Introduction

The Royal Canadian Navy and the Canadian Coast Guard (CCG) operate various vessels to fulfill their respective mandates. In 2010, the Government of Canada launched the National Shipbuilding Strategy to guide the renewal of the federal fleet; its objectives are to:

• renew the federal fleet in a timely and affordable manner;
• create and support a sustainable marine sector in Canada; and
• generate economic benefits for Canada.[1]

Under the Strategy, Public Services and Procurement Canada (PSPC) is the contracting authority and its Deputy Minister chairs an interdepartmental deputy minister committee responsible its implementation.[2] National Defence (on behalf of the navy) and CCG manage individual shipbuilding projects while “Innovation, Science and Economic Development Canada negotiates the shipyards’ obligations to generate economic benefits for Canadians, and it monitors and evaluates the shipyards’ performance according to their obligations.”[3]

For large vessel construction, the government’s initial approach under the strategy was to establish a sourcing arrangement with two Canadian shipyards to build more than 50 vessels for the navy and the CCG over 30 years.[4] Then, in 2012, PSPC entered into umbrella agreements with two competitively selected shipyards to build large vessels: Vancouver Shipyards Company in Vancouver for non-combat vessels; and Irving Shipbuilding in Halifax for combat vessels. At that time, the two shipyards were assigned to build up to 28 large vessels of different types, with additional ships expected to be added later.[5]

Umbrella agreements are not contracts to build ships, per se; rather, they establish guidelines for negotiating contracts. In fact, each major phase of every shipbuilding project is subject to a separate contract. Since 2012, the federal government has entered into several contracts with the two shipyards.[6]

In August 2019, PSPC announced a competitive process to select a third shipyard to build icebreakers for the CCG; in December, the Government of Canada announced that Chantier Davie Canada Inc. in Lévis, Quebec, had pre-qualified to become the third shipyard.[7]

In the spring of 2021, the Office of the Auditor General of Canada (OAG) released a performance audit that focused on

• whether the large vessel fleets of the Royal Canadian Navy and the Canadian Coast Guard were being renewed in a timely manner;
• whether shipbuilding was on schedule and whether the new ships were being delivered in time for the retirement of the old ships; and
• how the audited organizations managed the risks of delays, including how they mitigated the potential impact of delays on the navy’s and coast guard’s operations while waiting for new ships.[8]

Although the National Shipbuilding Strategy has three main elements (large vessel construction; small vessel construction; and repair, refit, and maintenance), the OAG audit focused on large vessels, which are vessels over 1,000 tonnes displacement.[9]

On 25 May 2021, the House of Commons Standing Committee on Public Accounts (the Committee) held a hearing on this audit with the following in attendance:

• OAG – General, Casey Thomas, Assistant Auditor General; Nicholas Swales, Principal; and Chantal Thibaudeau, Director
• Fisheries and Oceans Canada – Timothy Sargent, Deputy Minister, and Andy Smith, Deputy Commissioner, Shipbuilding and Materiel, Canadian Coast Guard
• Innovation, Science and Economic Development Canada – Simon Kennedy, Deputy Minister, and Mary Gregory, Associate Assistant Deputy Minister
• National Defence – Jody Thomas, Deputy Minister; Vice Admiral Craig Baines, Commander, Royal Canadian Navy; and Troy Crosby, Assistant Deputy Minister, Materiel Group
• PSPC – Bill Matthews, Deputy Minister; Simon Page, Assistant Deputy Minister, Defence and Marine Procurement; and Michael Vandergrift, Associate Deputy Minister.[10]

The following is a glossary of the key terms used in this study:

• Target state – When a shipyard achieves international ship-construction standards to enable efficient production.
• Tonnes displacement – A measure of ship size based on the weight of the water that a ship displaces when it is floating.
• Umbrella agreement – A strategic sourcing arrangement under which the government will then negotiate fair and reasonable individual contracts with the selected shipyard to build federal ships for each project.[11]

Findings and Recommendations

Delays

The OAG found that the federal fleet renewal had many delays in design and construction; e.g., only two of the four ships “scheduled at the start of the audit period to be delivered by January 2020 were delivered, and both were late. Expected delivery dates for other vessels were also pushed back during the audit period” — in some cases by years.[12] The OAG concluded that practices established by the Strategy were not fully effective in managing risks of delays.[13]

The “biggest challenge was the design and production of the first vessels of a given class.”[14] The first vessel class built and delivered was the offshore fisheries science vessel; however, construction “was well advanced before welding problems were discovered, which resulted in delays because of the need to investigate and repair several welds on the ships. These delays then cascaded to subsequent vessels.”[15]

Table 1 shows the “domino effect” that delays in delivering new ships had on the National Shipbuilding Strategy.

