PETER CAIRNS, President, SHIPBUILDING ASSOCIATION OF CANADA
By the time you read this column, the Auditor General’s report will be published. On November 18 by a quirk of fate, or design, the National Post, reported that the Auditor General’s report will show that the money set aside to build the Canadian Surface Combatant is inadequate. This conclusion is in line with the findings of the Parliamentary Budget Officer in his report of February 12, 2012 on costs associated with the Joint Support Ship.
With all the money budgeted for the National Shipbuilding Procurement Policy (NSPS), why does the government find itself in this box? In my view, it is because there are some fundamental flaws in the process.
To start, the design and construction of a state-of-the-art frigate-sized ship is a very complex high technology project, far more intricate than the average layman realizes. As an example, a Boeing 777 requires 50,000 person hours to assemble, as opposed to a frigate that needs 1,2000,000. Put another way, in comparison to a standard 113,000-tonne bulker, a 5,000-tonne frigate has 28 per cent more content in only 4 per cent of the volume.
Commander David Peer, writing in the Canadian Naval Review states “…. it is important that all those involved in the discussion of the future fleet – academics, journalists, politicians and the public – understand the complexity of estimating the cost of a naval ship”.
In the Canadian case, the cost of the Canadian Surface Combatant was set in 2004 to 2006 for a vessel that will start construction sometime in the 2020’s. From where I sit, it seems next to impossible to estimate the cost of a ship whose operational requirements have only been defined in a rudimentary manner, and will not be built for another twenty years. For government purposes, it makes sense to have a “ballpark” estimate of cost for long term budget purposes. That said, there has to be a way of continuously updating cost estimates until a build contract is signed.
In the design of a ship there are a series of iterations that the designers go through before the design is finalized. They start with a concept design that investigates a number of solutions to meet operational requirements. Feasibility studies are done to ensure that the technical requirements can be met. This leads to a functional design, followed by a detailed design. At each of these stages there is an opportunity to refine the estimated cost.
A good design is dependent upon a solid statement of requirements that can subsequently result in a fair price for both the shipyard and the government. However, a requirement that continually changes produces a planning nightmare with fluctuating end dates and constantly changing cost estimates.
It is illustrative to look at what happens in the commercial world. Not all commercial projects are models of efficiency but the good ones are normally very good indeed. In February of 2011, Maersk signed a contract with a Korean shipyard to build ten Triple-E container ships. These are the largest container ships in the world and will carry 18,000 TEUs of containers. The first ship has already been delivered, while the others will be delivered next year. Change orders are normally not entertained.
What is clear in this example is that the design must be finalized and not subject to any change orders once the final design is agreed. This necessitates the ship price be subject to adjustment at each stage of the design process if cost overruns are to be eliminated.
Another anomaly in our system that confuses almost everyone except those who work in the system itself is how we produce an overall cost of a ship project. Besides the construction cost, Canada’s costing also includes design, facilities, depot spares, operation of the project management office, documentation, crew and training costs, to name a few. These numbers are aggregated to produce a total project cost. NATO sail-away costs do not include these items. This results in an impression that Canadian built ships are significantly more expensive than their European equivalents.
My last point is about the chain of command or governance as it is now called. Who actually has the authority and power to make important decisions? Successful projects tend to have one strong person in authority. This person has his advisors and experts but in the end, he or she makes the decisions and makes them quickly. Lee Iacocca at Chrysler, Steve Jobs at Apple, Sandy Woodward in the Falklands War, Bill Gates at Microsoft, Hyman Rickover, the father of nuclear powered submarines and Sandy Thompson of Thordon Bearings are but a few of many examples. What is obvious is that they do not make decisions by committee. Government is not structured to allow champions to rise to the fore, but that does not mean it should not strive to emulate successful business models.
Peter Cairns, (Vice-Admiral, retired) served in the Canadian Navy for 39 years, retiring in 1994.