GAO

United States General Accounting Office

Report to the Chairman and Ranking 

Minority Member, Subcommittee on 

Readiness and Management Support, 

Committee on Armed Services, U.S. 

Senate

September 1999 DEFENSE TRADE

Department of 

Defense Savings From 

Export Sales Are 

Difficult to Capture

GAO/NSIAD-99-191

Page 1 GAO/NSIAD-99-191 Defense Trade

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-283002 Letter

September 17, 1999

The Honorable James M. Inhofe

Chairman

The Honorable Charles S. Robb

Ranking Minority Member

Subcommittee on Readiness and Management Support 

Committee on Armed Services

United States Senate

In 1998, the Department of Defense (DOD) and its contractors planned to 

sell to foreign countries defense equipment, articles, and services worth a 

total of about $44.3 billion. One of the U.S. government’s goals in exporting 

defense items, as articulated in the 1995 Conventional Arms Transfer 

Policy, is to allow DOD to meet its defense requirements at less cost. To 

determine whether DOD is maximizing this benefit, we reviewed the sales 

of five major weapon systems—the Hellfire Missile, Advanced Medium 

Range Air-to-Air Missile (AMRAAM), High Mobility Multipurpose Wheeled 

Vehicle (HMMWV), Black Hawk Helicopter, and Aegis Weapon System. 

Specifically, as requested, we determined whether (1) export sales reduced 

the price of the five weapon systems, (2) DOD waived the requirement to 

recover nonrecurring research and development and production costs 

associated with the sales, and (3) DOD included this information when 

notifying the Congress about the sales or requesting budgetary authority to 

purchase the weapon systems. 

Results in Brief DOD saved at least $342 million on its purchases of the five systems 

because either the Department or its contractors also exported the systems 

to foreign governments. However, DOD has not developed guidance aimed 

at maximizing savings from export sales, and acquisition personnel 

sometimes made decisions that reduced potential savings. DOD could 

have realized greater savings if it had combined purchases for foreign 

governments with purchases for the U.S. military, negotiated prices for 

export sales without giving up U.S. system price reductions, or required the 

contractor to perform work in the most economical manner even if such

Letr
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performance affected offset agreements.1 Savings would also have been 

greater if DOD had ensured that the export sales prices always included a 

proportionate share of the sustaining engineering and program 

management costs. The full impact of contractor direct sales on the price 

of DOD weapon systems cannot be assessed because information 

concerning the savings from combining material purchases and from 

learning efficiencies was not available.

Consistent with the Arms Export Control Act, DOD waived about

$378 million of costs to develop the five systems and establish their 

production facilities. In most cases, DOD waived these costs because the 

buyer was a North Atlantic Treaty Organization (NATO) ally and the sale 

meant that the United States and its allies would be using similar battlefield 

weapon systems. 

When DOD notified the Congress of potential sales of the five systems, it 

did not provide, nor was it required to provide, information on whether 

export sales reduced the price of weapon systems being acquired for the 

U.S. military or whether DOD waived nonrecurring costs associated with 

the sales. Similarly, DOD did not always provide information on savings 

from export sales that the Congress could use to assess the President’s 

request for budgetary authority to purchase the five systems. Nor did DOD 

always reduce its portion of the President’s budget to reflect export sales 

savings. Only the Air Force consistently considered the impact of export 

sales in developing a program’s budget. Beginning in fiscal year 1996, the 

Air Force voluntarily reduced the AMRAAM budget to reflect 

export-related reductions in the price of U.S. missiles. The Navy told us 

that its budget was reduced in 2 of the 5 years that it exported the Aegis 

Weapon System. The Army made no reductions to the Hellfire, Black 

Hawk, or HMMWV budgets. Instead, Army program offices used excess 

appropriations to buy additional systems or system components, or to meet 

unspecified needs. 

To enhance the economic benefits derived from defense exports, we are 

making recommendations to improve DOD’s ability to realize savings and 

the Department’s processes for disclosing to the Congress the effect of 

export savings on weapon system costs. 

1

Offsets are industrial or commercial benefits that a U.S. contractor provides to foreign governments as 

inducements or conditions for the purchase of military goods or services.

