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International Acquisition - Foreign Military Sales (FMS)

AINT 003

DAU GLOSSARY DEFINITION

A process through which eligible foreign governments and international organizations may purchase defense articles, services, and training from the United States Government.

Alternate Definition

That portion of U.S. security assistance authorized by the Arms Export Control Act (AECA) and conducted on the basis of formal agreements between the United States Government and an authorized recipient government or international organization for the transfer of defense articles, training, or services to the foreign recipient on a sale or lease basis. FMS includes government-to-government transfers sourced from DOD stocks or new procurement under DOD managed contracts, regardless of the source of financing.

General Information

Foreign Military Sales (FMS) is the largest and among the most well-known of all Security Assistance programs. Foreign Military Sales (FMS) is a component of the Department of State’s Security Assistance program and allows the transfer of military articles and services to friendly foreign governments and specified international organizations through, sales, grants, or leases. Security Assistance transfers are authorized under the premise that if these transfers are essential to the security and economic well-being of allied governments and international organizations, they are equally vital to the security and economic well-being of the United States. Security Assistance programs support U.S. national security and foreign policy objectives and increase the ability of our friends and allies to deter and defend against possible aggression, promote the sharing of common defense burdens, and help foster regional stability.

Security Assistance - A group of programs authorized by the Foreign Assistance Act (FAA) of 1961, as amended, and the Arms Export Control Act (AECA) of 1976, as amended, or other related statutes by which the United States provides defense articles, military training, and other defense related services, by grant, loan, cash sale, or lease, in furtherance of national policies and objectives. [Joint Pub 1-02, as amended through 14 April 2006]

Under Executive Order 13637, the Secretary of State is responsible for continuous supervision and general direction of the Security Assistance program. Within the DOD, FMS programs are conducted under the oversight of the Under Secretary of Defense for Policy and are administered by the Defense Security Cooperation Agency (DSCA). The Security Assistance Management Manual (SAMM) issued by DSCA defines policies and procedures for Security Assistance programs.

In an FMS program, the purchasing government is responsible for all costs that may be associated with the sale. There is a signed government-to-government agreement, normally documented in a Letter of Offer and Acceptance (LOA) between the USG and a foreign government, on a bilateral basis. Each LOA is commonly referred to as an FMS case and is assigned a unique case identifier for accounting purposes. Under FMS, military articles and services, including logistics support and training, may be provided from DOD stocks or from new procurement. If the source of supply is new procurement, on the basis of having an LOA which has been accepted by the foreign government, the USG agency or MILDEP assigned as the Implementing Agency for the case is authorized to enter into contractual arrangements with U.S. industry to provide the articles or services requested.

Usually, an FMS system sale involves a weapon system that DOD has already developed, produced, tested, and fielded for its own use. DOD policy generally provides that the USG will only agree to sell systems through FMS that have been approved for full rate production for U.S. forces after completion of operational testing. The key acquisition decision point, from an FMS perspective, is completion of Operational Test and Evaluation (OT&E). If a foreign customer requests an LOA for a system that has not yet completed OTE, a policy waiver is required in accordance with DODI 5000.85 and Section 1-7.4 of the Guide to International Acquisition and Exportability. In this situation, DSCA will request concurrence from USD(A&S) before offering an LOA for a system that is still under development. If the waiver is approved, the LOA includes a special note identifying the risk that the USG may not place this system into production. This waiver policy is often referred to as a “Yockey Waiver” named after a former Under Secretary of Defense for Acquisition. Also see SAMM, C5.1.8.3.

PMs involved in large scale, complex FMS Systems Acquisition efforts should also consider using the FMS - Systems Acquisition JST which was developed by DAU to assist PMs, IPTs, and DOD Component IPOs in this specialized area.

The DOD acquisition workforce Program Manager is responsible for many aspects of FMS case execution including:

  • Conducting acquisition in support of FMS cases in the same manner used for DoD requirements
  • Applying relevant elements and principles of the DOD 5000-series regulations
  • Establishing Integrated Product Teams (IPTs) to coordinate efforts
  • Developing detailed management plans and schedules Identifying and mitigating risks
  • Ensuring contracting actions are initiated to meet program requirements
  • Planning for weapon system training and logistics support to be provided to the customer
  • Reporting to higher headquarters on program execution
  • Conducting periodic program reviews

Foreign Military Sales Life Cycle Stages

1. Preliminary Stage

The initial stage of the FMS process begins when a Foreign Partner conducts a threat analysis in conjunction with its national security planning process. During this assessment, the Foreign Partner typically looks at materiel and non-materiel solutions to address capability gaps (i.e., think of U.S. JCIDS process). Foreign Partners often conduct international competitions during this phase.

2. Definition Stage

During this stage, the Foreign Partner refines its requirements and explores options by seeking information from the U.S. and other countries about specific systems. Normally, there are ongoing consultations between the foreign government and U.S. representatives - especially the in-country Security Cooperation Organization (SCO), which can assist the Foreign Partner in refining its requirements. Discussions will often expand to include U.S. defense contractors as well as representatives from the MILDEPs and other DOD organizations.

3. Request Stage

As the customer defines its requirements, the nation may submit a Letter of Request (LOR) for either Price and Availability (P&A) data (rough order of magnitude pricing data provided for planning purposes) or a formal sales offer in the form of an LOA. P&A and LOA data are generated with the support of the DoD organization that procures comparable articles and services for the DOD.

To assist Foreign Partners in developing actionable LORs, system-specific and generic LOR checklists are located in SAMM Figure C5.F14.