Table 1—Effects of Delays in Delivering New Ships

Effect	Examples
There were delays in introducing new capabilities and replacing capabilities lost when older vessels were retired.	Delays in building the Arctic and offshore patrol ships and the polar icebreaker postponed increasing the government’s capabilities to operate in Arctic waters. Delays in delivering the Canadian surface combatants meant that the Royal Canadian Navy would have to wait longer to replace long-range air defence capabilities that were lost after it retired its destroyers. Delays in the offshore oceanographic science vessel and the offshore fisheries science vessels hampered marine research and monitoring. The new vessels would also provide much improved platforms for science research.
Older vessels had their lives extended. Other steps were taken to support operations while waiting for new vessels.	The Canadian Coast Guard had to extend the life of the Canadian Coast Guard Ship Hudson, which the offshore oceanographic science vessel was to replace. This work included a $10-million life extension contract awarded in 2019. The coast guard had to charter commercial vessels to help carry out marine research and monitoring.
Costs increased.	In 2019, National Defence estimated that design costs for the Canadian surface combatant would increase by $111 million because of delays. Because the contract terms limited the direct labour hours that could be charged to build the offshore fisheries science vessels, the government amended the contract to increase the portion of indirect costs that could be billed by at least $39.8 million up to a maximum of $101.5 million.
Delays in a vessel created delays in subsequent vessels.	Delays in building the first offshore fisheries science vessel delayed the construction of the second and third vessels of this type.

Source: Office of the Auditor General of Canada, National Shipbuilding Strategy, Report 2 of the 2021 Reports of the Auditor General of Canada, Exhibit 2.3.

Additionally, the OAG found that the “government identified unreliable schedules as a risk for several projects but its efforts to address this risk were not always effective. Schedule management is key to efficient and effective shipbuilding projects and is part of the standards required for shipyards to reach target state.[16]

Furthermore, schedules were often not an effective tool to manage projects’ timeliness. For several projects, government officials were not satisfied with the schedules they received partly because the schedules were too general and underestimated the time needed to accomplish different tasks.[17] And, they were not provided in a timely manner; e.g., in the case of the Canadian surface combatant, it took more than six “months after the start of the design phase for the government to obtain a design schedule that was sufficiently detailed to accurately track progress.”[18]

Ultimately, this “lack of information impeded the government’s ability to fully understand expected progress and to monitor performance accordingly.”[19]

Consequently, the OAG recommended that the CCG, National Defence, and PSPC “should implement mechanisms to

• obtain complete, current, and reliable schedules to support shipbuilding projects; and
• ensure that progress toward forecast targets and delivery timelines is monitored to enable timely decision making.”[20]

In its Management Action Plan, Fisheries and Oceans Canada (on behalf of the CCG) stated its agreement with the recommendation and provided the following milestones with regard to how it will address it, as follows:

• Interim Milestone A—CCG will support PSPC as part of the integrated project teams (IPT) to review new and existing shipbuilding contracts to determine whether shipyard-related schedule and performance reporting obligations and deliverables are appropriate and/or are being met (31 March 2022).
• Interim Milestone B—IPTs will ensure that Earned Value Management (EVM) is used as an analytical tool to measure shipyard-produced Integrated Master Schedule (IMS) performance, with results presented during recurring NSS governance committee meetings (31 March 2022).
• Interim Milestone C—IPTs will ensure that shipyard-produced progress updates are supported by shipyard performance findings based on EVM and baseline critical milestones in the integrated project schedule align with progress updates, through regular dialogue between CCG Project Management Offices (PMO) and shipyards and by shipyards presenting robust Integrated Program Schedules (IPSs) and performance findings during NSS governance committee meetings (31 December 2021).
• Key Interim Milestone D—CCG IPTs will leverage the CCG’s Vessel Procurement’s, Programme Management Office (MP PgMO) to understand and implement strategies to better manage and enforce project schedules. In addition, the MP PgMO will work closely with NSS shipbuilding advisers to gain a better understanding of second and third order effects of individual project schedule slippage across the NSS (31 December 2021).[21]

