KPMG Framework and Independent Review of Cost Estimates for the F-35
The Seven-Point Plan directed the Treasury Board Secretariat to commission an independent review of National Defence's acquisitions and sustainment project assumptions and potential costs for the F-35A and to make the report public. Following a competitive procurement process, KPMG was awarded the contract for the independent review.
Guided by Government of Canada policies and international best practices, KPMG designed a best-practices guide (the Framework) to inform the development of full life cycle cost estimates for the Next Generation Fighter Capability program. KPMG's Framework is guided by the principles of accountability, transparency and consistency.
Life cycle costing framework
The Framework is a “principles-based” guide, which outlines best practices for the people, processes and products that are necessary to support the development of cost estimates. As noted in the KPMG report, judgement is required in applying its principles while respecting the accountabilities of Ministers and Deputy Heads to manage public resources.
The Life Cycle Costing Framework consists of three key principles:
- Estimated costs should include the full costs of all requirements that directly contribute to the Next Fighter Generation Capability program over an agreed time frame.
- The time frame for analysis should be driven by the purposes of the decision makers and stakeholders. For public presentation purposes, this should be the entire life of the program, from development to disposal.
- The estimate should be based on the best information available, including an unbiased review of the costs required to meet the established capability requirements.
KPMG recommends the following best practices for developing a comprehensive estimate:
- People – Cost estimators from a centralized organization, trained in cost estimating techniques.
- Processes – Planning, identifying assumptions and setting boundaries, developing a cost model, gathering data, and reviewing, analyzing and validating results.
- Products – Producing life-cycle cost estimates that are useful and relevant to decision-makers, Members of Parliament and Canadians.
- The Framework also stresses the varying purposes of life cycle cost estimates and the fact that different users have different requirements. As a result, the Next Generation Fighter Capability Life Cycle Cost Framework states that, for public presentation purposes, the life cycle costs include development, acquisition, sustainment, operations and disposal for a fleet of 65 F-35A, as stated in the Canada First Defence Strategy.
KPMG Independent Review of the National Defence Annual Update of cost estimates
KPMG did not identify any significant quantifiable differences in the current estimates provided by National Defence for the Next Generation Fighter Capability program. KPMG notes two key findings with respect to the cost estimates provided by National Defence.
The first finding relates to the contingency cost estimate, which KPMG indicates should fall within an overall range of $1.1 to $4.5 billion. National Defence's total contingency falls at the mid-point of this range, and therefore, is consistent with the Framework and reasonably reflects the identified risks and uncertainties associated with the F-35 program. However, KPMG notes that the current forecasted contingency for acquisition included in National Defence's Annual Update falls below the recommended contingency for that component of the program.
The second finding relates to the inclusion of attrition, or replacement, aircraft. KPMG recommends including this cost in the total estimate. National Defence provides cost estimates for anticipated attrition, or replacement aircraft in its Annual Update; these estimates are reported as additional costs as purchasing additional replacement aircraft is a policy decision that has not yet been made.
KPMG's report, Next Generation Fighter Capability: Independent Review of Life Cycle Cost, can be found on the National Fighter Procurement Secretariat website.
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