DRAFT FOUO PRE-DECISIONAL Requirement to Use Firm Fixed-Price Contracts for Foreign Military Sales (FY2017 NDAA, Sec. 830) July 2017 DRAFT FOUO PRE-DECISIONAL

DRAFT FOUO PRE-DECISIONAL Background Sec. 830 of the National Defense Authorization Act for Fiscal Year 2017 Directs the Department of Defense (DoD) to prescribe regulations requiring the use of firm fixed-price (FFP) contracts for foreign military sales (FMS) unless: The foreign country has an established preference for the use of a different contract type in writing, or requests a different contract type be used for a specific foreign military sale; or The Secretary or his designee determines on a case-by-case basis that a different contract type is in the best interest of the U.S. and American taxpayers. Authorizes the establishment of a pilot program to accelerate the contracting and pricing process of FMS by basing price reasonableness determinations on actual cost and pricing data for purchases of the same product for DoD and reducing the cost and pricing data to be submitted. DRAFT FOUO PRE-DECISIONAL

Sec. 830 Reporting Requirement DRAFT FOUO PRE-DECISIONAL Sec. 830 Reporting Requirement Page 1101 of the conference report (House Report 114- 840), accompanying NDAA for FY 2017, directs DoD to brief the Committees on Armed Services of the Senate and the House of Representatives on the process developed to determine the contracting preferences of foreign counterparties. The conferees directed the briefing on the elements of the process no later than 6 months after the enactment of the FY17 NDAA. (Section 830 directs that regulations implementing Section 830 be prescribed no later than 180 days after enactment of the Act.) DRAFT FOUO PRE-DECISIONAL

Other Key Elements of the Sec. 830 Conference Report DRAFT FOUO PRE-DECISIONAL Other Key Elements of the Sec. 830 Conference Report The conferees expect the Department to implement regulations that allow for a waiver of the firm fixed-price requirement in contracts only in exceptional cases. The conferees further expect that the Department will not interfere in the process of the host nation selecting a contract type. If a contract type other than firm fixed price is selected at the request of the country, the Department shall be prepared to notify Congress that it did not encourage the country in the decision to pursue that contract type. DRAFT FOUO PRE-DECISIONAL

Current Status in Implementing Regulation DRAFT FOUO PRE-DECISIONAL Current Status in Implementing Regulation The Department opened Defense Federal Acquisition Regulation Supplement (DFARS) case 2017-D024, Use of Fixed-Priced Contracts, to implement Sec. 830 requiring the use of firm-fixed-price contracts for foreign military sales, unless an exception applies or a waiver is executed. The Department is preparing a proposed rule to implement Sec. 830, in conjunction with Sec. 829, Preference for Fixed-Price Contracts, into the DFARS. The Department expects to publish a proposed rule for public comment in the fourth quarter of the FY 2017 and the final rule in the third quarter of FY 2018. DRAFT FOUO PRE-DECISIONAL

DRAFT FOUO PRE-DECISIONAL Process to Determine the Contracting Preferences of Foreign Counterparties During case development, the U.S. Government FMS case manager will ask that the foreign government assert in its formal, written Letter of Request (LOR) preference for a particular contract type if the foreign government desires the U.S. Government to negotiate other than a firm fixed-price contract on its behalf. The Security Assistance Management Manual (SAMM) will be revised (para C5.1) to prescribe this as a new element of the LOR and to make clear that DoD will not interfere in the foreign government’s selecting a contract type. While the Department will not “encourage” the country in the decision to pursue a particular contract type, it will respond to questions the foreign government might have about the most appropriate contract type for a given requirement. DRAFT FOUO PRE-DECISIONAL

DRAFT FOUO PRE-DECISIONAL Process to Determine the Contracting Preferences of Foreign Counterparties (cont’d) While the Department will give broad deference to the foreign partner’s preference whether firm fixed price contract type or an asserted written preference for a different contract type, the Department reserves the right to exercise the waiver authority provided for by paragraph (c) of Sec. 830 If the Secretary, or his designee determines on a case-by-case basis that a different contract type is in the best interest of the United States and American taxpayers, the contracting officer will accordingly negotiate a different contract type. For example, the Department anticipates using this waiver authority in circumstances where there is simultaneous production of a given weapon system for both U.S. Government and FMS requirements and the U.S. requirement is being executed under an other than firm fixed-price contract. DRAFT FOUO PRE-DECISIONAL

Pilot Program for Foreign Military sales DRAFT FOUO PRE-DECISIONAL Pilot Program for Foreign Military sales Department intends to establish a Pilot program to reform and accelerate the contracting and pricing processes associated with Full Rate Production (FRP) of weapon systems. The goal is to achieve a 90% reduction in time to get FMS (only) buys on contract. This pilot does not extend to contracted services. A secondary objective is to save on contractor Bid & Proposal costs by allowing reasonableness based on actual DoD prices. Up to 10 pilot FMS sales are authorized per the legislative authority and companies have the option of participating. To date, one defense contractor has approached the Department requesting to participate in the pilot. DRAFT FOUO PRE-DECISIONAL

Pilot Program for Foreign Military sales (cont’d) DRAFT FOUO PRE-DECISIONAL Pilot Program for Foreign Military sales (cont’d) Participating companies will unilaterally develop a model based on their unique systems that should reflect their ability to predict costs based on historical actual costs. The Government will not participate in the development of the model, but a small Government team of subject matter experts will review the model within 30 days of submission. If the model is effective in estimating costs with accuracy, the results will be placed on contract. Any costs that cannot be captured in the model based on actuals, e.g. nonrecurring, will have to be accounted for outside the model (with supporting data). DRAFT FOUO PRE-DECISIONAL

DRAFT FOUO PRE-DECISIONAL Summary The Department will issue a proposed DFARS rule under 2017-D024 to implement Sec. 830 DSCA will revise the SAMM to provide that FMS customers will articulate their preference for contract type in the LOR The Department is actively pursuing opportunities to employ the pilot authority granted by Sec. 830 to streamline the FMS pricing process DRAFT FOUO PRE-DECISIONAL