Letr
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Background The role of export sales in reducing the cost of weapon systems required by 

the U.S. military is becoming increasingly important. Between 1989, when 

the Cold War ended, and October 1998, DOD’s total budget declined

30 percent in constant dollars and its procurement budget declined

50 percent in constant dollars. To hold down annual acquisition costs and 

fit the inventory of weapon systems to the downsized military force 

structure, DOD often purchased fewer quantities of individual weapons 

than originally planned. Theoretically, purchasing fewer systems reduces 

overall costs but increases unit cost. But, production quantities can be 

increased and unit cost decreased if DOD or its contractors sell systems 

being purchased for the U.S. military to a foreign government, particularly 

if contracts for the export sales are awarded at about the same time as the 

U.S. contract is awarded. If the contractor plans to produce additional 

units, it can purchase materials in bulk at discounted prices, realize labor 

efficiencies, and spread fixed overhead costs2

 over more units of 

production. 

The U.S. government or contractors may sell defense items to a foreign 

government. When the sale is government-to-government through the 

foreign military sales program, DOD is generally required by section 21 of 

the Arms Export Control Act to charge the purchaser for a portion of the 

funds that the U.S. government invested to develop major defense 

equipment and establish a production capability.3

 Prior to 1996, DOD was 

authorized to waive these costs only if the sale advanced the U.S. 

government’s interests in equipment standardization with the armed forces 

of NATO countries, Japan, Australia, or New Zealand. However, in 1996, 

the Congress authorized DOD to waive nonrecurring costs if refusing to 

grant the waiver would likely result in the loss of the sale or if the sale

2

Fixed overhead costs are costs that an organization incurs because of its structure, style of operation, 

methods of selling, size of productive capacity, and stored-up knowledge of key individuals. These 

costs cannot be easily reduced when production activity declines. Examples of fixed overhead are the 

cost of depreciation of facilities and equipment, property taxes, fixed salaries of supervisory and office 

personnel, and the base charge for utilities.

3

Consistent with section 47 (6) of the Arms Export Control Act, DOD Directive 2140.2 defines major 

defense equipment as any item of significant military equipment listed on the U.S. Munitions List having 

a DOD nonrecurring research, development, test, and evaluation cost of $50 million or a total DOD 

production cost of more than $200 million.
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would reduce the cost of the U.S. purchase by an amount that would offset 

waived funds.4

Contractors are not required to collect nonrecurring costs. Since 1992, 

contractors have been exempt from collecting and depositing in the U.S. 

Treasury nonrecurring research and development and production costs 

when making direct sales to foreign governments. 

Contractors often provide commercial or industrial benefits to foreign 

governments that purchase military goods. These benefits, known as 

offsets, may be offered as inducements or may be required by the foreign 

government as a condition of the purchase. Offset agreements may include 

subcontracting with the purchasing country’s industries for component 

parts, providing the country’s businesses with financial or marketing 

assistance, or undertaking a broad array of other activities that increase the 

foreign country’s business base. The U.S. government is not a party to 

offset agreements and assumes no liability under the agreements.

DOD Realized Savings 

From Export Sales but 

Could Have Achieved 

More

DOD reduced the cost of the five weapon systems we reviewed when it or 

its contractors also exported the systems to foreign governments. 

However, DOD has no guidance on how to maximize savings from export 

sales and personnel responsible for negotiating and administering 

contracts that included U.S. and/or export requirements sometimes made 

decisions that prevented DOD from maximizing savings.

Export Sales Resulted in 

Reduced Costs of Weapon 

Systems

According to our analysis, DOD reduced its cost to purchase the Hellfire, 

AMRAAM, HMMWV, Black Hawk, and Aegis Weapon System by at least 

$342.3 million as a result of export sales. The sales of each of these systems 

increased the quantity of systems DOD purchased and reduced the 

systems’ unit prices because contractors could buy materials in bulk at 

discounted prices, realize labor efficiencies, and/or spread fixed overhead 

costs over more units of production. Table 1 displays our estimates of the 

quantifiable savings by system.

4

Although this new waiver authority was included in section 4303 of the National Defense Authorization 

Act for Fiscal Year 1996 (P.L. 104-106), DOD could not exercise its new waiver authority until the 

President introduced and the Congress passed legislation that fully offset the estimated revenues that 

would be lost from the additional waivers. In September 1996, the Congress allowed the President to 

sell a portion of the National Defense Stockpile. The funds from this sale were used in part to offset the 

funds that DOD estimated would be lost between 1997 and 2005 as a result of the new waiver authority.
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Table 1: Weapon System Savings From Export Sales

a All prices are those recorded at contract award.

b

Corporate policy restricts the disclosure of this data. 

c

The Hellfire II contractor reported that it sold 1,394 missiles directly to foreign governments. We were 

unable to collect information on the quantity of basic Hellfire missiles sold directly to foreign 

customers.

d

The Light Tactical Vehicles Program Office reported direct contractor sales for 1989-97. The quantity 

shown in the chart does not include any direct sales made by the contractor in 1998.

e

Aegis Weapon System savings include the effect of export sales on the prime contract only. Aegis 

Program Office officials told us that additional savings were realized when the government purchased 

system components and provided them to the prime contractor for integration into the Aegis Weapon 

System.

