New auditor general Michael Ferguson was also highly critical of the Public Works Department for not exercising due diligence in overseeing what will be the single largest expenditure of Canadian taxpayers' money for a piece of military hardware.
But it is the Defence Department that comes in for wide-ranging blame over its management of the project – a plan to buy 65 new F-35 radar-evading stealth fighters for what the military initially insisted would cost $9 billion, but will likely be far higher.
"We believe that establishing a budgetary cap without the aid of more complete and reliable cost estimates creates significant risks," says the scathing report.
"We also have significant concerns about the completeness of cost information provided to parliamentarians."
As is Ferguson's mandate, the audit focused only on the conduct of bureaucrats. But the findings will prove incendiary to the Harper government, which will certainly face renewed political attacks. The audit comes just one week after Finance Minister Jim Flaherty announced $5.2 billion in cuts to public spending in his deficit-fighting budget.
The Conservatives have steadfastly defended the F-35 purchase, including during last year's federal election campaign that gave them a majority government, despite a growing body of evidence that suggested the project could never be kept on budget. The program is designed to replace the country's aging fleet of CF-18 jet fighters.
The late NDP leader Jack Layton, as well as vanquished ex-Liberal leader Michael Ignatieff, repeatedly attacked the F-35 purchase during last year's federal election campaign.
The United States oversees the nine-country Joint Strike Fighter Program. The planes would be built by the U.S. defence giant Lockheed Martin, but the rollout of the plan has been plagued by delays and a 64 per cent cost increase.
The problems south of the border have been well-documented in reports by the U.S. Government Accountability Office, an investigative branch of Congress.
Now with Canada's auditor general weighing in for the first time, the federal government is expected to announce a new oversight mechanism for the F-35 procurement – an inter-departmental secretariat of senior ministers to oversee the project. The Tories received accolades for establishing such a secretariat to oversee its recently announced $33-billion National Shipbuilding Program.
The Harper government has said it expects to pay US$75 million dollars for each of the F-35s. But others – including Canada's parliamentary budget officer – have said the actual cost could be close to double that figure.
Ferguson's office examined documentation and briefing materials, including what elected officials were told, and concluded the Defence Department fell short in key areas.
Defence officials made major decisions without the required approvals or supporting documentation. They didn't take into account future maintenance costs or the cost of replacing jets that are damaged or destroyed.
Ferguson added that Public Works approved the sole-source purchase without proper documentation or analysis to back up Defence's claims that the F-35 was the way to go.
Defence agreed with a recommendation from the auditor general to refine its life-cycle cost estimates, and make the information publicly available.
But the military pointedly rejected criticism that it did not exercise due diligence in managing the project. "Problems relating to development of the F-35s were not fully communicated to decision makers, and risks presented to decision makers did not reflect the problems the JSF Program was experiencing at the time," the audit said.
Public Works also rejected Ferguson's finding that it failed to exercise due diligence. Ferguson said the department "relied almost exclusively on assertions by National Defence and endorsed the sole-sourced procurement strategy in the absence of required documentation and completed analysis."
One of the government's key justifications in backing the F-35 project was that it would generate billions of dollars in regional industrial benefits for Canadian defence and high-tech firms. That's because signing on to the JSF would give subcontractors a preferred status with the American leaders of the project.
But the audit concluded that the projected benefits to Canadian industry "fluctuated wildly" from $5.2 billion to $15.4 billion depending on various briefing documents generated by Defence and Industry Canada from 2001 to 2010.
"Moreover, in the majority of cases, only the most optimistic scenario was put forward, rather than a range of potential benefits that reflected the inherent uncertainties in the projections," says the audit.
"We are concerned, because these projections were used to support key decisions related to Canada's participation in the JSF Program and the purchase of the F-35 aircraft."
The government has not signed an actual contract with the U.S. to buy the F-35s. But it has invested $335 million so far to meet various commitments over the 15-year history of the U.S.-led JSF initiative.
A major phase of the project came in 2006 when the government signed a Memorandum of Understanding to move forward with the project.
The audit found that Defence did not engage with Public Works at this stage. In fact, Public Works never got a copy of the MOU until 2009.
"We found that the ministers of National Defence and Industry Canada and those ministers on the Treasury Board were not fully informed in the materials about the procurement implications of the 2006 MOU," the audit said.
Ferguson said Defence, as the lead department, "took appropriate steps" to manage project. "However, National Defence did not fully inform decision makers of the implications of participation in the JSF Program for the acquisition process. In some cases, documented analysis did not exist to support decisions."