare parts, repair services or other services.

9.150 A decision was made in July 1985 to increase the level of spare support for the administrative flight service from a normal commercial operator dispatch reliability rate of 95 per cent to a "blue ribbon" level of 99 per cent. The total cost of the additional spares for the increased level of service was estimated at $16 million, of which approximately $8 million was to be charged to the Challenger acquisition project.

9.151 Observations. The decision to purchase the aircraft from the Canadian supplier precluded any opportunity to use competitive bidding procedures as required by the Government Contract Regulations.

9.152 An amount of $27.2 million was improperly charged to 1984-85 expenditures when the cheque for $140 million was issued at the signing of the contract on 28 March 1985. The amount should not have been charged to the 1984-85 fiscal year since it was a holdback that was not due until the aircraft were delivered either to the completion centre or to the Department. This didn't happen until after 31 March 1985.

9.153 Most of the aircraft were bought contrary to the Department's planned priorities of equipment acquisition. Although eight aircraft can be linked to Department of National Defence broad roles and objectives, the decision to acquire them in February 1985 was made primarily to provide financial assistance to the manufacturer prior to 31 March 1985. As we reported in 1984, because DND does not have an approved force structure plan, it is not possible to assess the extent to which projects such as this satisfy clearly defined needs.


The Canadian Patrol Frigate (CPF)

9.154 Background. In December 1977, Cabinet authorized a $63 million project definition study for Phase 1 of a ship replacement program. Phase 1 involved the acquisition of six ships. Our 1984 Report reviewed the Identification and planning phases of the life cycle of Phase 1. The focus of this audit was on the implementation stage of this project.

9.155 The objective of the Canadian Patrol Frigate project is to provide six fully supported frigates within the terms of the contract and on schedule, with delivery of the first ship in 1989 and the last ship in 1992. Treasury Board approval was received 25 July 1983, and the contract was signed on 29 July 1983. The total cost is to be within the approved ceiling of $5.5 billion (budget-year dollars). This figure consists of about $1.2 billion for the cost of government activities and $4.3 billion for the contract work.

9.156 The project is in the hands of a Canadian prime contractor, with two major subcontractors responsible for integrating the combat systems and constructing and outfitting of three of the ships.

9.157 The contract provides for a number of incentives and penalties related to cost performance, scheduled deliveries, ship performance parameters and industrial benefit undertakings. The warranty provisions state that


9.158 The first ship, the Halifax, is under construction. Fabrication began in May 1986, and the first units such as the keel and the structure immediately above the keel have been completed and put in drydock. Float-up, which is the completion of the ship's hull structure and outfitting is due in January 1988 - with delivery of the Halifax to DND scheduled for October 1989.

9.159 Observations. We have a concern with the warranty as it now exists. The contractor is obligated to pay only 80 per cent of warranty claims that exceed the contract ceiling up to the warranty limits of $18 million for defects in material and workmanship and $43 million for design. Once these warranty limits have been reached, the Crown must pay 100 per cent of all warranty costs. The potential risk to the Crown could be substantial. If the project is completed at the ceiling cost, the Crown will be liable for all warranty costs above $61 million.

9.160 DND states that warranty provisions apply only after a comprehensive trials period, and provision was made within project contingency funds (about $400 million) for unforeseen difficulties such as unexpected price rises and warranty expenditures. Also, the warranty with the prime contractor can be used as leverage to encourage the prime contractor to exercise warranty arrangements it has made with the various sub-contractors.

9.161 Our review of the project monitoring and control systems indicates that they are adequate. However, there are about 150 items in the software development process that are behind schedule in part because of a lack of clarity in the specification of software requirements. To get back on schedule, steps have been taken to clarify the requirements, and work is proceeding in parallel with this, where possible. Nevertheless, the area must be closely tracked to ensure that the schedule is met and costs are controlled. This process has taken approximately four months and is near completion. But this may further delay the Canadian Patrol Frigate Project with possible increases in costs. DND suggests that the delay in software development is due to start-up difficulties and an ambitious schedule, and that current projections are that the project will be completed on time and within the contract ceiling price.

9.162 We also have some concerns about milestone payments. The contract for the Patrol Frigate requires milestone payments "no later than April 15, 198X." A cheque for the second of these annual payments was issued 15 April 1985 and charged to the old year. The authority quoted for this action was a 27 July 1983 Treasury Board letter that contained permission to disburse advance payments ahead of schedule to facilitate the cash flow management needs of the Department. However, the charge to the old year is questionable because the payment was not disbursed until the new year. The Government's Payment at Year End directive allows an advance to be recorded as a charge to the old year only if it was due on or before 31 March. The term "no later than April 15" does not satisfy this requirement. This matter was reported as part of the Office's Year-end Payments Study in 1986.

