A new and crucial wrinkle has emerged in the Liberal government's first major military equipment purchase: the ongoing saga to replace the air force's fixed-wing search and rescue planes.

The losing bidder in the $4.7-billion program has told CBC News that it was never informed there was flexibility within the federal government's proposed acquisition budget.

Leonardo S.p.A., an Italian aircraft maker, found itself on the outside of the deal last fall when the Liberal government chose to buy 16 new C-295W transports from rival Airbus Defence and Space.

The company with the losing bid, which offered its C-27J aircraft, has launched a Federal Court challenge. It also recently lost a bid before the Canadian International Trade Tribunal to halt the project.

Central to its case is how the program budget envelope went to $4.7 billion from $3.4 billion, which was initially approved and set aside by the previous Conservative government.

The three companies bidding on the replacement contract and 20 years of in-service support — Leonardo, Airbus Defence and Space and Embraer — were told that exceeding the budget envelope could lead to disqualification.

"If the financial proposal of the winning bid is higher than the notional budget, Canada could, at its sole discretion exercise any of its rights," which includes rejection of the offer, said the request for proposals.

Federal officials, in explaining the mechanics of the decision last December, told CBC News that the contract was being broken up into two stages.

The Airbus bid came in at $2.4 billion and included only 11 years of maintenance. There would be an option to renew in-service support for up to 15 years, and, if fully extended, it would add an additional $2.3 billion to the value of the tender.

As the Canadian partner of Airbus, Provincial Aerospace in St. John's would be the main beneficiary of those contract extensions.

Bidder left in the dark?

Public works conducted extensive consultations with the bidders and trumpeted the openness and transparency of the contract process.

Yet, a senior official at Leonardo says nowhere in those discussions was his company given the indication that the project budget could be exceeded.

"All efforts made by Leonardo during the proposal preparation were focused, for the benefit of Canada, on considering the notional budget as a target to meet," Filippo Bagnato, the managing director of Leonardo Aircraft Division, told CBC News.

"Leonardo was not aware of any budget flexibility, beyond that described in the RFP (request for proposal), and that an increase in budget would be remotely possible."

You can do all kinds of industry consultation, that doesn't mean you're actually listening and responding in a way that bidders understand - Dave Perry

A spokesperson for public works underlined the fact the program budget was "notional," meaning it was hypothetical with figures that were prepared a few years ago when bids were first solicited.

"While the Government of Canada shared a notional budget of $3.4 billion as information for the replacement of its fleet of Fixed-Wing Search and Rescue (FWSAR) aircraft with bidders, it was never a mandatory requirement nor was it a ceiling price that bidders had to bid under," said spokesperson Pierre-Alain Bujold.

"The notional budget was based on best information available at the time when the solicitation was released to industry. The solicitation documents clearly identified a best value approach for the selection of the winning bid, which considered capability and socio-economic benefits as well as cost."

Hybrid procurement

At the outset, the program was intended to be different.

It was considered a hybrid procurement, where bidders were asked to deliver not only aircraft, but recommendations on how many planes were needed and where to station them.

The companies were asked to submit prices and aircraft numbers for a fleet that would operate out of at least four main bases across the country — Winnipeg, Greenwood, N.S., Trenton, Ont., and Comox, B.C. — and a separate proposal using only three airfields.

But in the end, the bids looked more like a straightforward procurement.

The confusion over whether Leonardo could have exceeded the budget envelope could be a significant factor in the Federal Court case, said one defence expert.

Defence Minister Harjit Sajjan would not comment on the procurement process and its twists and turns Monday. (Fred Chartrand/Canadian Press)

Even if it doesn't make its case in court, Dave Perry of the Canadian Global Affairs Institute says it will certainly call into question how public works handled the bidders.

"The language (of the request for proposals) wasn't clear cut," said Perry.

"You can do all kinds of industry consultation, that doesn't mean you're actually listening and responding in a way that bidders understand. The consultation process is held up as a panacea, but just doing it doesn't address everyone's concerns."

Perry said he has similar concerns about how public works is handling the navy's frigate replacement program, which involves tens of billions of dollars.

Multi-government odyssey

The selection of the Airbus C-295W was supposed to end a 12-year, frustrating procurement odyssey that has spanned three governments.

The replacement aircraft were originally ordered by Paul Martin's Liberal government in 2004, but the plan was derailed when rival bidders, including Airbus, complained the air force had calibrated the specifications to favour Leonardo's C-27J.

Defence Minister Harjit Sajjan wouldn't say Monday whether he believed the procurement had been handled properly.

He simply underlined the need to get new planes on the flight line.

"Search and rescue is not one that is nice to have. It is a fundamental thing that we need to have for Canada," he told reporters before question period.

"When this project — we wanted to move it as quickly as possible. When we made the announcement I was very happy to hear from our search and rescue community that this aircraft is going to deliver all the necessary tools and be able to enhance our ability. I'm looking forward to having new equipment for our search and rescue because our men and women deserve that."