National Defence, in its action plan, also stated its agreement with the recommendation and provided the following milestones to address it – these milestones presented many of the same elements as those presented by the CCG:

• Interim Milestone A—IPTs will ensure that fulsome shipyard-produced IMS updates, supported by metrics outlining a clear critical path (30 September 2021).
• Interim Milestone B—IPTs will ensure that EVM is used as an analytical tool to measure shipyard-produced IMS performance, with results presented during recurring NSS governance committee meetings. This will promote a collective understanding of shipyard-produced IMS performance and serve as a data point to inform broader strategic decisions to manage overall shipbuilding project schedules (30 September 2021).
• Interim Milestone C—IPTs will review new and existing shipbuilding contracts to determine whether shipyard-related schedule obligations and deliverables are appropriate and/or are being met. On an as-required basis, IPTs will then utilize established NSS governance to consider proposed contract amendments aimed at ensuring adequate shipyard‑related schedule obligations and deliverables are included as part of shipbuilding contracts. This activity will be led by PSPC and supported by DND as a member of the IPTs, and will ensure that Canada has appropriate contractual mechanisms in place for shipyards to produce robust IMSs and for IPTs to manage overall shipbuilding project schedules (30 September 2021).[22]

Lastly, PSPC, in its detailed action plan, also agreed with the recommendation and provided the following milestones to address it — these milestones presented many of the same elements as those presented by the CCG and National Defence:

• Interim Milestone A—Continue to leverage the world-class EVM methodology that integrates schedule, costs, and scope to measure project performance; collaborate with client departments to confirm capability to perform detailed EVM analysis, or contract on their behalf to obtain third-party expert support to do so; use EVM analysis to evaluate windows of opportunities within the project/program schedules; link integrated EVM data to Risk Management discussions (EVM Clauses in Key Build Contracts: already completed; Implementation across all Governance: 50% already completed, 100% by 30 June 2022).
• Interim Milestone B—Review existing contracts for EVM and schedule‑related obligations and deliverables; assess the adequacy/acceptability and completeness of these obligations and deliverables and re-enforce and/or adjust specific clauses as required; leverage NSS governance to consider proposed contract amendments aimed at ensuring use of EVM schedules, other shipyard-related schedule obligations, and deliverables are included as part of shipbuilding contracts; lessons learned from the review of existing contracts will be applied to new contracts.
• Interim Milestone C—Establish a dedicated, recurring agenda item for the review of integrated schedule information (including EVM data and long-term project and programme schedules) at Deputy Minister and Assistant Deputy Minister-level governance committees. This recurring agenda item will have direct linkages to the Risk Management information and be reviewed in a consolidated and timely manner so that project and program schedules can be comprehensively discussed and decision-making can be effectively enabled (31 December 2021).[23]

At the hearing, Jody Thomas, Deputy Minister, National Defence, explained that the department coordinated with PSPC and Fisheries and Oceans Canada on developing their action plans to ensure they achieve an integrated outcome, and added that National Defence expects to have shipbuilding schedules that are complete and reliable by the second quarter (i.e., Q2) of fiscal year 2021-2022.[24]

Additionally, Timothy Sargent, Deputy Minister, Fisheries and Oceans Canada, provided the following:

I welcome this recommendation and consider it to be a foundational element of both project and program management. Scheduled monitoring and oversight is something we have been managing very closely with the shipyards and with [PSPC], and we are making progress.[25]

Lastly, Bill Mathews, Deputy Minster, PSPC, explained the following regarding the challenges related to establishing schedules for complex shipbuilding procurements:

We also want schedules that are credible. When finding that balance in the early days, the yards and the government, frankly—officials—were overly optimistic in terms of timelines.

