There are  several different contract types and selection is the principal means that  DOD has for allocating cost risk between the government and the  contractor. At  times, DOD may combine FMS purchases with its own procurements. However, in recent years, there  has been an increase in the use of fixed-price-incentive contracts for FMS  procurements, which is consistent with DOD guidance that has  emphasized the use of these contracts. DOD is in the early stages of implementing the  Fiscal Year 2017 NDAA requirement to use firm-fixed-price contracts and  is weighing various factors such as how waivers will be reviewed and  approved. Firm-Fixed-Price Contracts Accounted for Nearly All FMS Procurements but Use of Fixed-Price-Incentive Contracts Has Increased

Over the past 10 years DOD used a mix of contract types to procure  defense articles and services on behalf of foreign customers through the  FMS program; however, firm-fixed-price contracts were most frequently  used, both in terms of number of contracts awarded and dollars obligated. Once Army  officials discovered the high profit rates, they switched to a fixed-price- incentive contract for subsequent awards to position the U.S.  government and FMS customers to share in any subsequent cost  savings. DOD Is Weighing Various Factors as It Takes Steps to Implement Legislative Contracting Requirements for FMS

The Fiscal Year 2017 NDAA called for DOD to revise its acquisition  regulations to require the use of firm-fixed-price contracts for items  procured under the FMS program, unless a waiver is granted or the  foreign customer states a preference for an alternate contract type. Variety of Factors Can Extend FMS Timeframes and Increase Costs, but Some DOD Programs Use a Checklist to Expedite Requirements Definition Challenges in Defining Requirements Can Slow the FMS Process, but Some Programs Use a Checklist to Minimize Delays

A variety of factors can prolong various phases of the FMS acquisition  process, but program officials we spoke to most commonly cited the  challenge in defining FMS customer’s requirements as a major  contributing factor. Defining the requirement—that is, the  materiel and services needed—occurs in the first phases of the FMS  process and is the linchpin to enable DOD to deliver the goods and  services to FMS customers by the time they need them and at a price  they can afford. In  addition, specifying these details enables the contracting officer to obtain  more accurate pricing data from the contractor and better estimate  delivery timeframes. We  reviewed 32 FMS cases from across the seven programs in our sample  and found that program offices missed the 20-day goal in 14 cases. Accordingly, the military  departments have developed a range of checklists, with some from the  Air Force and Army available to the public on the Internet. The Air Force has developed checklists for specific weapon systems  such as missiles, global positioning systems, and various types of  aircraft. Delays during FMS Case Reviews May Prevent Synchronization of DOD and FMS Requirements

According to DOD program officials, the reviews conducted by the U.S.  and foreign governments after a program office develops a letter of offer  and acceptance can be lengthy and may affect a program’s ability to  synchronize FMS and U.S. procurements. Recommendation for Executive Action

To help increase efficiency when defining FMS requirements to be placed  on contract, we recommend that the Secretary of Defense issue  department-wide guidance for the military departments and DOD  components to expand the use of requirements checklists to develop  more comprehensive letters of request for FMS cases. In its comments, reproduced in appendix II, DOD concurred  with our recommendation. Appendix I: Objectives, Scope, and Methodology

The House Report 114-537 that accompanied the National Defense  Authorization Act of Fiscal Year 2017 included a provision for GAO to  review certain aspects of Department of Defense’s (DOD) acquisition  process, including contract type selection, to determine their effect, if any,  on foreign military sales (FMS). We assessed 1) how the use of firm- fixed-price contracts compares to other contract types awarded for FMS  procurements and the reasons they were used and 2) the factors that  may contribute to delays and potentially increase costs for FMS  procurements.
Why GAO Did This Study

The U.S. government procures billions of dollars in goods and services each year on behalf of foreign governments through the FMS program. Multiple federal agencies are involved in the FMS program; however, DOD manages the procurement process. The FMS program is a key component of national security and foreign policy.
House Report 114-537 included a provision for GAO to review certain aspects of DOD's acquisition process such as what effect, if any, certain types of contracts may have on the FMS process. This report addresses (1) how the use of firm-fixed-price contracts compares to other contract types awarded for FMS and the reasons they are used; and (2) the factors that may contribute to delays or potentially increase costs. GAO has other work addressing the FMS process and will issue separate reports.
GAO analyzed FMS procurement data for fiscal years 2007 through 2016, the most current data available to determine trends. GAO also selected a non-generalizable sample of 32 FMS cases from seven program offices, based on use of different contract types to procure the same item; reviewed relevant DOD and federal acquisition regulations and policies; and interviewed DOD officials.

What GAO Found

Over the past 10 years, firm-fixed-price contracts—where the contractor is paid a set amount regardless of incurred costs—accounted for 99 percent of contract awards and had the highest obligations for foreign military sales (FMS). But in recent years, there has been an increased use of fixed-price-incentive contracts—where the government and contractor share in cost savings and risks and the contractor's ability to earn a profit is tied to its performance. This trend is consistent with recent Department of Defense (DOD) contracting practices and aligns with department guidance that emphasizes the use of fixed-price-incentive contracts in certain instances where better pricing outcomes might be achieved. Contracting officers generally follow the same acquisition guidance for FMS procurements as they do for DOD and use various contract types based on assessed risks. For example, for decades, the Air Force had awarded firm-fixed-price contracts for FMS customers to procure an air-to-air missile, but in 2015 transitioned to a fixed-price-incentive contract when it realized the contractor could achieve cost savings through production efficiencies. Legislative changes in fiscal year 2017 call for DOD to use firm-fixed-price contracts for FMS unless a waiver is granted. DOD is in the early stages of implementing these revisions and is weighing various factors, such as how waivers will be reviewed.
GAO found several factors may contribute to delays or increased prices in FMS. For example, program officials noted that general acquisition issues, such as delayed contract awards and unforeseen events during production, can similarly affect FMS. Moreover, military department officials stated that the process for defining requirements is a significant challenge that affects expediency of FMS procurements. DOD guidance states that programs may combine FMS and domestic requirements onto a single contract as a way to lower prices and facilitate timely delivery. However, program offices GAO spoke with noted that adequately defining foreign customers' requirements may prevent them from doing so. To expedite requirements definition, the Air Force and Army implemented checklists to aid foreign partners and program offices when specifying requirements. The Navy developed but has not yet disseminated its checklists for use. GAO's analysis of 32 FMS cases showed that checklists were not always available to support procurements but that program offices that used them noted increases in timeliness. Expanding the use of checklists by DOD may better position DOD to obtain information needed to deliver equipment and services to FMS customers when needed.

What GAO Recommends

GAO recommends that DOD issue department-wide guidance for program offices to expand the use of tools, such as checklists, to aid FMS customers in specifying their requirements in a way that DOD can act upon in a timely manner. DOD concurred with GAO's recommendation.