oversight

Foreign Military Sales: Observations on DOD's Approach to Developing Price and Availability Estimates for Foreign Customers

Published by the Government Accountability Office on 2019-02-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States Government Accountability Office
                Report to Congressional Committees




                FOREIGN MILITARY
February 2019




                SALES

                Observations on
                DOD's Approach to
                Developing Price and
                Availability Estimates
                for Foreign Customers




GAO-19-214
                                            February 2019

                                            FOREIGN MILITARY SALES
                                            Observations on DOD’s Approach to Developing
                                            Price and Availability Estimates for Foreign
Highlights of GAO-19-214, a report to
                                            Customers
congressional committees




Why GAO Did This Study                      What GAO Found
DOD manages the procurement of              The Department of Defense (DOD) reported receiving 3,038 requests for Foreign
billions of dollars in defense items and    Military Sales (FMS) price and availability data in fiscal years 2014 through 2018
services on behalf of foreign customers     from 93 countries across six geographic regions, as shown in the figure. Foreign
through the FMS program. These sales        customer requests included services and items such as training and support
help support the defense industrial         services for weapon systems, missiles, aircraft, and communication equipment.
base and are vital to U.S. foreign policy
and national security interests.            Number of Foreign Military Sales Price and Availability Requests by Region, Fiscal Years 2014
                                            through 2018
The FMS process generally begins
with a request by a foreign government      Not all countries in each region submitted a price and availability request.
for information about a U.S. defense
item or service. Requests for price and
availability data are an optional step in
the process. DOD guidance is to
generally respond to such requests
within 45 days.
The fiscal year 2018 National Defense
Authorization Act included a provision
for GAO to review DOD’s process for
developing price and availability data
for foreign customers. This report
addresses, among other objectives, (1)
price and availability requests DOD
received from fiscal years 2014
through 2018, (2) how DOD develops
price and availability data, and (3) the
factors that can influence the
timeliness of DOD’s responses to
foreign customers with price and
availability data.
GAO analyzed DOD price and
availability data for fiscal years 2014     DOD officials indicated they generally strove to offer price and availability data
through 2018, the latest data available;    that reflected rough order of magnitude estimates of total anticipated costs for a
and reviewed documents for a non-           complete and sustainable capability. Contractors often provide input to DOD for
generalizable sample of five price and      these cost and schedule estimates. In the five examples GAO reviewed, DOD
availability responses—varying by           officials considered factors such as possible production delays and included
estimate value—provided to foreign          anticipated costs for support services, operations, and sustainment, when
customers by the Army, Navy, and Air        needed. DOD officials also included FMS administrative charges and, as
Force. GAO also interviewed defense         applicable, nonrecurring and transportation costs. GAO found that when DOD
contractors and DOD officials.              considered these factors in developing the response to the customer, at times,
                                            they made adjustments to the estimates provided by contractors to more fully
GAO is not making any
recommendations at this time.               reflect expected costs if the items are purchased.
                                            Among the five examples, GAO found that response times ranged from 45 to
                                            320 days and that a number of factors can affect timeliness. For example, the
                                            complexity of the system or capability the customer is interested in acquiring may
View GAO-19-214. For more information,      require involvement from multiple program offices and defense contractors,
contact Marie A. Mak at (202) 512-4841 or
makm@gao.gov.
                                            requiring more time than the 45 days suggested by DOD’s guidance.



                                                                                               United States Government Accountability Office
Contents


Letter                                                                                      1
               Background                                                                   4
               DOD Received about 3,000 Requests for Price and Availability
                  Data over the Past 5 Years                                                7
               DOD’s Guidance Allows for Flexibility in Developing Price and
                  Availability Data and Reflects Leading Practices for Using
                  Quality Information                                                      11
               In Selected Examples, DOD Included Comprehensive Data on
                  Ownership Costs When Developing Price and Availability
                  Responses                                                                14
               Various Factors Can Influence DOD’s Approach and the
                  Timeliness of DOD’s Responses                                            16
               Agency Comments                                                             19

Appendix I     Objectives, Scope, and Methodology                                          22



Appendix II    Comments from the Department of Defense                                     26



Appendix III   GAO Contact and Staff Acknowledgments                                       27


Table
               Table 1: DOD Response Timeframes for Selected Foreign Military
                       Sales (FMS) Price and Availability Requests                         17

Figures
               Figure 1: Illustration of Optional Price and Availability (P&A) Step
                        within the Foreign Military Sales Process                           6
               Figure 2: Number of Requests DOD Received for Foreign Military
                        Sales Price and Availability Data by Region, Fiscal Years
                        2014 through 2018                                                   8
               Figure 3: Requests for Foreign Military Sales Price and Availability
                        Data DOD Received by Component, Fiscal Years 2014
                        through 2018                                                        9
               Figure 4: Illustration of Process to Develop Foreign Military Sales
                        Price and Availability Data                                        12



               Page i                                         GAO-19-214 Foreign Military Sales
Abbreviations

DSCA              Defense Security Cooperation Agency
DOD               Department of Defense
FMS               Foreign Military Sales



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Page ii                                                  GAO-19-214 Foreign Military Sales
                       Letter




441 G St. N.W.
Washington, DC 20548




                       February 6, 2019

                       Congressional Committees

                       Each year, the United States reports billions of dollars in sales of defense
                       items and services to foreign governments or international organizations.
                       Sales like these can occur through the Foreign Military Sales (FMS)
                       program, wherein the Department of Defense (DOD) manages the
                       procurement process on behalf of the foreign customer. Sales under FMS
                       are vital to U.S. foreign policy and national security interests, and these
                       types of sales also support U.S. defense contractors and suppliers. DOD
                       reported sales totaling over $55 billion under the FMS program for fiscal
                       year 2018. Further, according to DOD, the U.S. defense industry faces
                       increasing competition from other countries that also produce and sell
                       defense articles and services. U.S. defense contractors have also stated
                       that maintaining a competitive edge even from the outset when foreign
                       customers first request information to gauge the feasibility of a potential
                       purchase of defense items and services is important. DOD is responsible
                       for developing and providing responses to foreign customer requests for
                       price and availability data, which DOD describes as rough order of
                       magnitude estimates. When developing these data, DOD incorporates
                       input from U.S. defense contractors that provide the defense items and
                       services, as needed. However, questions have been raised about DOD’s
                       approach for providing estimates during the early stages of the FMS
                       process.