As we now have a few ships under our belts, we are in a position to be more real in our challenge to the schedules. We're demanding more detail from the yards in terms of the schedules, so that we can assess if they're credible.

I have mentioned the earned value management approach that we plan on adding in, and we have started that. As the yards mature, we'll have a better sense of what they can deliver when, and we can change their schedules accordingly.[26]

Therefore, the Committee recommends:

Recommendation 1—on managing schedules

That, by 31 December 2021, the Canadian Coast Guard, National Defence, and Public Services and Procurement Canada provide the House of Commons Standing Committee on Public Accounts with a progress report regarding A) obtaining complete, current, and reliable schedules to support shipbuilding projects; and B) ensuring that progress toward forecast targets and delivery timelines is monitored to enable timely decision-making. A final report should also be provided by 30 June 2022.

Monitoring Risks

The OAG found that the tools for assessing, mitigating, and monitoring risks were inadequate.[27]

Although the “National Shipbuilding Strategy had a high-level risk management framework and practices in place to identify and assess risks, develop mitigation strategies, and monitor and report on risk management plans,” the OAG found that the tools used to manage risks were limited.[28] For example, one risk was not having enough staff within departments to implement the strategy in a timely manner; however, the risk management team did not document whether this risk was affecting the pace of implementing the strategy.[29]

Moreover, other “risks were not having enough workers at each shipyard, which could affect timely delivery of vessels. Again, the team did not document how these risks were affecting timely shipbuilding.”[30] In fact, the OAG noted instances where such staff shortages resulted in shipbuilding delays.[31]

The OAG also “found weaknesses in risk mitigation planning. The risk registers and risk information sheets contained little planning information;” e.g., “the sheets identified high-level strategies in some instances but did not include specific actions on how to implement them or set deadlines to complete them.”[32]

Lastly, the OAG also “found a weakness in the monitoring of the risk mitigation plans;” i.e., the documents it examined “contained so little information that it could not be determined to what extent the mitigation actions identified had been implemented.”[33]

In light of all these considerations, the OAG recommended that PSPC “should improve risk management tools at the National Shipbuilding Strategy’s management level to enable

• thorough risk analysis;
• specific, time-bound, and measurable risk mitigation action plans; and
• better monitoring of the implementation of risk mitigation measures.”[34]

In its action plan, the department stated its agreement with the recommendation and provided the following milestones to address it:

• Key interim milestone A—Engagement of a fully dedicated team and acquisition of supporting software/tools to increase risk management capacity to allow for a coherent and integrated approach to the evaluation of risks across all programmes including identification and reduction of systemic risks, the measurement of these risks, and recurring problems analysis (31 December 2021).
• Key interim milestone B—Ensure clarity and transparency, ensure completeness of mitigation strategies for all NSS risks and implement approaches to track and report on progress; integrate risk mitigation strategies into the ADM and DM-level governance meetings and ensure linkages with key project/program parameters such as cost and schedules are established and monitored (31 March 2022).[35]

In response to a question about the inclusion of sales taxes in cost estimates, Jody Thomas provided the following:

Our costing is, as I said, based on models. We do not include tax. The [Parliamentary Budget Office] does, but the numbers have essentially been within a range of each other that I think is reasonable going into the design phase of the ship.

The difference the last time had to do with the amount of contingency and the emphasis that the PBO put on the weight of the vessel.[36]

Additionally, Bill Mathews explained the expected benefits of EVM:

[One] of the best practices we are in the process of implementing is earned value management. It's a great way to integrate schedule risk as well as budget, and it's something you'll see used throughout the world. We've taken steps to start the implementation. We still have some work to do there, but it is one example of better techniques and world-class practices that we are integrating now. There are others as well. The assistant auditor general mentioned the software tool. There are plans to acquire a new one, and that will be coming soon as well.[37]

Therefore, the Committee recommends:

Recommendation 2—on risk monitoring

That, by 31 December 2021, Public Services and Procurement Canada provide the House of Commons Standing Committee on Public Accounts with a progress report regarding how it has improved its risk management practices, including a comprehensive examination of all factors that could lead to cost overruns, regarding the National Shipbuilding Strategy. A final report should also be provided by 30 June 2022.

