Improperly Subsidizing the Foreign Military Sales Program--A Continuing Problem

FGMSD-79-16: Published: Mar 22, 1979. Publicly Released: Mar 22, 1979.

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Department of Defense (DOD) sales of articles and services to foreign governments have grown from $953 million in fiscal year (FY) 1970 to $13.4 billion in 1978. DOD has been improperly subsidizing the foreign military sales program by failing to recover an estimated $370 million during the past 6 fiscal years for quality assurance services performed by U.S. government employees on items sold to foreign governments. Since 1973 the government-provided quality assurance services have been specifically identified in Defense pricing instructions as a recurring support cost to be recovered.

Contracting officials in the military services had no standard system for writing prime contracts that would readily identify items for foreign sales. It would be expensive and cumbersome to track foreign sales requirements through all the subcontracts and purchase orders involved in the production of major items such as tanks, planes, or missiles. Between FY 1976 and 1978 some prime contracts did identify foreign sales items costing about $13 million for quality assurance services. When the regional contract administration services submitted the billings to the military services, however, the billings were rejected on the ground that they did not provide sufficient detailed information to bill the countries. The Defense standard sales contract provides that adjustments may be made to estimated costs that are not commensurate with actual costs, but there is a lack of personnel at the DOD office to make sure that pricing policy is effectively implemented.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: Congress should require the Secretary of Defense to provide a plan for overcoming the foreign military sales pricing problems. The plan should specify any organizational changes that will be made and set forth the number of additional personnel with a description of their duties to be assigned to these activities. If the Secretary determines that the expanded staff cannot be provided from present resources, then he should request an increase in the Department's personnel ceiling.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Defense should reconsider the previous recommendation to assign specific responsibility for ensuring effective and consistent implementation of foreign military sales pricing policies to a new or existing organization that can be sufficiently freed from other work to carefully follow up or monitor implementation of the policies in pricing systems.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Defense should develop and implement practical procedures to recover the cost of government-provided quality assurance.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Defense should direct responsible organizations to make a reasonable attempt to identify and recover undercharges on foreign sales resulting from nonrecovery of the costs of government-provided quality assurance services.

    Agency Affected: Department of Defense

 

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