Foreign Military Sales: A Financial Analysis and Assessment of the Administrative Surcharge Rate

Abstract

This study addresses a request by the Defense Security Cooperation Agency (DSCA) to assess the foreign military sales (FMS) administrative surcharge rate and identify relevant cost drivers. The DSCA operates on a no-profit, no-loss basis and recovers full costs by charging a surcharge rate against FMS values. In 2006, the DSCA increased the rate from 2.5% to 3.8% based on an internal Fees Study Group analysis. While their analysis was well-founded, FMS has more than doubled inflating the trust fund balance and raising questions regarding the proper surcharge rate. We recommend the DSCA lower its administrative surcharge rate from 3.8% to 3.0%. Historical models validate 3.0% as a sufficient rate when applied to actual data from 1999 to 2010. Monte Carlo FMS simulations demonstrate that 3.0% minimizes trust fund variation, while mitigating the risk of falling below safety levels or accruing an excessive balance. Using parametric cost-estimating techniques, we tested six cost factors as explanatory variables to predict workload and budgets. Through regression analysis, we identified the number of letters of request (LORs) completed during the fiscal year as the most statistically significant cost driver. Additionally, the DSCA should monitor the rising trends in contractor support and total open cases.