Information that could be used to determine how much DOD saved through 

export sales varied among the five systems. AMRAAM and Hellfire savings 

that resulted from larger production quantities could easily be calculated 

by comparing identified unit prices with and without export sales. Black 

Hawk savings could also be easily determined because price adjustments 

were documented in the contract. 

The savings from HMMWV and Aegis Weapon System export sales were 

less easily determined, and our estimates of these savings were less 

precise. Documents that clearly identified the savings from export sales 

Dollars in millions

System Hellfire AMRAAM HMMWV Black Hawk Aegis Weapon System

Time period reviewed 1986-97 1993-98 1989-98 1984-99 1988-98

Pricea and quantity of U.S. 

systems

$1,285.4 $1,148.7 $1,757.2 $4,173.5 $2,792.3

42,660 3,657 51,463 1,086 50

Pricea and quantity of 

foreign military sales

$92.6 $909.4 $372.4 $296.9 $501.0

3,255 3,138 9,251 65 8

Pricea

 and quantity of 

contractor export sales

Price

unavailableb

No contractor

sales

Price

unavailableb

Price

unavailableb

No contractor

sales

Total quantity

unavailable c

None 12,027d 336 None

Estimated quantifiable 

savings

$1.9 $223.0 $71.3 $7.4 $38.7e
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were available for only one of the five export sales of the Aegis Weapon 

System and for none of the HMMWV sales. We estimated savings for these 

two systems by discussing with the contractors the elements of product 

cost affected by increased production and then analyzing their proposal 

data for those cost elements to isolate and estimate the effect of export 

sales on unit prices. 

Our analysis of Aegis Weapon System proposal data did not allow us to 

estimate the system’s total savings. The contractor said that for three of 

the sales, savings were included in contract underruns.5

 Because the 

government and contractor shared savings from the underruns, DOD’s 

costs were reduced. However, the underruns were attributable to a 

number of factors, and we could not isolate the savings created by export 

sales.

Larger Savings Were 

Possible

DOD issued no guidance to aid acquisition personnel in maximizing savings 

from export sales. Our analysis showed that savings from export sales 

could have been larger if contracts had been negotiated or administered 

differently. DOD’s benefit from export sales was less when the military 

services (1) purchased weapon systems for the United States and export 

sales separately, (2) negotiated prices for export sales that required giving 

up price reductions for DOD systems, (3) allowed the contractor to incur 

higher material costs to satisfy an offset agreement, or (4) failed to 

implement an effective method to spread production costs evenly over 

units produced for the U.S. military and foreign buyers. 

Timing of Purchases Affects 

Savings 

Our analysis showed that the timing of foreign sales was important. We 

observed that contractors reduced weapon system prices when DOD 

combined its purchases for foreign customers with its purchases for the 

U.S. military. Of the five weapon systems we reviewed, only the AMRAAM 

program office managed its export sales so that the U.S. and export 

requirements could be combined. Each year, DOD asked U.S. embassies in 

countries likely to purchase AMRAAM missiles to determine if those 

governments planned to make purchases in the coming year. According to 

program officials, foreign countries understand that their AMRAAM 

purchases must be combined with DOD’s purchases to achieve the lowest 

possible price. Since 1993, with only two exceptions, the Air Force has 

5

A contract is underrun when the contractor produces systems at less than the target price established 

by the contract. 
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combined purchases for foreign sales with U.S. purchases. This acquisition 

strategy enabled the Air Force to reduce the cost of U.S. Air Force and 

Navy AMRAAM missiles about $223 million. Our analysis also showed that 

the Army could have saved an additional $2.9 million in the cost of Hellfire 

missiles by simultaneously purchasing missiles for export and Army 

requirements. Similarly, an Aegis Weapon System contract representative 

told us that if DOD purchased a larger quantity of systems at the time it 

awarded its annual production contract, the price of each system would be 

lower. 

