At its core, the FMS program is an acquisition process through which the U.S. government procures military equipment, training, and other services on behalf of foreign governments. Under the FMS program, foreign governments pay the U.S. government to administer the acquisition of defense articles and services on their behalf. Typically, weapon systems made available for transfer or sale to foreign governments are systems that have completed operational testing and are entering full rate production. Multiple organizations have a role in the FMS program, including DOD and State. Within DOD, DSCA and the military departments play an extensive role in administering the program and managing FMS acquisitions. DSCA carries out key administrative functions, such as coordinating the formulation and execution of FMS cases and conducting negotiations with foreign governments. The military departments carry out the day-to-day implementation of procurements to fulfill FMS agreements between the U.S. and foreign government. The FMS process is complex and involves multiple interactions between foreign and U.S. governments and defense contractors. The FMS process has five phases, as described in the DSCA Security Assistance Management Manual and summarized below. 1) Assistance request. The FMS process begins when a foreign government submits a letter of request to State or DOD to purchase defense articles or services. In the letter of request, the foreign government may express interest in (1) obtaining a preliminary cost estimate for the capabilities it needs, or (2) requesting a letter of offer and acceptance that details the specific items, quantities, cost, and schedule for the sale of military articles and services. Defining the requirements to meet the desired capability can be an iterative process that requires multiple interactions between the foreign government and the military department. For example, to sufficiently define the requirement, DOD consults with the foreign government to identify not only the weapon system but also support needed to achieve the desired capability. Specifically, if a foreign government seeks to acquire an aircraft, DOD will also ensure the customer considers factors such as the operational environment in which the aircraft will be used, the capacity of its forces to operate and maintain the aircraft, and spare parts needed, among other things. According to DOD, this approach helps ensure the foreign government is adequately equipped to operate and sustain the defense items obtained under the FMS program. 2) Agreement development. The request is forwarded to the military department responsible for the particular defense article, which then provides preliminary pricing data or develops a sales agreement between the United States and the foreign government called a letter of offer and acceptance. A single DOD entity may not have full responsibility for all aspects of the FMS agreement and thus coordination within and across military departments may be needed to obtain complete information on pricing and availability to include in the letter of offer and acceptance. When developing the agreement, DOD takes into account the specific system and related support such as training, logistics, warranties, and spare parts. Once the agreement has been drafted by the military department, State and DSCA officials review and approve the agreement and Congress is notified if the proposed sale meets certain dollar thresholds and other requirements. The military department then sends the agreement to the foreign government for its acceptance and signature. 3) Acquisition. In this phase, the responsible military departments fulfill the FMS request from existing supply or procure defense items and services. Once the letter of offer and acceptance has been signed and funding has been received, DOD contracting officers may solicit requests for proposals from industry and negotiate prices, as necessary, to award contracts. During this phase contracting officers make a determination about the best acquisition strategy, including the appropriate contracting vehicle to fulfill the FMS requirement, as articulated in the agreement. For example, the contracting officer may determine the best approach is to combine FMS and U.S. requirements on a single contract or to place them on separate contracts depending on which approach is deemed to be more cost effective and best meets production schedules that align with the foreign customer’s timeframes. 4) Delivery. Upon the contractor’s delivery of items included in the letter of offer and acceptance, the FMS customer will take custody and make arrangements for their transport. The foreign customer may pay the U.S. government to deliver these items or arrange for a freight forwarder authorized to manage these deliveries. 5) Case Closure. An FMS case is a candidate for closure when all materiel and services have been delivered and the FMS customer has not requested for the case to be kept open. Any remaining funds may be made available to the foreign country. Figure 2 summarizes the role of selected entities in the FMS process. Each year, federal agencies procure a variety of products and services in support of their respective missions and activities. Agencies acquire products and services through contracts that specify the government’s requirements, the price and payment arrangements agreed upon by the government and the vendor, and other terms and conditions. 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. To fulfill FMS requirements, DOD generally follows the same acquisition process it uses to meet its own military needs. In this regard, DOD follows federal and defense acquisition regulations, which provide uniform policies and procedures to guide the acquisition of goods and services. At times, DOD may combine FMS purchases with its own procurements. Similar to contracting approaches used for DOD’s requirements, DOD contracting officers have, prior to recent legislation described below, selected from among multiple types of contracts to acquire goods and services on behalf of foreign governments as specified in the letter of offer and acceptance. Contract types generally fall under categories such as fixed-price and cost-reimbursement. The Federal Acquisition Regulation (FAR) notes that contract type selection should be based on the type, complexity, and urgency of the requirement, the contractor’s technical capability, and the extent of subcontracting and acquisition history. Further, consideration should be given to the degree to which analysis can provide insight into prices, the cost impact of uncertainties, and the reasonable allocation of cost responsibility to the contractor. Each contract type comes with a different level of cost or performance risk for the government and contractor. The following is a brief description of fixed-price and cost- reimbursement contract types: Fixed-price contracts provide for a firm price or, in appropriate cases, an adjustable price. Examples of fixed-price contracts include: Firm-fixed-price contracts which provide a price for the good or service that is not subject to any adjustment on the basis of the contractor’s costs during performance of the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties. Fixed-price-incentive contracts which provide for an adjustable profit and establish the final contract price by a formula based on the relationship of the final negotiated total cost to the total target cost. A fixed-price-incentive contract allows the government to share in contractor cost savings if the contractor underruns its target cost although it must also share in contractor cost overruns up to the contract’s ceiling price. According to acquisition guidance, fixed-price-incentive contracts may be appropriate in situations where there is more cost uncertainty, such as for acquisition programs in the early production phase following critical design review where significant developmental testing remains. Incentive arrangements can be designed to achieve specific objectives by motivating contractor efforts that might not otherwise be emphasized and discouraging contractor inefficiency and waste. Cost-reimbursement contracts, such as cost-plus-fixed-fee contracts, are used when requirements are not well defined or a lack of knowledge does not permit costs to be sufficiently estimated to use a fixed-price contract. These contracts establish an estimate of total costs and a ceiling that the contract may not exceed without the approval of the government. Under cost-reimbursement contracts, the contractor is reimbursed for its reasonable costs of performance, regardless of whether the work is completed. The government pays the contractor’s allowable incurred costs to the extent specified in the contract and may include an additional fee, or profit. By way of example, cost-plus-fixed-fee contracts provide for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. Additionally, incentive or award fees may be used to motivate contractor performance. Since 2010, DOD has issued guidance and updated regulations that have emphasized the benefits of using fixed-price-incentive contracts, which would also apply to FMS procurements. In June 2010, DOD issued the first of its Better Buying Power memorandums that, among other things, called on acquisition officials and contracting officers to use proper contract types for development and procurement. The guidance emphasized use of incentive contracts, in which the government shares equally in cost increases or savings. Then in 2012, subsequent guidance called for further consideration of fixed-price-incentive contracts, particularly when moving from system development to production. In addition to using fixed-price-incentive contracts during early production efforts, DOD has also emphasized that these contracts may be useful during the mature production phase of an acquisition program, especially when programs have reason to conclude that there is a poor correlation between the negotiated price and actual cost outcomes. Finally, defense acquisition regulations articulate that, in instances where actual costs on a firm-fixed-price production contract have varied by more than 4 percent from negotiated costs, contracting officers should consider using fixed- price-incentive contracts for future procurements of the same system. The Fiscal Year 2017 NDAA called for DOD to revise its regulations by June 2017 to require the use of firm-fixed-price contracts for FMS procurements unless a waiver is granted or the foreign government states a preference for an alternate contract type.