4. Development/Offer Stage

The initial processing of the LOR by the Service Component Implementing Agency (IA) includes validation the requestor's eligibility to purchase U.S. defense articles and services and acknowledges receipt of the LOR, accomplishes requiredTechnology Security and Foreign Disclosure (TSFD)reviews, building/writing of LOA in the Defense Security Assistance Management System (DSAMS). 

When compiling LOA data, case managers should adhere to the Total Package Approach (TPA) to ensure that FMS customers are afforded the opportunity to acquire the full complement of articles and services necessary to field, maintain, and utilize major items of equipment efficiently and effectively.

Note: It is prudent to also discuss a strategy for follow-on support (a subsequent LOA) to continue to address ongoing support requirements. 

Prior to providing an LOA to the customer for review and signature, LOAs meeting the criteria and requirements identified in SAMM Table C5.T13 must be notified to Congress for 15, 30, or 45 calendar-days, depending on the details of the sale and the foreign purchaser. If Congress objects to a proposed LOA, it must pass a joint resolution prior to the expiration date of the notification period. If the notification period passes without Congressional action, DSCA may then countersign the LOA and release it for official presentation to the foreign customer. (See SAMM C5.5 for more details regarding Congressional notification.)

5. Acceptance Stage

Once appropriately reviewed and staffed, the FMS case is offered to the Foreign Partner for their review. Every LOA includes an Offer Expiration Date (OED) on the cover page, which is the date by which the Foreign Partner has to accept the LOA. To officially accept an LOA, the Foreign Partner has to sign the LOA by the OED and provide an initial deposit to Defense Finance and Accounting Service (DFAS).

6. Implementation Stage

After receiving the initial deposit, DFAS releases obligation authority to the Implementing Agency (MILDEP or Defense Agency) who can begin FMS case execution through requisitions from stock and/or initiation of contracting actions for new procurement.

Although an LOA provides basic information and authority for an FMS case, it may have insufficient information for case implementation for supporting organizations (i.e., Program Office). A Case Manager may issue supplemental guidance in order to provide more detailed case implementation instructions to activities that will be involved in executing the FMS case.

7. Execution Stage

This is the longest stage of the FMS lifecycle. Once an FMS case for sale of a weapon system has been implemented, its execution is much the same as a DOD acquisition program. There are only two major differences: Funds are provided through the LOA vice through the Planning, Programming, Budgeting, and Execution (PPBE) system, and customer is a foreign government or international organization vice a U.S. warfighter. The Case Manager is involved in every aspect of planning and executing the assigned FMS case. (SAMM Table C2.T1contains Case Manager Responsibilities)

The Implementing Agency designates a program manager for major systems sales. The SAMM provides that acquisition in support of FMS cases will be conducted in the same manner as it is for U.S. requirements, thus affording the customer the same benefits and protections that apply to DOD procurements. FMS procurement requirements may be consolidated on a single contract with U.S. requirements or may be placed on a separate contract, whichever is most expedient and cost effective.

When an FMS customer accepts an LOA, it enters a government-to-government agreement to purchase military items or services from the USG. In regard to the LOA, the FMS customer is the buyer, and the USG is the seller. The USG may provide articles or services from stock but often must contract with industry to acquire items or services for delivery to the FMS customer. In the procurement contract, the USG is the buyer, and the U.S. industry vendor is the seller. The USG is acting on the FMS customer’s behalf and the FMS customer is not a legal participant in the contract with the U.S. vendor. As far as the vendor is concerned, it is under contract and directly obligated to USG and has no direct contractual relationship with the FMS customer.

Contracting for FMS mirrors the process DOD uses for its own contracting actions. There are a few peculiarities associated with FMS contracts that are addressed in Defense Federal Acquisition Regulation Supplement (DFARS) Subpart 225.73, Acquisitions for Foreign Military Sales. DFARS Subpart 225.7303-2 permits certain costs to be allowable for FMS contracts such as international selling expenses and offset costs. Although by law and policy, the USG does not encourage or commit U.S. companies to offset agreements nor can it be a party to an offset agreement, the DFARS recognizes that contractors performing business in support of foreign governments or international organizations may incur certain additional legitimate business costs. DFARS 206.3-4 also allows for “Other than Full and Open Competition” (e.g., sole source) to be requested by customer in the LOR, and subsequently included in LOA response and execution. 

Offsets: An offset is a package of additional benefits that the seller agrees to provide or perform in addition to delivering the primary product or service. A direct offset involves work directly related to the item being purchased such as permitting the purchaser to produce components or subsystems of the system being sold. An indirect offset involves goods or work which are unrelated to the item being purchased. For example, the contractor may agree to purchase, usually for resale, certain of the customer country’s manufactured products, agricultural commodities, raw materials, or services. Contractors are permitted to build the cost of performing offsets into the contract price it charges the USG. Under the FMS pricing policy, the USG must recover all costs of conducting FMS through the LOA. As a result, if offsets are required by the purchasing country, the LOA price will be incrementally higher in order to cover the cost of the offset. If the LOA is funded with Foreign Military Financing (FMF) program funds, offset costs are not allowable in the contact.

Coproduction: FMS programs may also include coproduction where government-to-government agreements authorize the transfer of technology to permit a foreign company to manufacture all or part of a U.S.-origin defense article. Such transactions are based upon agreements referenced in LOAs and government-to-government international agreements. In some cases, the DOD transfers technical data packages to support coproduction programs under an LOA.

8. Closure Stage

Throughout execution of an FMS case, but particularly as delivery of articles and services nears completion, the case manager should make preparations to reconcile deliveries and financial accounting actions to facilitate prompt case closure after supplies and services have been delivered or provided. Cases should be closed as soon as it is feasible to do so. 

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