                       The fiscal year 2018 National Defense Authorization Act includes a
                       provision for GAO to review DOD’s process for developing price and
                       availability data. 1 This report (1) describes FMS price and availability
                       requests DOD received from fiscal years 2014 through 2018, (2)
                       assesses DOD’s guidance on developing price and availability data, (3)
                       describes how DOD develops price and availability data for the requested
                       capability, and (4) identifies the factors that can influence the timeliness
                       for DOD to provide price and availability data to the customer.

                       To describe price and availability data requests DOD received, we
                       collected and analyzed data from the Defense Security Assistance
                       Management System for fiscal years 2014 through 2018, the latest data

                       1
                       Pub. L. No. 115-91, § 1268 (2018).




                       Page 1                                          GAO-19-214 Foreign Military Sales
available. In addition, we obtained information from officials in the
Defense Security Cooperation Agency (DSCA), responsible for managing
the system and administering the FMS program. To gain insights about
the system and the data produced, we also obtained information from
security assistance offices in the three military departments—Army, Navy,
and Air Force, which account for the majority of FMS acquisitions. We
assessed the reliability of FMS price and availability data by reviewing the
data for issues such as missing data elements and duplicates, among
other steps. We determined these data were sufficiently reliable for the
purposes of reporting information about price and availability requests.

To assess available guidance, we reviewed DSCA and Army, Navy, and
Air Force guidance for developing preliminary estimates in response to
requests for price and availability data. We compared the guidance to the
Standards for Internal Control in the Federal Government, which call for
agencies to use quality information to achieve their objectives. 2
Specifically, we reviewed the guidance to determine if it contained
attributes that contribute to quality information such as identifying the
information requirements and relevant data sources needed to develop
the price and availability data.

To describe how DOD develops price and availability data and illustrate
how these factors influence the process, we selected a non-generalizable
sample of five responses using fiscal year 2017 data provided by the
military departments. We generally selected the five responses to include
a mix of dollar values. The sample includes price and availability data
prepared by five offices—referred to as program offices—from the Army,
Navy, and Air Force. 3 Because the sample is not generalizable, we
cannot report whether the five program offices’ practices are consistently
used across DOD for all price and availability responses. However, these
examples provide useful insights about the process and the assumptions
program offices considered when developing price and availability data.
For each example, we collected and analyzed the letter of request from
foreign customers, price and availability data, DOD’s response to the
customer, and available supporting documentation such as clarification of
the customer’s request, and data collected from defense contractors or
2
 GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: Sept. 10, 2014).
3
 The five offices included four acquisition program offices and one security assistance
management directorate. For the purposes of this report, we refer to offices responsible
for developing price and availability responses as program offices.




Page 2                                                   GAO-19-214 Foreign Military Sales
other DOD program offices. We reviewed this information for the
assumptions and factors used in developing the data and the various
elements that make up the estimates, such as administrative charges and
costs for training and spare parts. We interviewed cognizant DOD
security assistance and program officials and defense contractor
representatives to understand the context and decisions made in
developing the price and availability data.

To identify factors that can influence the timeliness of responses, we
obtained information from security assistance and program offices within
the military departments and DSCA on their approach to develop price
and availability responses. We also obtained information from defense
contractors and foreign customers who, as stakeholders in the FMS price
and availability process, have broad insights and perspectives on the
process. To gather input from foreign customers, we interviewed
representatives from the Foreign Procurement Group who also solicited
information from its members on our behalf. 4 We received responses
from 12 countries. To obtain contractor’s perspectives, we gathered
information from five companies through interviews and attended a
meeting hosted by the National Defense Industrial Association. Three of
the companies we obtained information from also provided cost and
schedule data for four of the examples in our sample. The information we
obtained from these foreign customers and defense contractors are not
generalizable to all foreign customers and defense contractors but,
nonetheless, provided insightful views on the FMS price and availability
process. We did not assess the timeliness of when DOD provided
responses to foreign customers because DOD does not consistently track
information regarding when price and availability data responses are
provided to customers, as discussed later in the report. However,
information we gathered for the five examples in our sample provided
some insight about how long it took DOD to provide a response to the
customer. Appendix I contains additional detail on our objectives, scope,
and methodology.

We conducted this performance audit from June 2018 to February 2019
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our

4
 The Foreign Procurement Group is a consortium of 46 member countries that purchase
U.S. defense items and services through FMS.




Page 3                                               GAO-19-214 Foreign Military Sales
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             The FMS program, which transfers defense articles and services to
Background   international partners and organizations, is essentially an acquisition
             process through which the U.S. government procures military equipment,
             training, and other services on behalf of foreign customers. 5 Multiple
             organizations have a role in the FMS program. The Department of State
             has overall responsibility for the program, including approving what
             defense items and services can be sold to specific countries. DOD
             administers the FMS program and manages the procurements executed
             within the military departments on behalf of foreign governments. Within
             DOD, DSCA carries out key functions such as supporting development of
             policy for FMS. The military departments carry out the day-to-day
             implementation of FMS procurements which can include providing price
             and availability data at the customer’s request.

