Foreign Military Sales

November 26, 2012 By Matias Maloberti

Foreign Military Sales Sole Source Requirements Updated

A recent policy update changes the requirements for sole source requests in Foreign Military Sales (FMS) cases. Previously, the foreign government had to provide a justification for sole source requests. With the new policy guidance, a justification for sole source is not required, and sole source requests will be approved unless there is “an indication that the request [is] improper or unethical.”

Here’s the updated technical language from the Security Assistance Management Manual (SAMM), shortened for brevity:

An authorized official of the purchasing government may submit a written request […] that the Implementing Agency […] procure a defense article(s) and/or service(s) from a specific organization or entity, or that competition be limited to specific organizations or entities. […] FMS customers need not provide a rationale for the request.

Under this policy, the foreign government customer may request a specific prime contractor and even identify subcontractors in their Letter of Request for the FMS case.

Why does this matter for U.S. Defense Companies?

Companies put in lots of work to generate international sales – attending trade conferences, marketing, even making product alterations for the international market. After all this, the last thing they want is for the Foreign Military Sales case to be assigned to their competitor!

With the “normal” FMS process (see my FMS timeline here), the defense company has little influence over the outcome of the competitive procurement – their bid is evaluated against all others based primarily on price. It’s possible that after putting in the time to develop a sale, the procurement is awarded to another company that can offer cut-throat prices. The FMS procurement process generates enough uncertainty that many defense companies prefer Direct Commercial Sales, where they have more influence in the negotiation of the sale.

This process should make it much easier for Defense Companies to work with foreign government customers through Foreign Military Sales. As we discussed in a previous post, companies can (and should) use Pre-LOR Consultations to define and solidify an international sale. With the updated sole source requirements, companies can feel more confident that they will actually receive the sale that they generate overseas.

Read more about Foreign Military Sales:

October 8, 2012 By Matias Maloberti

Foreign Military Sales Admin Fee Decreases to 3.5%; Small Case Fee Eliminated

DSCA recently announced two major changes to its administration of Foreign Military Sales (FMS): The administrative fee will decrease to 3.5% from 3.8% and there is no longer a Small-Case Management Line (SCML).

These changes stem from the fact that FMS sales have grown dramatically in recent years. Remember that FMS must be a zero-sum program – meaning that the U.S. DoD may not expend funds to administer it, nor make a profit. With the recent growth in FMS sales, it appears that DSCA is more than covering its administrative costs and now needs to lower the fee.

This is great news for FMS customers (foreign governments), since it will decrease the price they pay to procure U.S. defense products. FMS already offers great prices to foreign governments, since the DOD negotiates bulk pricing for customers the same way it does with its own procurement. The reduced fee will make FMS even more affordable.

The biggest benefit here is the elimination of the Small Case Management Line (SCML). Until now, all cases under $400,000 were charged a flat admin fee of $15,000. (For small cases, in addition to the 3.8% fee, an extra line was added to the FMS case with a value of $15,000 minus the 3.8% fee.) Essentially, the minimum administrative processing fee for an FMS case was $15,000. This meant that small orders – sniper rifles for Special Forces, imagery systems for emergency response teams, boarding equipment for Coast Guard’s VBSS teams, for example– were either extremely costly under FMS, or not economically feasible at all. Now the SCML has been eliminated and the admin fee has been reduced, so customers will pay only the flat 3.5% administrative fee on any FMS case. Need $100,000 worth of spare parts? The USG admin fee will run you only $3,500. This is quite a break from the previous $15,000.

The last major beneficiary of this change? Those small to medium U.S. defense companies that are well-positioned in the U.S. defense market and want to go international using Foreign Military Sales. Companies that make relatively inexpensive systems or accessories used to face a major barrier in the small case management line. It’s difficult to pitch your equipment to a foreign government as an economical option if there’s an added fee for small cases. Now, more U.S. defense companies have the opportunity to break into the FMS market without the need for a massive order.

Will your company benefit from these changes in FMS? What impact do you anticipate?

September 10, 2012 By Matias Maloberti

Growth in Foreign Military Sales — Fluke or Long-Term Trend?

New Foreign Military Sales (FMS) recently passed $65 billion for FY2012, according to AOL Defense online, and are expected to continue growing through the end of the fiscal year.

Were the FY2012 numbers a fluke, or part of a long-term trend? The AOL Defense article points out that this year’s number could be an outlier due to large, one-time sales of high-value items, specifically, large fighter plane deals with Saudi Arabia and Japan.

However, even without these two sales, FMS for FY2012 are nearly $30 billion (and counting). DSCA historical data (pdf file) shows a dramatic rise in FMS sales over the last few years. FMS sales totaled $28.4 billion in FY2011, and about $24.4 billion in FY2010. Just 10 years earlier, in FY2002, FMS sales were only 11.5 billion (see table below).

What would explain this increase? The recent explosion in FMS agreements results from growing interest both from the defense industry, and from foreign governments, in using FMS to facilitate international sales. With the threat of sequestration, defense companies are increasingly looking toward the international market for new growth opportunities. As I’ve discussed, FMS is often the best way for defense companies to reach an international market.

Foreign governments, as well, have realized that the FMS model is often the most convenient way to procure defense items. Foreign governments may benefit politically by signing a government-to-government deal with the USG, and they gain the confidence that the DOD will manage all the logistics of their purchase. Depending on local procurement regulations, government-to-government agreements may be non-competitive, avoiding the long and burdensome process of an open competition.

Given this growing focus on FMS, these numbers will only continue to rise as U.S. defense companies further expand into the international market.

FY2002-2010 data from DSCA (pdf) / FY 2011 data from UPI.com / FY 2012 data from AOL Defense online

Foreign Military Sales Sole Source Requirements Updated

Why does this matter for U.S. Defense Companies?

Foreign Military Sales Admin Fee Decreases to 3.5%; Small Case Fee Eliminated

Growth in Foreign Military Sales — Fluke or Long-Term Trend?

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