Acquisition Decisions Reduced 

DOD’s Savings

DOD’s acquisition decisions affected savings. The Army could have 

reduced the cost of Hellfire missiles another $1.4 million if it had not 

insisted on lower prices for export missiles. The Hellfire contract required 

a price reduction if additional missiles were purchased within 60 days of a 

U.S. order. In early 1996, the Army purchased additional missiles within the 

required time frame. However, the agency gave up its right to a reduction 

in the unit price of its missiles that totaled about $0.9 million in exchange 

for a lower missile price for the foreign government. Later in 1996, the 

contractor offered to reduce the U.S. price by $2.4 million because the 

Army was purchasing additional export missiles for another foreign 

customer 5 months after the U.S. order. However, the lower price for the 

U.S. missiles was contingent upon the foreign government paying a higher 

price to convert the missiles to the export configuration and to cover the 

cost risk associated with the sale.6

 The Army negotiated a $1.9 million cost 

reduction, rather than the $2.4 million offered by the contractor, giving up 

the additional $0.5 million so that the contractor would agree to include 

less profit in the export missile price. The Army did not explain its 

rationale for this action.

Acquisition decisions also affected Aegis Weapon System savings. The 

Navy reduced its potential savings about $3 million when it allowed the 

contractor for the Aegis Weapon System to purchase rather than make 

system subcomponents to satisfy an offset agreement. The contractor 

originally proposed to make the subcomponents at a cost of about

$22.5 million. However, when the contractor found that it was not meeting 

its agreement with the foreign government to purchase $97 million of 

6

According to a contractor representative, foreign customers typically require more technical support 

than DOD, and export missile warranties are often more expensive than estimated. Defense Federal 

Acquisition Regulation Supplement 215.404-71-3 (d) (3) allows DOD to pay a contractor more profit 

than normal in sales where the contractor can demonstrate that there are substantial risks above those 

normally present in DOD contracts for similar items. 
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subcomponents or parts from that country’s industries, the contractor 

decided to buy additional subcomponents for DOD systems from the 

foreign manufacturers. According to an audit completed by the Defense 

Contract Audit Agency (DCAA), this decision will cause the contractor to 

pay about $27.7 million for the parts—about $5.2 million more than it cost 

to make them.7

 In addition, DCAA said the loss of production in the 

contractor’s plant would result in an additional $0.8 million in overhead 

costs. The decision to purchase the parts will not affect the weapon’s 

target price under the Navy’s fixed-price incentive contract. However, the 

contractor has underrun target prices since 1988 and, according to the 

terms of the contract, shared the savings equally with DOD. If the 

contractor were to reduce this contract’s costs as much as it did some 

earlier contracts, the decision to buy the subcomponents could result in 

about $6 million less in savings, which would reduce DOD’s share by

$3 million.

Full Allocation of Production 

Costs Necessary to Maximize 

Savings

We examined four Black Hawk production contracts where the Army 

purchased additional helicopters for export sale after initial contract 

award. Three of the four contracts allocated all sustaining engineering and 

program management costs to the units initially purchased on the contract 

and none to the additional units, although these units also benefited from 

these activities.8

 In two of the contracts, the Army directed the contractor 

to remedy the situation by adding a surcharge to the export units. 

However, the surcharge fell short of distributing the costs evenly to all 

helicopters purchased under the contract. In only one case did we have 

sufficient data to quantify the potential savings that the Army might have 

realized if these costs had been allocated evenly. In that case, we 

calculated that the Army could have recovered an additional $3.4 million 

from export sales by evenly distributing the contractor’s sustaining 

engineering and program management costs.

7

The contractor agreed that its decision to purchase rather than make the parts will increase cost, but 

estimates that the increase will be only about $0.6 million. DCAA’s and the contractor’s loss estimates 

differ because the contractor (1) estimated the cost to make the parts at current prices rather than the 

price negotiated at contract award, (2) deleted additional material cost from the estimate to buy the 

parts that is normally added to all purchased hardware, (3) assumed that its production loss and 

personnel retraining cost would not affect negotiated overhead rates, and (4) predicted that the foreign 

contractor would not require increased engineering support to produce the parts. 

8

We were unable to determine how sustaining engineering and program management costs were 

allocated to units purchased under the fourth contract.
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Savings Attributable to 

Direct Sales by Contractors 

Is Unknown

Contractors’ direct export sales also reduced the cost of DOD’s weapon 

systems, but we could not always determine the amount of the reductions 

or whether the contractors considered all cost reductions when pricing 

DOD’s systems. Our analysis showed that the Hellfire, HMMWV, and Black 

Hawk contractors sold those systems directly to foreign governments and 

included their direct sales in calculations of their overhead rates, which 

resulted in lower rates. Since these rates are the contractor’s means of 

assigning overhead costs, such as equipment depreciation, property taxes, 

and administrative costs to a contract, a lower rate results in lower 

contract costs and a reduced weapon system unit cost. However, the 

Hellfire and Black Hawk contractors either did not have data or considered 

it too time consuming to develop data that would allow us to assess what 

the overhead rates would have been had there been no export sales. None 

of the contractors provided data that would allow us to determine whether 

material and labor costs decreased when the contractors increased 

production quantities by selling directly to foreign governments or whether 

these reductions, if they occurred, reduced the price of DOD’s weapon 

systems. Neither could DOD officials provide information that would allow 

us to quantify the impact of contractors’ direct sales on the price of U.S. 

weapon systems.

