What are the advantages and disadvantages of Foreign Military Sales compared with Direct Commercial Sales?

Under FMS, the international partner is entering a direct government-to-government relationship with the USG. In fact, the international partner is purchasing directly from the USG. This arrangement can be viewed as either an advantage or a disadvantage depending on the political climate. Some international partners desire the association implied by the FMS interaction. Other international partners, where the popular view of the United States is not as positive, may desire to distance themselves from the USG and enter into a DCS arrangement with a U.S. contractor. In this situation, public opinion may view a relationship with U.S. industry more favorably than the direct government-to-government relationship inherent in FMS.

The USG is involved in approving both FMS and DCS. For FMS, DSCA consults with the DOS for approval to develop new FMS cases. For DCS, the contractor must apply to the DOS to obtain an export license. In either method, the DOS makes the final decision to authorize military defense sales.

Under the AECA, both FMS and DCS must be notified to the U.S. Congress if the proposed sale meets or exceeds the statutory dollar thresholds. The key difference in Congressional Notifications between FMS and DCS relates to the timing during the acquisition cycle. For FMS, Congressional Notification occurs prior to the U.S. Government contracting with a U.S. contractor for the goods and prior to LOA offering. For Direct Commercial Sales, Congressional Notification takes place following contract signing with the foreign party. This has created a misconception that DCS is faster, because, under DCS, there is a shorter timeline to contract signing. However, this does not necessitate a difference in the delivery timeline.

All sales of defense articles or services, FMS or DCS, must not negatively impact U.S. strategic national security and foreign policy interests. This determination is made for DCS in the licensing process and for FMS in the internal coordination process of preparing a case. Although it rarely occurs, the USG always reserves the right to terminate a DCS export license or an FMS case and to halt the actual export deliveries of FMS items or DCS-licensed items when doing so is determined to be in the national interest of the United States.

Care should be taken when comparing timelines under FMS and DCS; neither FMS nor DCS are faster than the other in general, and many factors impact delivery timelines. The FMS acquisition process involves the development, review, and acceptance of the case, plus the assembling of requirements for economic quantity or consolidated purchasing cycles as well as contract negotiations and production lead times. An individual international partner’s priorities must be integrated into the overall DOD-acquisition priority in the FMS process.

By contrast, the DCS system only involves contract negotiations and production lead times after the company obtains the export license. In general, industry prepares its proposal more quickly than the USG prepares the case. Under DCS, the international partner negotiates its priority with industry. Industry may be capable of accelerating their processes for commensurate financial compensation. It is also possible that international partners with a well-developed purchasing capability can negotiate sales contracts more quickly than the DOD, which is bound to the structured Federal Acquisition Regulation (FAR) process.

For secondary and support items, the DOD may maintain an inventory. In cases of an emergency for the international partner, if the materiel is available in DOD inventories, it may be possible for the FMS international partner to achieve faster delivery through shipment from DOD stocks or through the diversion of items that are under production for the DOD. Contractors normally do not produce items in anticipation of sales and generally do not maintain an extensive inventory of defense articles.

International partners frequently desire to compare the FMS total cost to the DCS total cost. It is the policy of the USG for FMS not to compete with U.S.-industry DCS; the USG does not support cost comparisons. It is difficult to predict whether employing the FMS system or direct commercial channels would be more or less expensive for any particular acquisition. The differing contractual pricing and financing approaches, as well as variations in the total package content, make cost comparisons between FMS and DCS quite difficult.

Unless the USG has determined that a specific item or service will only be offered via FMS, there are few absolutes that dictate all countries should select exclusively either FMS or commercial channels for a given purchase requirement. Rather, there are many considerations, unique both to the individual international partner and to the items being procured, that are involved in such a choice. In fact, in comparing the FMS system to the DCS system, it is important to realize that the decision regarding a potential procurement actually has a range of possibilities other than just choosing between two separate options: traditional FMS or traditional DCS. The question of whether to procure via FMS or DCS ultimately involves a decision by the international partner about how much procurement responsibility they are willing to assume and how much they are willing to entrust to the DOD.

Offsets offer a mechanism for the international partner to leverage a major defense acquisition to obtain other domestic benefits for the international partner’s nation. Many international partners have the misconception that offsets are only compatible with DCS procurements, but this is not true. Offset agreements can occur in conjunction with international partner-funded FMS cases, but FMS cases financed with FMF funds or other non-repayable credits are not permitted to include any offset costs.