Who manages the procurement in a Foreign Military Sale?

The case standard terms and conditions define the nature of this sales relationship. Section 1.2 specifically defines the procurement responsibilities and states that the international partner has entrusted the procurement process to the DOD. The DOD will conduct the procurement on behalf of the international partner using the same regulations and procedures that the DOD uses to procure for itself. Under traditional FMS, the international partner is not responsible for accomplishing any procurement actions following acceptance of the LOA. Under the provisions of the case, the DOD takes responsibility for the following:

• Conducting the entire procurement process, to include contractor source selection, and negotiating the contract terms and conditions
• Contract administration, quality control, inspection, acceptance, and audit functions

Under the FMS system, purchases for an international partners are made by a well-established DOD contracting network. The DOD is committed to procuring FMS defense articles and services under the same contractual provisions used for its own procurements. This system is designed to acquire the required quality items at the lowest price from qualified sources and to provide for contract administration. In fact, FMS and DOD orders are often consolidated to obtain economy-of-scale buys and, therefore, lower unit prices. Although the DOD’s procurement process offers these benefits, the international partner will be charged an appropriate fee in the case, for the contracting and administrative services provided by the DOD.

In DCS, the international partner assumes contract negotiation and management responsibility. These activities represent overhead management costs to the international partner and the actual contract cost. Although it is not necessary for an international partner to fully duplicate the DOD contracting network to make an efficient commercial purchase, the size and skill of the international partner’s contracting staff may be a limiting factor in the quantity and complexity of DCS procurements. Numerous contractors and subcontractors may be involved in supplying the entire package for a major weapon system. As a result, multiple DCS contracts may be necessary to procure the total system. The capability and capacity of the international partner’s indigenous procurement system must be evaluated.

The USG assumes responsibility for the procurement of FMS items. It determines the contract type, selects the contract source, and negotiates prices and contract terms with individual contractors. These negotiations are conducted on the same basis as procurements for DOD purchasers. Under FMS, the international partner trusts the USG to negotiate a contract that will meet the international partner’s needs.

The USG generally purchases directly from as many original manufacturers as possible, minimizing the purchase price. This approach avoids going through a single prime contractor to procure various items from subcontractors and, therefore, also avoids the associated prime contractor price mark-ups on subcontracted components. Unless an international partner’s purchasing staff is sufficiently large and skilled, a comparable procurement approach of purchasing directly from subcontractors cannot be duplicated in DCS.

Under FMS, Contract Administration Services are included as standard components of the overall FMS price; they include contract quality assurance, inspection, and audit services.

For commercial contracts, the purchasing international partner must consider the additional cost of resources needed to monitor production, evaluate modifications, provide for improvements, and ensure contract compliance. A large number of highly educated personnel well trained in international commerce, quality assurance, and audit processes may be required to perform such functions.

If the U.S. agrees to sell the system through FMS, the FMS acquisition will be accomplished with support by the same program management office that is managing the system for the DOD. The system program management office may acquire the FMS requirements either as separate individual procurements or by consolidating the FMS requirements with DOD requirements on the same U.S. contract.

International partners with extensive international procurement expertise may prefer to independently conduct their own defense procurements directly with U.S. industry. Typically, the only USG involvement in a DCS arrangement would relate to the export license approval decision. However, international partners should recognize they can purchase contract administration services (CAS) from the Defense Contract Management Agency (DCMA) to obtain CAS for their DCS.

While the international partners’ government representatives may possess all the skills and abilities to negotiate a favorable contract with U.S. industry, the subsequent process for DCS contract administration, quality control, inspection, acceptance, and audit functions may present both a logistical and financial barrier. The U.S. contractor may perform work at multiple geographically-dispersed locations. As such, it may be difficult and expensive for the international partners’ representatives to conduct these functions throughout the United States.

Acquiring CAS from DCMA for self-negotiated DCS may be a cost-effective option to support DCS. Under this approach, upon receipt of a LOR, DCMA would develop a case for the cost of its CAS in support of the particular DCS. Under the case, DCMA uses its existing contract administration infrastructure to perform CAS on behalf of the international partner.

Traditional DCS offers the international partner the greatest degree of direct involvement in their U.S.-sourced defense procurement. In DCS, the international partner directly interfaces with the contractor on all elements of the contract without the DOD being an intermediary. Traditional DCS provides a range of opportunities. However, the international partner must be prepared to accept a significant level of responsibility.