DOD Waived 

Nonrecurring Research 

and Production Costs

Consistent with the Arms Export Control Act, DOD declined to charge 

foreign purchasers $377.8 million of nonrecurring costs that it incurred to 

develop the five weapon systems and establish their production facilities. 

Of the $377.8 million, DOD waived $289.6 million because the exports 

increased standardization of weapon systems between the United States 

and its NATO allies and $29.6 million to avoid the loss of export sales. The 

remaining $58.6 million was not collected when the Air Force and the 

Defense Security Cooperation Agency created hybrid sales agreements for 

some sales made in January 1995 and January 1996. 

DOD considered the hybrid sales as the contractor’s direct sales because 

the contracts were between the contractor and foreign purchasers and 

imposed no financial obligation on the U.S. government. But the sales were 

treated in many respects as government-to-government sales, with Air 

Force personnel negotiating, writing, and administering the contract. An 

AMRAAM program official said the foreign customers would not have 

purchased AMRAAM missiles if the $58.6 million of nonrecurring costs 

were included in the purchase price. Therefore, DOD could not classify the 

sales as foreign military sales because legislation in effect at the time would 
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not have allowed DOD to waive these costs to avoid the loss of the sales. 9 

Neither did the contractor sell the missiles directly to the foreign 

customers without DOD participation, which would have exempted the 

countries from paying the nonrecurring costs, because the Air Force 

recommended that the program office sell the AMRAAM only through the 

foreign military sales program. 

Table 2 shows the amount of waived nonrecurring costs for each weapon 

system.

Table 2: Waived Nonrecurring Costs

a

The Army was able to locate data for only 88 percent of the HMMWV foreign military sales that would 

allow us to assess whether nonrecurring costs were waived. For those sales that we could assess, we 

found that all nonrecurring costs were collected.

Decisionmakers 

Received Little 

Information on Savings 

or Waivers 

Each time DOD or its contractors sought to export the Hellfire, AMRAAM, 

HMMWV, Black Hawk, or Aegis Weapon System, the President notified the 

Congress—giving it a chance to object to the system’s export—and each 

year the President asked the Congress to appropriate funds to purchase the 

systems.10 Sections 36 (b) and (c) of the Arms Export Control Act require 

that the notifications include such information as the name of the 

purchasing country or international organization, the dollar amount of the 

sale, the number of items included in the sale, and a description of the item 

being sold. The notifications did not include, nor were they required to 

9

DOD’s authority to waive the nonrecurring costs to avoid the loss of a sale became effective September 

1996. The Air Force created hybrid sales agreements for sales made in January 1995 and January 1996.

Cost Hellfire AMRAAM HMMWV Black Hawk

Aegis Weapon

System

Collectable nonrecurring costs $12,617,768 $349,739,466 $1,365,060 $10,304,380 $130,418,000

Waived nonrecurring costs $1,802,188 $310,803,404 0a 0 $65,152,000

Percent of collectable nonrecurring 

costs waived

14.28 88.87 0 0 49.96

10The Arms Export Control Act requires the President to report to the Congress proposed foreign 

military sales of defense articles or services for $50 million or more, design and construction services 

for $200 million or more, or major defense equipment for $14 million or more. The act also requires the 

President to report to the Congress contractors’ applications for licenses for the export of major 

defense equipment to be sold under a contract in the amount of $14 million or more, or defense articles 

or services to be sold under a contract in the amount $50 million or more. 
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include, information on whether or by how much anticipated export sales 

would reduce the cost of DOD’s weapon systems, or whether DOD had 

waived nonrecurring research and development and production costs. 

Similarly, the President’s budget requests did not always advise the 

Congress of the impact of export sales on program budgets, and DOD did 

not consistently reduce its budget request to account for savings resulting 

from export sales. 

Only the Air Force consistently reduced its budget request to reflect 

savings from anticipated export sales. Beginning in 1994, AMRAAM 

program office personnel recognized that export sales of the AMRAAM 

were likely to significantly impact AMRAAM production costs.11 According 

to a program official, the Air Force estimated the number of missiles that 

would be sold and reduced its AMRAAM budget request to account for the 

expected savings. In those cases where the actual savings exceeded the 

budget reduction, the program office used the additional funds to purchase 

more AMRAAMs. 