             Typically, defense items—such as weapon systems—made available for
             transfer or sale to foreign customers are systems that have completed
             operational testing and are entering or have entered full rate production.
             In addition, DOD also sells non-standard items, which are defined as
             items that DOD does not currently manage and may include items that (1)
             are commercially available, (2) DOD previously purchased and have
             since been retired, or (3) were purchased in a different configuration for
             DOD components. For example, a customer may express interest in
             buying tanks that DOD no longer buys for its own needs. A customer may
             also express interest in buying a tank that DOD currently procures but
             with a radio communications configuration that is different from what DOD
             uses.


             5
              The Arms Export Control Act authorizes the sale of defense articles and services to
             eligible foreign customers under the FMS program, which is one of multiple security
             cooperation programs that provide for the transfer of defense articles and services to
             foreign governments. Other security cooperation programs permit foreign governments to
             procure items directly from industry through a direct commercial sale without the
             assistance of the U.S. government. In addition, the Foreign Military Financing program
             provides funding to eligible partner nations to purchase defense articles, services, and
             training through FMS or, for a limited number of countries, through direct commercial
             contracts. Further, the Excess Defense Articles program allows partner nations to
             purchase equipment no longer required by the U.S. government at a reduced price.




             Page 4                                                  GAO-19-214 Foreign Military Sales
FMS Price and Availability   A single DOD entity may not have full responsibility for all aspects of
Process                      responding to a foreign customer’s request to purchase U.S. defense
                             items and services. Under DSCA policy, FMS procurements must
                             generally be managed at “no cost” or “no profit” to the U.S. government.
                             DOD’s work related to developing price and availability data and other
                             FMS operations is generally paid for through the administrative charges
                             collected from foreign customers. Depending on the complexity of the
                             customer’s request, coordination within and across DOD components
                             may be necessary to obtain complete information on pricing and
                             availability. DOD may also need to coordinate with defense contractors
                             who ultimately develop and provide the equipment or services.

                             The FMS process generally begins when a foreign government submits a
                             letter of request to the Department of State or DOD to purchase defense
                             articles or services. In the letter of request, the foreign customer may
                             express interest in obtaining preliminary price and availability data for the
                             capabilities it seeks. While DOD describes price and availability data as
                             rough order of magnitude estimates, DSCA’s guidance does not define
                             the precision of these estimates. According to DOD, FMS price and
                             availability data are non-binding estimates for the defense items and
                             services and are not intended to be budget-quality estimates. Requests
                             for price and availability data can signal to DOD and defense contractors
                             the potential for future sales. DOD and contractors may also draw upon
                             these requests to forecast staffing needs and production line availability.

                             DOD security cooperation organizations working in U.S. embassies
                             around the world can assist potential customers with defining and refining
                             their requirements prior to submitting a request for price and availability
                             data. The security cooperation organizations engage in this early
                             coordination to help customers articulate their capability needs. This early
                             coordination also gives DOD components advance notice of upcoming
                             requests so they can initiate technology security and foreign disclosure
                             processes for the timely release of information. 6

                             Requests for price and availability data represent an optional step in the
                             process. Customers may forgo the price and availability process and
                             instead submit a formal assistance request for a letter of offer and
                             acceptance, which when signed by the customer and U.S. government
                             6
                              These processes include, for example, evaluation of the disclosure of advanced
                             technologies and classified information relating to defense articles and services in
                             accordance with applicable policies and regulations.




                             Page 5                                                    GAO-19-214 Foreign Military Sales
                                           becomes an executable FMS case. Figure 1 illustrates where the option
                                           to request price and availability occurs in the overall FMS process.

Figure 1: Illustration of Optional Price and Availability (P&A) Step within the Foreign Military Sales Process




DOD Is Reconsidering                       The National Defense Authorization Act for Fiscal Year 2017 required
Options to Implement                       DOD to establish a process for defense contractors to provide input on
                                           any differences regarding the appropriateness of government price and
Recent Legislative                         availability data prior to delivery of formal responses to customers. 7 In
Change for FMS Price and                   response, DSCA issued a policy memorandum in October 2018 that was
Availability Process                       rescinded 2 months later due to concerns about the sensitivity of
                                           information to be shared with contractors. The policy memorandum had
                                           instructed DOD components to formally request rough order of magnitude
                                           estimates from the prime defense contractor if (1) the total value of the
                                           primary article or service requested exceeds $50 million, and (2) the
                                           customer has a preference for a non-competitive sole source acquisition
                                           or only a single source exists for the primary defense item. Additionally,
                                           the memorandum stated that DOD components will allow the prime
                                           contractor 5 business days to provide feedback on the appropriateness of
                                           the estimate for its items that is included in the price and availability
                                           response prior to the customer receiving this response. The
                                           memorandum had established a formal process to obtain contractor
                                           feedback and resolve issues that may occur, such as differences between
                                           the program office’s and prime contractors’ estimates, and emphasized
                                           the importance of being aware of program deadlines when following the

                                           7
                                            Pub. L. No. 114-328, § 1297 (2016).




                                           Page 6                                                 GAO-19-214 Foreign Military Sales
                         process to coordinate with contractors. According to a DSCA official, this
                         new policy would have helped alleviate industry concerns about how
                         DOD incorporates estimates provided by industry to develop price and
                         availability responses provided to foreign customers. However, according
                         to DSCA officials, when implementing the process, DOD found that the
                         potential level of detail and precision in price and availability estimates
                         could provide an unfair competitive advantage to contractors coordinating
                         with DOD on price and availability responses to foreign customers. As
                         discussed in further detail later in the report, in some instances we found
                         price and availability estimates DOD offered included more precise
                         information than rough order of magnitude estimates. According to DSCA
                         officials, such information could offer the contractor insight into the
                         government’s pricing methodologies. DSCA subsequently rescinded the
                         October 2018 policy memorandum. DSCA plans to conduct a 120-day
                         review to reassess options to find a solution, if any, on what information
                         can be shared with contractors to satisfy the legal requirement to obtain
                         contractor input and feedback on price and availability estimates before
                         DOD responds to customers.


