Foreign Military Sales and Nonrecurring Cost Recoupments

GAO discussed its review of the Department of Defense (DOD) program to recover a proportionate share of the nonrecurring research, development, and production costs of major defense equipment sold abroad. GAO found that: (1) the current pro rata cost recovery system requires DOD to calculate a charge by estimating the total combined cost and dividing it by an estimate of a weapon system's total production quantity; and (2) all of the pro rata charges that it examined were inaccurate. This inaccuracy is caused by DOD: (1) inability to accurately predict future costs and requirements; (2) errors in calculating and applying common costs to old and new generation weapon systems; (3) inconsistencies in establishing a pro rata charge for weapons systems; and (4) policy not to revise charges unless they change by at least 30 percent. GAO noted that the pro rata system accuracy could be improved by: (1) using actual data when available instead of estimates; (2) deleting cancelled project costs from weapon system cost pools; (3) recovering a proportionate share of nonrecurring costs for weapon system components; and (4) clarifying DOD instructions to provide more adequate guidelines for applying commonality between earlier and new models. GAO found the flat rate method to be advantageous because: (1) it would simplify the administrative and review processes for cost charges; (2) it would apply to all defense equipment sales; and (3) the charges could increase or decrease as unit prices change and would not be subject to the uncertainties of the pro rata method. GAO noted that adoption of the flat rate method may require amending the Arms Export Control Act.