The Navy told us that its budget for the Aegis Weapon System was reduced 

to account for savings from export sales in 2 of the 5 years that it exported 

the system. In fiscal year 1994, the Navy voluntarily reduced its budget 

request $11 million to account for an expected decrease in the weapon 

system’s production cost caused by an export sale. In addition, the 

Congress reduced the Aegis budget by $3.8 million in fiscal year 1998 when 

the Aegis Program Office disclosed that another export sale would reduce 

the cost of DOD’s purchases.

The Army did not decrease its Black Hawk, Hellfire, or HMMWV budget 

requests to reflect savings from export sales. According to Army officials, 

when budget requests were prepared, DOD was unsure whether 

anticipated export sales would occur. The officials said that it was too 

risky to reduce budgets when savings might not be achieved. However, 

when export sales later produced savings, the Army did not inform the 

Congress of the savings or reduce its subsequent budget requests. Instead, 

the program offices used the excess funds to purchase additional systems 

or system components or to meet other unspecified needs.

11Because DOD begins to formulate each fiscal year’s budget request 2 years in advance of its 

submission to the Congress, the Air Force’s recognition of production cost reductions in 1994 did not 

result in reduced budget requests until fiscal year 1996.
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Conclusions Although DOD reduced its cost to purchase five weapon systems when the 

systems were also sold to foreign governments, DOD did not maximize the 

potential for savings. In addition, the Congress lacked information that 

would have helped it oversee weapon system acquisitions and export sales.

DOD provided no guidance on how to maximize savings from export sales. 

As a result, program offices often handled export sales differently. We do 

not believe that every contract should be negotiated and administered in 

the same way. However, guidance could point out actions that have been 

shown to maximize savings. These actions include combining purchases of 

weapon systems for the U.S. military with purchases for foreign countries, 

negotiating and enforcing clauses that reduce weapon system prices if 

export sales are made within a reasonable time after DOD contracts are 

awarded, requiring contractors to perform work in the most economical 

manner, and allocating sustaining engineering and program management 

costs evenly over all units produced under a contract. 

In addition, DOD provided the Congress with little information on the 

impact of foreign military and contractors’ direct export sales on the price 

of the five weapon systems, the waivers that were part of some sales 

agreements, or the potential for budget reductions created by savings from 

weapon system exports. Although DOD is not required to provide this 

information, the data could have helped the Congress determine whether 

export sales achieved the goal of reducing the cost of U.S. weapon systems 

and whether DOD required all of the funds it requested to purchase weapon 

systems.

Recommendations We recommend that the Secretary of Defense develop guidance that will 

assist the military services in maximizing savings from export sales. 

Matters for 

Congressional 

Consideration

DOD does not always reduce its annual budget request to reflect savings 

from export sales or inform the Congress so that it may consider doing so. 

As evidenced by the Congress’ reduction of the Aegis Weapon System’s 

1998 budget, information on savings due to export sales can be useful to 

the Congress in making budget decisions. In addition, the Congress may 

find information on cost savings and waivers of nonrecurring costs useful 

when reviewing proposed export sales. The Congress could use this 

information to judge the extent to which such sales will contribute to the 

cost reduction goal articulated by the Conventional Arms Transfer Policy.
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Accordingly, the Congress may wish to consider requiring that the 

Secretary of Defense develop guidance to ensure that budget requests 

reflect actual and projected savings from foreign military sales. In addition, 

the Congress may wish to consider requiring that the Secretary of Defense 

provide information on projected foreign military sales savings and waivers 

of nonrecurring costs when notifying the Congress of proposed sales. 

Finally, the Congress may wish to consider tasking the Secretary to assess 

the feasibility of collecting information that would quantify the impact of 

contractors’ direct export sales on the price of U.S. weapon systems. If 

DOD is successful in collecting this data, it could also be reflected in 

budget requests and sales notifications.

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, DOD concurred with our 

recommendation to develop guidance that will assist the military services 

in maximizing savings from export sales. DOD did not concur with our 

recommendation that it include information about the impact of export 

sales on each program’s funding request. DOD noted that consideration of 

export sales is already a normal part of the budgeting process and that 

isolating the impact of export sales from other factors that affect program 

cost estimates would have no benefit. Neither did DOD concur with our 

recommendation that the Secretary of Defense collect information that 

would allow an assessment of the impact of export sales on the price of 

U.S. weapon systems. DOD said its requirement to provide cost and pricing 

data in sole-source acquisitions and its reliance on price competition in 

competitive acquisitions ensure that DOD obtains a reasonable price for its 

weapon systems.