                         From fiscal years 2014 through 2018, DOD reported receiving 3,038
DOD Received about       requests for price and availability data from foreign customers from 93
3,000 Requests for       countries and the North Atlantic Treaty Organization. Foreign customer
                         requests included services and items such as training and support
Price and Availability   services for weapon systems, missiles and ammunition, aircraft, and
Data over the Past 5     communication equipment. We found that most requests came from the
                         same foreign customers. Specifically, 10 customers accounted for 56
Years                    percent of requests, with one customer accounting for 28 percent of all
                         requests during the 5-year period within our review. Customers in the
                         Indo-Pacific region accounted for the largest share of requests, as shown
                         in figure 2.




                         Page 7                                         GAO-19-214 Foreign Military Sales
Figure 2: Number of Requests DOD Received for Foreign Military Sales Price and Availability Data by Region, Fiscal Years
2014 through 2018
Not all countries in each region submitted a price and availability request.




                                         Among DOD components, the military departments—Army, Navy, and Air
                                         Force—received almost all price and availability requests, as shown in
                                         figure 3. The Army received slightly more requests over the 5-year period,
                                         closely followed by the Navy.




                                         Page 8                                              GAO-19-214 Foreign Military Sales
Figure 3: Requests for Foreign Military Sales Price and Availability Data DOD
Received by Component, Fiscal Years 2014 through 2018




Note: Other DOD components include the Defense Threat Reduction Agency, Defense Information
Systems Agency, Defense Logistics Agency, Missile Defense Agency, and National Security Agency.




Foreign customers we obtained information from noted that they request
price and availability data to inform their acquisition strategy, obtain a
sense of affordability, and for budget planning. For example, when
considering potential acquisition strategies, some customers may request
data for different options, variants, or quantities of similar items or
services, resulting in multiple requests for price and availability data to
inform a potential purchase. 8 In cases when a customer is interested in
procuring a specific item, the customer may request data to obtain

8
 According to DSCA and military department officials, in some cases, DOD may provide
multiple responses; in other cases, one response may contain information that addresses
multiple scenarios.




Page 9                                                      GAO-19-214 Foreign Military Sales
information about prices and lead times to determine affordability. The
customer may also request the data when considering whether to
purchase from the United States or from foreign countries.

Requesting price and availability data can also provide foreign customers
with information on whether the U.S. government will make the requested
defense item or service available for sale. While preliminary estimates are
not an official acknowledgement that the item or service will be made
available to the customer, the request can trigger a U.S. government
review that includes application of policies that govern the release of
certain technologies or systems and a discussion with the customer about
the item or service. In some cases, customers can receive responses with
partial information if some requested items are not available for release.

DOD does not collect data on which customers’ requests for price and
availability data resulted in a formal request to purchase defense items or
services under FMS. Army security assistance officials told us it can take
years between when price and availability data are provided and when a
customer submits a request for a letter of offer and acceptance, if at all.
For their part, customers we obtained information from noted that there
may be numerous reasons for why they might choose not to pursue a
potential sale. For example, the item or service could not be made
available within a timeframe to meet their needs; the overall capability
was not affordable; or price and availability estimates were higher than
estimates from other foreign sources.

The military departments do not consistently track information on the
status of responses sent to foreign customers. We found the Navy and
Army generally captured the status of a response in the system,
identifying when a response is in development, has been sent to the
customer, or has been canceled but, according to security assistance
officials, this information may not be entered consistently. 9 In addition, the
Air Force does not generally update the status of a response in the
system. Further, Air Force security assistance officials told us the
department does not update data in the system to reflect that the Air
Force provided price and availability data to the customer. According to
DSCA and military department officials, there is no requirement that DOD
components record when a response is sent to a customer. A DSCA
9
 According to DSCA and military department officials, DOD cancels some requests
because customers choose to withdraw the request or decide to proceed with a formal
request for assistance.




Page 10                                               GAO-19-214 Foreign Military Sales
                            official told us that DSCA does not have a specific need to monitor the
                            status of price and availability responses, in part because these are not
                            formal offers, and DOD prioritizes data collection for formal FMS cases—
                            cases for which a signed agreement between the U.S. government and
                            foreign customer is in place.


                            DSCA has established DOD-wide guidance—the Security Assistance
DOD’s Guidance              Management Manual—for responding to foreign customers’ requests for
Allows for Flexibility in   information on defense items and services available for purchase through
                            the FMS program. The manual includes some guidance on developing,
Developing Price and        documenting, and communicating price and availability data to foreign
Availability Data and       customers, but largely pertains to a customer’s request for a letter of offer
                            and acceptance with the intent to buy. Security assistance officials from
Reflects Leading            across the military departments told us they rely on the manual to guide
Practices for Using         their efforts throughout the price and availability process, and that
                            DSCA’s guidance provides a framework for the process and is not always
Quality Information         prescriptive, allowing military departments latitude in how they implement
                            it. DSCA and military department officials we spoke with said that a
                            flexible process is needed to account for various circumstances specific
                            to each request. 10 The price and availability process outlined in guidance
                            and described by DSCA and military department officials involves input
                            from numerous organizations within and external to DOD, as shown in
                            figure 4. The guidance states the process should be completed within 45
                            days.