Achieving Target State

The OAG found that PSPC had not yet confirmed that the first two shipyards had achieved target state (i.e., met international ship-construction standards to enable efficient ship production).[38] Although the “2012 umbrella agreements with both companies had not set a mandatory date to achieve target state,” they set the expectation that the non-combat shipyard (Vancouver) would achieve target state within about three years and the combat shipyard (Irving) within about six years.[39] In 2019, the umbrella agreement with Irving was amended to allow it four additional years to achieve target state.[40]

In 2018, the level of target state achieved by Vancouver Shipyards was assessed by a third-party expert. At the time of the OAG audit, “government officials were reviewing the shipyard’s corrective action plan. The level of target state achieved by Irving Shipbuilding is expected to be assessed before February 2022.”[41] The OAG noted that the National Shipbuilding Strategy had identified risks to attaining target state.[42]

Therefore, the OAG recommended that PSPC should consider the experience of the first two shipyards in determining a schedule to achieve target state for the third shipyard.[43]

In its action plan, the department stated its agreement with this recommendation and that it “is applying to the third shipyard the lessons learned from the first [two] strategy shipyards in terms of the timing of assessments within the target state process.”[44] It also provided the following milestones:

• Key Interim Milestone A—Review current approaches with regards to timing and expected results of Target State assessments; show specific linkages between Target State and shipyards’ ability to build the ships within their programme of work; use best practices and develop alternative methodology for the NSS 3rd shipyard Target State assessment process (30 September 2021).
• Key interim milestone B—Based on lessons learned from initial NSS Umbrella Agreements, integrate into the third NSS shipyard’s Umbrella Agreement timing for Target State assessments (31 March 2022).[45]

At the hearing, Simon Page, PSPC, explained the progress regarding achieving target state:

As for the Vancouver shipyard, we have not yet achieved target state, as Mr. Matthews specified, but we are nearly there. We are working on a corrective action plan to deal with the last elements of achieving target state.[46]

Things will be a bit more complex for the Davie shipyard because the selection process that will take place over the summer will have to be completed, and then the framework agreement must be signed. So as we get closer to signing the framework agreement, the details of target state for Davie will be discussed. That is when things will get interesting for us. With a view to ongoing improvement, we will take into account lessons learned with the two other shipyards and will ensure a good negotiation with the Davie shipyard in that respect.[47]

Thus, the Committee recommends:

Recommendation 3—on the achievement of target state

That, by 31 December 2021, Public Services and Procurement Canada provide the House of Commons Standing Committee on Public Accounts with a progress report regarding the achievement of target state for shipyards participating in the National Shipbuilding Strategy. A final report should also be provided by 30 June 2022.

Conclusion

The Committee concludes that the National Shipbuilding Strategy experienced delays regarding the delivery of both combat and non-combat ships that Canada requires for its domestic and international obligations. Notwithstanding several improvements that have been implemented to address these challenges, given that the majority of the new ships are yet to be built, the Government of Canada has an opportunity to further improve how it manages risk so that future projects are delivered on schedule and when they are needed.

To that end, the Committee has made three recommendations in this report to help the Government of Canada improve the way it manages the National Shipbuilding Strategy.

Summary of recommendations and timelines

Recommendation	Recommended Measure	Timeline
Recommendation 1	The Canadian Coast Guard, National Defence, and Public Services and Procurement Canada should provide the House of Commons Standing Committee on Public Accounts with a progress report and a final report regarding A) obtaining complete, current, and reliable schedules to support shipbuilding projects; and B) ensuring that progress toward forecast targets and delivery timelines is monitored to enable timely decision-making.	31 December 2021 30 June 2022
Recommendation 2	PSPC should provide the Committee with a progress report and a final report regarding how it has improved its risk management practices, including a compressive examination of all factors that could lead to cost overruns, regarding the National Shipbuilding Strategy.	31 December 2021 30 June 2022
Recommendation 3	PSPC should provide the Committee with a progress report and a final report regarding the achievement of target state for shipyards participating in the National Shipbuilding Strategy.	31 December 2021 30 June 2022