We based our recommendations on the Congress’ need for additional 

information to support the budgetary and arms transfer decision-making 

processes, not as a substitute for other means of obtaining a fair price. We 

found during our review that DOD did not consistently reduce military 

budgets to account for savings from export sales or provide enough 

information for the Congress to do so. DOD’s disclosure of the budgetary 

impact of export sales would give the Congress greater oversight of 

military budgets. 

Complete data that includes the impact of an export sale on DOD’s weapon 

system price would also assist the Congress in making an informed arms 

sales decision. The Congress and the executive branch base decisions on a 

number of factors. In recent years, one important consideration has been 

the value that accrues to DOD from export sales in the form of lower unit 
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costs. Yet we found during our review that the Congress is asked to 

approve export sales without information regarding the impact of export 

sales on the price of U.S. weapon systems. The Congress could benefit 

from information regarding production cost savings created by export sales 

and waivers of nonrecurring costs associated with the sales. This data 

would allow the Congress to assess whether export sales achieve the goal, 

established by the Conventional Arms Transfer Policy, of reducing the price 

of U.S. weapon systems. 

In our opinion, additional information would improve budgetary oversight 

and assist the Congress in determining the extent to which export sales 

achieve Conventional Arms Transfer Policy goals. Therefore, we have 

deleted recommendations to the Secretary regarding those issues and 

addressed them to the Congress.

DOD also provided a technical comment on the report. We reviewed 

DOD’s suggestion and made an appropriate change.

Scope and 

Methodology

We conducted our review as a case study of five weapon systems--the 

Hellfire missile, AMRAAM, HMMWV, Black Hawk Helicopter, and Aegis 

Weapon System. We judgmentally selected the systems because they 

represent acquisitions of each of the U.S. military services, were produced 

by four different contractors, and were of varied price. Because the sample 

is small, we cannot statistically state that the conditions we found in our 

sample would be found in all export sales. However, the sample illustrated 

the diverse actions that affect DOD’s ability to maximize savings from 

export sales. 

We calculated the effect export sales had on the price of DOD’s weapon 

systems by analyzing contractor proposal data and prices and government 

billing adjustments. For the Hellfire and AMRAAM missiles and one Aegis 

Weapon System purchase, we examined the contractors’ proposed prices 

for varying quantities to determine the price DOD would have paid if it had 

purchased only the quantity of weapon systems required by the U.S. 

military. We compared DOD’s price for this lower quantity of systems to 

the Department’s price for a larger quantity that satisfied both U.S. and 

foreign military requirements. The difference between the two prices 

represented system savings. To calculate the remainder of the Aegis 

Weapon System and all HMMWV savings, we determined the elements of 

the systems’ costs that were affected by changes in the production rate. 

Once we identified these elements, we recomputed their cost assuming a 
B-283002

Page 15 GAO/NSIAD-99-191 Defense Trade

level of production that satisfied only U.S. requirements. We defined 

system savings as the difference between the contractor’s proposed price, 

which was based on U.S. plus export requirements, and the price we 

calculated using the recomputed cost elements. For the Black Hawk, we 

examined government billing adjustments to determine the sustaining 

engineering and program management costs that the government 

recovered when it added these costs to the contractor’s price for foreign 

military sales systems. The Army made this adjustment because the 

contractor had charged these costs, which benefited all units, to 

helicopters purchased when the Army awarded its annual production 

contract and none to units produced for foreign military sales. We 

considered all recovered costs as savings. All costs and savings are 

reported in current year dollars unless otherwise noted. Data were not 

available to estimate dollar savings by year that would allow conversion to 

constant dollars.

To accomplish our analysis, we collected documents from and held 

discussions with the Air-to-Ground Missile Systems Project Office, 

Huntsville, Alabama; the U.S. Army Aviation and Missile Command 

(AMCOM) Acquisition Center, Huntsville, Alabama; the Air-to-Air Joint 

Systems Program Office, Eglin Air Force Base, Florida; the Light Tactical 

Vehicles Program Office, Warren, Michigan; the U.S. Army 

Tank-Automotive and Armaments Command (TACOM) Acquisition Center, 

Warren, Michigan; the Utility Helicopter Program Management Office, 

Huntsville, Alabama; and the Aegis Weapon System Program Office, Crystal 

City, Virginia. We also analyzed and discussed proposal data, price 

matrices, offset data, overhead analyses, and savings from export sales 

with officials at Lockheed Martin Electronics and Missiles, Orlando, 

Florida; Raytheon Missile Systems Company, Tucson, Arizona; AM General 

Corporation, South Bend, Indiana; Sikorsky Aircraft Corporation, 

Stratford, Connecticut; and Lockheed Martin Government Electronic 

Systems, Moorestown, New Jersey. While at the contractor locations, we 

talked with Defense Contract Management Command and DCAA personnel 

about export sales’ impact on contractor overhead rate calculations.