                            10
                              The military departments also have guidance for the process that generally reflects
                            DSCA’s guidance and in some cases provides more detail. For example, Navy and Air
                            Force guidance calls for security assistance officials to review price and availability
                            responses prior to providing the data to foreign customers.




                            Page 11                                                  GAO-19-214 Foreign Military Sales
Figure 4: Illustration of Process to Develop Foreign Military Sales Price and Availability Data
Actual steps may vary, for example, depending on the practices of the DOD component implementing the process.




                                           Note: Program office refers to the organization within a DOD component that is responsible for
                                           developing the price and availability data.




                                           Page 12                                                        GAO-19-214 Foreign Military Sales
Internal Control Standards: Information       Generally, we found that DSCA’s guidance reflected attributes conducive
and Communication                             to using quality information as called for by federal internal control
Internal control standards prescribed for     standards. 11 For example, the standards call for agencies to define
federal agencies call for management to use
and communicate quality information to        information requirements and obtain relevant data from reliable sources.
achieve an entity’s objectives.               DOD’s guidance reflects this, stating that price and availability data
                                              should serve as rough order of magnitude estimates of the cost and
                                              availability of defense items or services and are for rough-order planning
                                              purposes. The guidance also

                                              •     instructs officials to assess whether a foreign customer’s request
                                                    contains the necessary information to develop price and availability
                                                    data, such as the major item or service, quantity, anticipated delivery
                                                    schedule, and other specifications;
                                              •     suggests that price and availability data also provide customers with
                                                    information about costs for not only buying equipment but also the
                                                    related operation and sustainment costs;
                                              •     assumes responses will include standard items—nonstandard items
                                                    require DSCA approval;
Source: GAO. | GAO-19-214
                                              •     identifies relevant data sources that the military departments can
                                                    consult to develop price and availability data, such as last contract
                                                    award, stock price, or information from defense contractors; 12
                                              •     states that military departments and DSCA should use the Defense
                                                    Security Assistance Management System to prepare responses to
                                                    price and availability requests;
                                              •     suggests that data should be itemized by separating main equipment
                                                    from training, technical publication, transportation costs, and other
                                                    elements, as applicable; and
                                              •     states that responses should be developed and communicated to
                                                    customers within 45 days from when DOD receives the request.




                                              11
                                                  GAO-14-704G.
                                              12
                                                Guidance also notes that DOD components should adjust data sources to account for
                                              inflation.




                                              Page 13                                               GAO-19-214 Foreign Military Sales
                         When selling defense items and services to foreign customers, military
In Selected              department officials indicated that they strive to offer a complete and
Examples, DOD            sustainable capability, referred to as the total package approach. Using
                         this approach, DOD takes into account the related support, such as
Included                 training, logistics, spare parts, warranties, contractor support, and other
Comprehensive Data       considerations necessary for operating and sustaining the defense items
                         or services being purchased. The total package approach represents the
on Ownership Costs       initial and follow-on cost of owning and supporting the capability. For
When Developing          example, a DOD program official may develop a cost estimate for the
                         capability, including several years of technical support for maintaining it.
Price and Availability   DOD may also provide a customer with cost estimates for maintaining the
Responses                capability over the course of its expected lifetime.

                         Specifically, in the five examples we reviewed, we found that DOD
                         officials generally used a total package approach when developing price
                         and availability data. For example, military department officials developed
                         price and availability data that not only included the items and services
                         requested by the customer, but also included rough order of magnitude
                         estimates for additional costs to reflect the expected ownership costs.
                         Ownership costs may include development, procurement, operation, and
                         sustainment costs for the defense item, as part of a total package
                         approach. The timeframe of ownership costs provided may vary.
                         According to a DSCA official, ownership costs generally cover the first 2
                         years. In four of the five cases we reviewed, the customer requested a
                         capability and, in response, the program office provided estimates for not
                         only the equipment but also the support needed to achieve the desired
                         capability ranging from one week of training to five years of technical
                         support. For example, in one case, a customer requested data for a
                         complex naval weapon system that they had not previously used. Navy
                         program officials provided estimates for the system, spare parts, training,
                         and other items as requested by the customer. Program officials also
                         included estimates on radio navigation equipment and software that are
                         essential for the system to function as intended, but were not part of the
                         customer’s initial request. Officials stated that they included these
                         additional costs to give the customer a comprehensive view of the costs
                         to acquire, operate, and maintain the weapon system. In the fifth case,
                         program officials told us they did not have to include training or support as
                         this customer was replacing missiles in their inventory, previously
                         purchased through FMS. However, in considering the foreign customer’s
                         ownership costs, the officials said they included costs for containers for
                         storing the missiles.




                         Page 14                                         GAO-19-214 Foreign Military Sales
For the selected examples, program officials obtained data from defense
contractors and previous sales, adjusting estimates from data sources to
ensure the price and availability estimate reflected what the customer
could expect to pay for the item or service—initial and follow-on cost of
owning and supporting the capability—if the customer decided to proceed
with the purchase. Defense contractors responsible for providing data for
four of the five examples told us they consider the quantity and specific
requirements of the request, such as training, spares, and support; as
well as inflation and anticipated production and delivery schedules in
some cases. We found that for the selected examples program officials
adjusted estimates from contractors and other data sources for a number
of reasons, such as to account for potential changes in production
schedules and adding program management support provided by the
U.S. government to administer system upgrades. By accounting for these
likely costs, program officials stated that they were providing the customer
with estimates that would more closely reflect expected costs if the
customer proceeded with the sale. For example:

•   In two of the responses we reviewed for missiles and communication
    systems, Navy and Air Force officials increased contractors’
    estimates, in part, to account for possible changes to production
    plans. In the Navy response, for example, program officials increased
    the contractor’s estimate for the missiles by approximately 14 percent.
    Officials told us this was to account for possible changes in the
    production schedule and quantity. Contractor representatives told us
    that their estimate was based on a specific number of missiles being
    produced in a certain production lot. Program officials told us that the
    customer would not likely have a signed agreement in place to receive
    missiles from that specific production lot. According to program
    officials, this means the price per missile could be higher than
    forecasted in the contractor’s initial estimate because there may be
    fewer quantities in production, resulting in fixed production costs
    spread among fewer missiles.
•   In an Army response we reviewed for non-standard upgrades to
    several hundred tanks, the program official used estimates provided
    by the contractor to develop the price and availability data. These tank
    upgrades are considered non-standard because the U.S. government
    no longer uses these tanks. In light of this, the program official
    included costs for program management support provided by the U.S.
    government because he said the magnitude of the program would
    likely require an Army office to execute and manage the upgrades,
    which is projected to last up to 10 years.




Page 15                                         GAO-19-214 Foreign Military Sales
                      •    In an Air Force response we reviewed for a warning system, program
                           officials considered historical data from similar DOD contracts. The
                           program officials increased the price by $2.4 million dollars from past
                           procurements based on the customer’s request to add a new full-time
                           onsite engineer to support the warning system. This price also
                           included costs for housing, living allowance, and travel expenses.
                      Further, in our review of selected cases, we found that program officials
                      may include other charges in price and availability data, such as

                      •    nonrecurring costs that are unique one-time program-wide
                           expenditures for certain major defense equipment sold under the FMS
                           program; 13
                      •    a contract administration charge—generally, 1.2 percent of the value
                           of procured items—for services such as quality assurance and
                           inspection;
                      •    transportation costs for delivery of the item, which are generally
                           calculated based on rates established by DSCA; and
                      •    an administrative charge—currently set at 3.2 percent of the total
                           value of the sale to recover civilian employee salaries and operational
                           costs for administering the FMS acquisition. 14

                      Military department officials told us that various factors influence the level
Various Factors Can   of effort and information involved in developing price and availability data,
Influence DOD’s       some of which may also affect how long a response takes and whether
                      the 45-day timeframe suggested by DSCA’s guidance is achieved. When
Approach and the      a foreign customer requests price and availability data, DOD and defense
Timeliness of DOD’s   contractors, if involved, expend time and resources to provide a
                      response, all without any certainty that a sale will materialize. As such,
Responses             DOD officials and defense contractors determine what level of response
                      is appropriate, given the nature of the customer’s request and whether it
                      includes non-standard items or items that require customization, among
                      other things. DSCA and Navy program officials said customers are
                      interested in receiving price and availability responses quickly and

                      13
                        Nonrecurring costs include research, development, and one-time production costs, such
                      as expenses for testing equipment. The Arms Export Control Act permits these costs to be
                      waived under certain circumstances.
                      14
                        The administrative charge was previously set at 3.5 percent as of November 1, 2012,
                      but decreased to 3.2 percent effective June 1, 2018. The price and availability examples
                      we reviewed were subject to the 3.5 percent administrative charge.




                      Page 16                                                  GAO-19-214 Foreign Military Sales
recognize that timeliness is an area of concern with the FMS process, in
general. 15 Over half of the 12 foreign customers we obtained information
from noted that they are concerned with the length of time DOD’s
responses can take. Lengthy response times could result in customers
missing opportunities to consider potential requests in upcoming budget
cycles. Several customers communicated that some responses took
considerably longer than 45 days, with some taking anywhere from 6 to
12 months. Among the five examples we reviewed, responses took from
45 to 320 days, as shown in table 1.

Table 1: DOD Response Timeframes for Selected Foreign Military Sales (FMS) Price
and Availability Requests

 Description of request                                                            Response timeframe (days)
 Equipment and services for 1 warning system                                                                 45
 4 anti-ship missiles                                                                                       130
 Upgrades for up to 1,400 tanks                                                                             250
 10 naval weapon systems                                                                                    252
 37 communication systems                                                                                   320
Source: GAO analysis of Department of Defense (DOD) information. | GAO-19-214




Program and security assistance officials we interviewed told us they
consider the following factors:

•     Customer interest and commitment. Insight into the degree of
      customer commitment to purchase through FMS may influence the
      time and resources military departments expend on developing a
      price and availability response. For example, Air Force security
      assistance officials told us that they may develop a more detailed
      response if advised by in-country personnel that a request for price
      and availability data will likely become a request for an actual
      purchase.


15
  We have previously reported on the challenges DSCA faces in meeting its timeframes to
be responsive to foreign customers and recommended DOD take steps to measure
timeliness and improve the overall efficiency of FMS processes. GAO, Foreign Military
Sales: Expanding Use of Tools to Sufficiently Define Requirements Could Enable More
Timely Acquisitions, GAO-17-682 (Washington, D.C.: Aug. 14, 2017); and Foreign Military
Sales: DOD Needs to Improve Its Use of Performance Information to Manage the
Program, GAO-17-703 (Washington, D.C.: Aug. 22, 2017).