9.163 A $50 million partial payment of a $74 million milestone payment, due no later than 15 April 1986, was paid 26 March 1986. If the Crown borrows money at the rate of 8 per cent, this early milestone payment would have cost the government about $220,000. Proper cash flow management suggests that the advance should have been paid on 15 April 1986, or $220,000 deducted from the $50 million payment when the Department paid the money earlier than was necessary so as not to confer an interest benefit to the contractor and a loss to the Crown.


1 1/4 Ton Truck Project

9.164 Background. The purchase of 1 1/4 ton trucks is one component of a Military Operational and Support Trucks Project that deals with all logistic wheeled vehicles. It includes planning and implementing of the acquisition of replacement fleets.

9.165 Replacement of the 1 1/4 ton truck fleet had been planned for the early to mid 1980s, but funds were not available to satisfy all project requirements. So replacement of this fleet had to be postponed until the early 1990s. In the meantime, approval was given to a refurbishment project to extend the life of the 1 1/4 ton truck fleet until new replacements are provided.

9.166 The 1 1/4 ton truck fleet consists of 2,836 four-wheel drive commercial trucks that were acquired in 1976. They had an economic life expectancy of eight years. By 1982, significant corrosion was evident, and an investigation made by independent consultants concluded that the main structure of the trucks was basically sound and that the life of the fleet could be extended to 1990 by patching over corroded areas and making some simple improvements for reinforcement and to protect against structural deterioration.

9.167 In 1983, a DND Senior Review Board decision approved the refurbishment project and the purchase of a life-time supply of spare parts that were being phased out of production by the manufacturer. The patching and product improvements were to be funded out of operation and maintenance funds with a budget of $6.3 million. The purchase of spare parts was estimated at $9.5 million and was to be made from capital budgeted for the original acquisition project in 1976. The implementation of the refurbishment was carried out in accordance with approved procedures.

9.168 The approach used to determine and report on the operational availability of the fleet is largely judgemental and varies from base to base. We were therefore unable to express an opinion on the integrity of the operational availability reporting system of the fleet because of the lack of consistent predetermined criteria for measuring availability.

9.169 Observations. Because of the effects of road salt, there was a noticeable disparity in the condition of trucks used in different parts of the country. Also, as shown in a departmental report prepared in 1983, there was a great difference in mileage accumulated from vehicle to vehicle; in fact, the difference varied from less than 600 miles to more than 80,000 miles. Both of these conditions indicated that the fleet had not been rotated in accordance with Canadian Forces' normal practice. The fleet was rotated in 1984-85, but DND has estimated that by not doing so previously on a regular basis, maintenance costs of $6 million were incurred earlier than necessary. And some vehicles had to be disposed of because they were not economically repairable. This consequence has contributed to a shortfall of vehicles available for operational requirements.


1/4 Ton Iltis Truck Project

9.170 The 1/4 Ton Iltis truck project is the first in the major Crown project category to be audited by the Department's internal audit group. We carried out a number of tests to confirm compatibility with our audit approach and concluded that the work was appropriate and reliable.

9.171 Background. The purchase of 1/4 ton trucks is a component of the Military Operational and Support Trucks (MOST) Project which deals with the Canadian Forces' requirements for all logistic wheeled vehicles.

9.172 Iltis is the vehicle selected to replace the Jeep and Jeep-type 1/4 ton vehicles which had reached the end of their economic lives.

9.173 The Iltis is a European designed vehicle that has been used for several years by the West German army. It was chosen by the Canadian Forces over a selection of other vehicles because of design and socio-economic considerations and benefits.

9.174 Manufacturing rights were obtained by a Canadian company from the original equipment manufacturer with some design modifications made to suit the Canadian Forces' requirements. The basic vehicles have been produced in Canada and Canadian manufactured components have been substituted for foreign sourced items wherever possible.

9.175 Final Treasury Board approval was given in July 1985 for the acquisition of 2500 vehicles, special kitting and spare parts at a ceiling cost of $115 million (budget-year dollars). The project is scheduled to be completed by December 1987. Current departmental estimates show that total expenditures are expected to be $110.2 million (budget-year dollars).

9.176 Observations. The contract terms for the Iltis vehicle have not adequately protected DND's interests. They have not provided a basis to negotiate recovery of additional foreign exchange costs attributable to late deliveries or to provide recompense for late delivery of spare parts. DSS officials advise that the prime contractor would not agree to provisions covering damages due to late delivery or exchange rate fluctuations in regard to the spare parts.

9.177 Some spare parts procured from off-shore sources have been delivered almost one year later than scheduled, despite the fact that the contract did not allow for price increases beyond those in force at the planned delivery date. In the meantime, the exchange rate for the foreign currency involved had increased steadily and the spares were paid for at the higher rate. The internal audit group has calculated that an additional cost of at least $377,000 was incurred because of the increase in exchange rates between the scheduled and actual delivery dates.

9.178 Legal counsel concluded that there is no basis for obtaining any adjustment in price since the rate of exchange was not time-specific; that is, it was not tied to contract schedule dates.

9.179 Because of this and the absence of any penalties for late delivery of spare parts, there was reduced incentive for the supplier to meet schedule dates.

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