We determined whether DOD exercised its authority to waive nonrecurring 

research and development and production costs by analyzing foreign 

military sales documents and discussing nonrecurring cost waivers with 

officials at the AMCOM Security Assistance Management Directorate; the 

Air-to-Air Joint Systems Program Office; the TACOM Security Assistance 

Center; and the Aegis Weapon System Program Office. 
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Page 16 GAO/NSIAD-99-191 Defense Trade

In addition, we reviewed DOD’s export sales notification and budgetary 

processes to determine whether DOD provided information on anticipated 

savings and waivers to the Congress when notifying it of expected export 

sales or requesting budgetary authority to purchase the weapon systems. 

We collected documents from and held discussions with officials from the 

Defense Security Cooperation Agency, the Air-to-Ground Missile Systems 

Project Office, the Air-to-Air Joint Systems Program Office, the Light 

Tactical Vehicles Program Office, the Utility Helicopter Program 

Management Office, and the Aegis Weapon System Program Office. 

We conducted our work from July 1998 through May 1999 in accordance 

with generally accepted government auditing standards.

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days from its 

issue date. At that time, we will send copies of this report to other 

interested congressional committees; the Honorable William Cohen, 

Secretary of Defense; the Honorable Louis Caldera, Secretary of the Army; 

the Honorable Richard Danzig, Secretary of the Navy; the Honorable F. 

Whitten Peters, Secretary of the Air Force; and the Honorable Jacob Lew, 

Director, Office of Management and Budget. We will make copies available 

to others upon request.

A list of contacts and key contributors for this report is in appendix II. 

Henry L. Hinton, Jr.

Assistant Comptroller General
Page 17 GAO/NSIAD-99-191 Defense Trade
Page 18 GAO/NSIAD-99-191 Defense Trade

Appendix I

Comments From the Department of Defense ApenxIdi

Note: GAO’s comments 

supplementing those in the 

report text appear at the end 

of this appendix.
Appendix I

Comments From the Department of Defense

Page 19 GAO/NSIAD-99-191 Defense Trade

See comment 1.
Appendix I

Comments From the Department of Defense

Page 20 GAO/NSIAD-99-191 Defense Trade

See comment 2.

See comment 3.
Appendix I

Comments From the Department of Defense

Page 21 GAO/NSIAD-99-191 Defense Trade

The following are GAO’s comments on the Department of Defense’s (DOD) 

letter dated August 3, 1999.

GAO Comments 1. The detailed analysis substantiating the computation of the reported 

export sales cost savings was offered to each program office for review. 

Officials from three of the program offices reviewed our data and agreed 

with its results. Officials from the remaining two program offices elected 

not to review the data, but did not indicate any disagreement with the 

savings being reported. 

2. DOD said that the consideration of export sales is already a normal part 

of the budgeting process in that program cost estimates include 

consideration of contractors’ direct and foreign military sales. However, 

our review showed that in only one of the five instances did a program 

office consistently reduce its budget to account for the savings from export 

sales. Officials at four of the five program offices told us that they did not 

reduce their production cost estimates or their planned budget requests to 

account for possible savings from export sales. Only the Advanced 

Medium Rance Air-to-Air Missile (AMRAAM) program office adjusted its 

production cost estimate and consistently decreased its planned budget 

requests once export sales began to reduce weapon system costs. 

3. We reworded our recommendation to more clearly state our intent. Our 

recommendation is based on the need for more information to support the 

arms decision-making process and is not intended as a substitute for other 

means that DOD uses to obtain a fair price. The Congress cannot assess 

whether export sales achieve the goal of reducing the price of U.S. weapon 

systems unless DOD (1) isolates the production savings realized from each 

export sale, regardless of whether the sale is made directly by the 

contractor or through the foreign military sales program and (2) informs 

the Congress of whether the sale resulted in the recovery of some portion 

of the funds spent to develop and establish production facilities for the 

system. 
Page 22 GAO/NSIAD-99-191 Defense Trade

Appendix II

GAO Contacts and Staff Acknowledgments ApenxIdi

GAO Contacts Katherine Schinasi (202) 512-4841

Barbara Haynes (256) 650-1435

Acknowledgments In addition to those named above, Lee Edwards, Erin Baker, and Marcus 

Ferguson made key contributions to this report. 

(707371) Lret
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