Page 17                                                                         GAO-19-214 Foreign Military Sales
•   Clarity and completeness of customer’s request. Customers may
    submit requests that lack the clarity and details needed to develop
    accurate data and estimate delivery timeframes. Several military
    department officials told us that when reviewing the customer’s
    requests for price and availability data, they often have discussions
    with customers to clarify requirements and in some cases estimated
    delivery schedules before developing a response. Defining the
    customer’s requirement—even at this early stage—can be an iterative
    process that requires multiple interactions between the foreign
    customer and DOD officials. In one of the examples we reviewed, the
    defense contractor was also involved. These discussions to clarify the
    customer’s requirements can prolong the process, according to
    several program officials.
•   Existing policy to release price and availability data. The U.S.
    government’s relationship with the foreign customer and the type of
    defense item or service being requested—such as a weapon system
    with protected critical technologies versus medical evacuation
    equipment—can influence the length of time to obtain necessary
    approvals for the release of price and availability data, according to
    Navy program and Air Force security assistance officials. Requests
    for price and availability data may spur the U.S. government to review
    the current list of countries that have access to particular critical
    technologies, as shown in one Navy response to a request for a
    ballistic missile defense system. Initially, the Navy’s Foreign
    Disclosure Office determined the system would not be available for
    potential release and the Navy program office excluded it from the
    price and availability data. About a year later, according to Navy
    officials, following a change in U.S. policy, the Foreign Disclosure
    Office approved the release of price and availability data for the
    system and the Navy included it in a subsequent price and availability
    response.
•   Complexity of the request. Requests for a non-standard system,
    integration with foreign components, or a complex system may cause
    program offices to spend additional resources and time to develop
    price and availability data. For example, in response to a request for a
    complex weapon system to be integrated into a foreign customer’s
    ship, Navy program officials said that they needed several months to
    develop price and availability data due to the complexity of this
    request, which required program officials to work with multiple
    contractors and DOD entities to develop price and availability data. In
    contrast, Army security assistance officials said that they generally
    aim to conserve resources and time by developing price and




Page 18                                         GAO-19-214 Foreign Military Sales
                       availability data based on standard items, even in instances when
                       customers may request non-standard or complex systems. 16
                  •    Existing workload. The volume of requests and competing priorities
                       can also affect the timeliness and the level of effort applied to the
                       response. For example, Army security assistance officials stated that
                       they may prioritize a customer’s request for a letter of offer and
                       acceptance, which initiates an executable FMS case, over a request
                       for price and availability data because there are not resources
                       available to do both at the same time.
                  •    Availability of requested item or service. When obtaining the items
                       from defense contractors, for example, military department officials
                       consider production schedule and quantity—both of which require
                       additional assumptions to estimate unknown costs. For items that are
                       in DOD’s inventory and will not be replaced, officials are to take into
                       account the item’s actual value when developing price and availability
                       data, according to a DSCA publication.
                  •    External factors. In cases where a customer is requesting price and
                       availability data to decide whether to purchase defense items or
                       services from the United States or another foreign government,
                       military departments may expend additional resources to develop
                       detailed price and availability data. For example, a Navy security
                       assistance official stated that when officials are aware the customer
                       plans to hold competitions between U.S. and foreign defense
                       contractors, they solicit more detailed technical and cost information
                       from defense contractors to present a competitive estimate.
                  Individually and combined, these factors, as well as the overall process,
                  can influence response times.


                  We provided a draft of this report to the Department of Defense (DOD) for
Agency Comments   comment. DOD’s response letter is reproduced in appendix II. DOD
                  separately provided technical comments, which we incorporated as
                  appropriate.




                  16
                    The Army example we reviewed used a total package approach to developing price and
                  availability data, including rough order of magnitude estimates for logistics, engineering,
                  and spares.




                  Page 19                                                  GAO-19-214 Foreign Military Sales
We are sending copies of this report to the appropriate congressional
committees and the Acting Secretary of Defense. In addition, the report is
available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-4841 or makm@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made key contributions to this report
are listed in appendix III.




Marie A. Mak
Director, Contracting and National Security Acquisitions




Page 20                                        GAO-19-214 Foreign Military Sales
List of Committees

The Honorable James M. Inhofe
Chairman
The Honorable Jack Reed
Ranking Member
Committee on Armed Services
United States Senate

The Honorable James E. Risch
Chairman
The Honorable Robert Menendez
Ranking Member
Committee on Foreign Relations
United States Senate

The Honorable Adam Smith
Chairman
The Honorable Mac Thornberry
Ranking Member
Committee on Armed Services
House of Representatives

The Honorable Eliot L. Engel
Chairman
The Honorable Michael T. McCaul
Ranking Member
Committee on Foreign Affairs
House of Representatives




Page 21                           GAO-19-214 Foreign Military Sales
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              In this report, we (1) described foreign military sales (FMS) price and
              availability requests Department of Defense (DOD) received from fiscal
              years 2014 through 2018, (2) assessed DOD’s guidance on developing
              price and availability data, (3) described how DOD develops price and
              availability data for the requested capability, and (4) identified factors that
              can influence the timeliness for DOD to provide price and availability data
              to the customer. 1

              To describe requests for price and availability data DOD received from
              foreign customers, we analyzed data from the Defense Security
              Cooperation Agency (DSCA). We reviewed data for fiscal years 2014
              through 2018, the most recent 5-year period available. DSCA and other
              DOD components, including the military departments, use the Defense
              Security Assistance Management System as a workflow resource to
              process price and availability data requests, among other things. The
              system does not track which of the estimates result in a letter of offer and
              acceptance. To assess the reliability of Defense Security Assistance
              Management System data, we tested for missing data, duplicates,
              inconsistent coding, and compared data for five examples to price and
              availability documentation we received from the Army, Navy, and Air
              Force. We interviewed DSCA officials responsible for the data system to
              identify the quality controls in place to help ensure the data are accurate
              and reliable and discussed military department practices for using the
              system with security assistance officials. We found that generally the
              documentation for the five selected preliminary estimates matched the
              data DSCA provided and requests matched across multiple datasets we
              received from DSCA. Based on these steps, we determined the data
              were sufficiently reliable to report examples of the types of items and

              1
                The fiscal year 2018 National Defense Authorization Act, which mandated this work, also
              included two additional topics for review. However, due to lack of available data we were
              unable to conduct work in these areas. Specifically, the mandate included a provision that
              GAO compare the magnitude of cost differences between FMS price and availability data
              and direct commercial sales early cost estimates. Direct commercial sales are sales in
              which U.S. companies are licensed to export directly to foreign customers with no
              involvement from the U.S. government in the procurement process. We were unable to
              conduct this work because direct commercial sales data are confidential between the
              contractor and a customer. In addition, the mandate included a provision that we identify
              the extent to which DOD has identified instances where discrepancies in pricing for major
              items or services resulted in the loss of a foreign military sale for a United States
              commercial entity. According to DOD officials, the department does not collect data that
              identifies the reasons why a foreign customer may choose to not proceed with an FMS
              sale after receiving price and availability data because they have not identified a need to
              do so.




              Page 22                                                  GAO-19-214 Foreign Military Sales
Appendix I: Objectives, Scope, and
Methodology




services requested and the number of requests DOD received by region,
DOD component, and foreign customer. We did not report the number of
responses DOD provided for these requests or how long it took DOD to
provide a response to foreign customers using this data because military
departments do not consistently update information in the Defense
Security Assistance Management System to track the status of responses
or dates when a response is provided to the customer.

To assess available guidance, we reviewed DSCA and Army, Navy, and
Air Force guidance for developing preliminary estimates in response to
requests for price and availability data. We compared the DOD-wide
guidance—the Security Assistance Management Manual—to the
Standards for Internal Control in the Federal Government, which call for
agencies to use quality information collected from relevant and reliable
sources. 2 Specifically, we reviewed the guidance to determine if it
contained attributes that contribute to quality information such as
identifying the information requirements and relevant data sources
needed to develop the price and availability data.

To describe factors that DOD considers when developing price and
availability data and illustrate how these factors influence the process, we
selected a non-generalizable sample of five responses from fiscal year
2017 data provided by the military departments. Fiscal year 2017
represented the last complete year of data available when we selected
this sample. Because the sample is not generalizable, we cannot report
whether practices used among the responses are used across DOD for
all price and availability responses. However, these examples provide
useful insight into the process and the assumptions used when
developing price and availability data. We selected the five examples—
one from Army, two from Navy, two from Air Force—to obtain a variety of
responses, including median and large case values and a median
response time. We determined there were inconsistencies in the data
provided, but that the data were sufficient for our purposes of selecting a
non-generalizable sample from across the military departments.

For each selected example, we collected and analyzed the letter of
request, price and availability data, DOD’s response to the customer,
supporting documentation if provided such as clarification of the

2
 GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: Sept. 10, 2014).




Page 23                                              GAO-19-214 Foreign Military Sales
Appendix I: Objectives, Scope, and
Methodology




customer’s request, and data collected from defense contractors or
program offices. We reviewed the assumptions and factors used in
developing the data and the various elements that make up the data,
such as administrative charges and costs for training and spares. We
interviewed relevant DOD security assistance and program officials, and
defense contractor representatives to understand the context and
decisions made in developing, documenting, and communicating the
price and availability data.

To identify the factors that can influence the timeliness of responses, we
interviewed officials from DSCA and the Army, Navy, and Air Force. We
also obtained information from defense contractors and foreign customers
who, as stakeholders in the FMS price and availability process, have
broad insights and perspectives on the process. To gather input from
foreign customers, we interviewed representatives from the Foreign
Procurement Group who also solicited information from its consortium of
46 member countries on our behalf. 3 We received responses from 12
countries—one of which was also a customer for one of the examples
included in our review. To obtain contractor’s perspectives, we gathered
information from five companies through interviews and attended a
meeting hosted by the National Defense Industrial Association. 4 Three of
the companies we obtained information from were involved in providing
cost and schedule data for four of the examples in our sample. The
information we obtained from these foreign customers and defense
contractors is not generalizable to all foreign customers and defense
contractors. As mentioned previously, we did not assess the timeliness of
DOD’s responses because DOD does not consistently track when price
and availability data responses are provided to customers in the Defense
Security Assistance Management System. However, the information we
gathered for the five examples in our sample provided some insight about
how long it took DOD to provide a response to the customer.

We conducted this performance audit from June 2018 to February 2019
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our

3
 The Foreign Procurement Group is a consortium of 46 member countries that purchase
U.S. defense items and services through FMS.
4
 The National Defense Industrial Association includes membership of 1,600 companies
and represents a range of large and small business concerns related to defense.




Page 24                                               GAO-19-214 Foreign Military Sales
Appendix I: Objectives, Scope, and
Methodology




findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 25                                       GAO-19-214 Foreign Military Sales
Appendix II: Comments from the Department
             Appendix II: Comments from the Department
             of Defense



of Defense




             Page 26                                     GAO-19-214 Foreign Military Sales
Appendix III: GAO Contact and Staff
                  Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Marie A. Mak, (202) 512-4841 or makm@gao.gov
GAO Contact
                  In addition to the contact named above, Candice Wright (Assistant
Staff             Director) and Leslie Ashton (Analyst-in-Charge) managed this review.
Acknowledgments   Bruna Oliveira, Carmen Yeung, Kurt Gurka, Robin Wilson, and Emily
                  Bond made significant contributions to the work.




(102858)
                  Page 27                                      GAO-19-214 Foreign Military Sales
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