SUBPART 225.73  ACQUISITIONS FOR FOREIGN MILITARY SALES (2024)

SUBPART 225.73--ACQUISITIONS FOR FOREIGNMILITARY SALES

(Revised January 31, 2023)

225.7300 Scope of subpart.
225.7301 General.
225.7301-1 Reserved.
225.7301-2 Solicitation approval for sole source contracts.
225.7302 Preparation of letter of offer and acceptance.
225.7303 Pricing acquisitionsfor FMS.
225.7303-1 Contractor sales toother foreign customers.
225.7303-2 Cost of doingbusiness with a foreign government or an international organization.
225.7303-3 Government-to-government agreements.
225.7303-4 Contingent fees.
225.7303-5 Acquisitions whollypaid for from nonrepayable funds.
225.7304 FMS customerinvolvement.
225.7305 Limitation ofliability.
225.7306 Offset arrangements.
225.7307 Contract clauses.

225.7300 Scope of subpart.

(a) This subpartcontains policies and procedures for acquisitions for foreign military sales(FMS) under the Arms Export Control Act (22 U.S.C. Chapter 39). Section 22 of the Arms Export Control Act (22U.S.C. 2762) authorizes DoD to enter into contracts for resale to foreigncountries or international organizations.

(b) This subpart doesnot apply to—

(1) FMS madefrom inventories or stocks;

(2) Acquisitionsfor replenishment of inventories or stocks; or

(3) Acquisitionsmade under DoD cooperative logistic supply support arrangements.

225.7301 General.

(a) The U.S. Government sells defense articles and services to foreign governments or international organizations through FMS agreements. The agreement isdocumented in a Letter of Offer and Acceptance (LOA) (see the Defense Security Cooperation Agency (DSCA) Security Assistance Management Manual (DSCA 5105.38-M)).

(b) Conduct FMSacquisitions under the same acquisition and contract management procedures usedfor other defense acquisitions.

(c) Follow the additional procedures at PGI225.7301(c) (DFARS/PGI view)for preparation of solicitations and contracts that include FMSrequirements.

(d) See 229.170 for policy on contracts financedunder U.S. assistance programs that involve payment offoreign country value added taxes or customs duties.

225.7301-1 Reserved.

225.7301-2 Solicitation approval for sole source contracts.

The contracting officer shall coordinate through agency channels with the Principal Director, Defense Pricing and Contracting, prior to issuing a solicitation for a firm-fixed-price sole source contract type for U.S./FMS combined requirements for a major system that has an estimated contract value that exceeds $500 million. See also 201.170 and PGI 216.403-1(1)(ii)(B) and (C) (DFARS/PGI view).

225.7302 Preparation of letter of offer and acceptance.

For FMS programs that will require an acquisition, the contracting officer shall assist the DoD implementing agency responsible for preparing the Letter of Offer and Acceptance (LOA) by—

(1) Working with prospective contractors to—

(i) Identify, in advance of the LOA, any unusual provisions or deviations (such as those requirements for Pseudo LOAs identified at PGI 225.7301 (DFARS/PGI view));

(ii) Advise the contractor if the DoD implementing agency expands, modifies, or does not accept any key elements of the prospective contractor’s proposal;

(iii) Identify any logistics support necessary to perform the contract (such as those requirements identified at PGI 225.7301 (DFARS/PGI view)); and

(iv) For noncompetitive acquisitions over $10,000, ask the prospective contractor for information on price, delivery, and other relevant factors. The request for information shall identify the fact that the information is for a potential foreign military sale and shall identify the foreign customer; and

(2) Working with the DoD implementing agency responsible for preparing the LOA, as specified in PGI 225.7302 (DFARS/PGI view).

225.7303 Pricing acquisitionsfor FMS.

(a) Price FMS contractsusing the same principles used in pricing other defense contracts. However, application of the pricingprinciples in FAR Parts 15 and 31 to an FMS contract may result in prices thatdiffer from other defense contract prices for the same item due to theconsiderations in this section.

(b) If the foreign government has conducted a competition resulting in adequate price competition (see FAR 15.403-1(b)(1)), the contracting officer shall not require the submission of certified cost or pricing data. The contracting officer should consult with the foreign government through security assistance personnel to determine if adequate price competition has occurred.

225.7303-1 Contractor sales toother foreign customers.

If the contractor has madesales of the item required for the foreign military sale to foreign customersunder comparable conditions, including quantity and delivery, price the FMScontract in accordance with FAR Part 15.

225.7303-2 Cost of doingbusiness with a foreign government or an international organization.

(a) In pricing FMScontracts where non-U.S. Government prices as described in 225.7303-1 do notexist, except as provided in 225.7303-5, recognize the reasonable and allocablecosts of doing business with a foreign government or internationalorganization, even though such costs might not be recognized in the sameamounts in pricing other defense contracts.Examples of such costs include, but are not limited to, the following:

(1) Sellingexpenses (not otherwise limited by FAR Part 31), such as—

(i)Maintaining international sales and service organizations;

(ii) Salescommissions and fees in accordance with FAR Subpart 3.4;

(iii)Sales promotions, demonstrations, and related travel for sales toforeign governments. Section 126.8 ofthe International Traffic in Arms Regulations(22 CFR 126.8) may require Government approval for these costs to beallowable, in which case the appropriate Government approval shall be obtained;and

(iv)Configuration studies and related technical services undertaken as adirect selling effort to a foreign country.

(2) Productsupport and post-delivery service expenses, such as—

(i)Operations or maintenance training, training or tactics films, manuals,or other related data; and

(ii)Technical field services provided in a foreign country related toaccident investigations, weapon system problems, or operations/tacticsenhancement, and related travel to foreign countries.

(3) Offsets. For additional information see 225.7306.

(i) An offset agreement is the contractual arrangement between the FMS customer and the U.S. defense contractor that identifies the offset obligation imposed by the FMS customer that has been accepted by the U.S. defense contractor as a condition of the FMS customer’s purchase. These agreements are distinct and independent of the LOA and the FMS contract. Further information about offsets and LOAs may be found in the Defense Security Cooperation Agency (DSCA) Security Assistance Management Manual (DSCA 5105.38-M), chapter 6, paragraph 6.3.9. (http://samm.dsca.mil/chapter/chapter-6).

(ii) A U.S. defense contractor may recover all costs incurred for offset agreements with a foreign government or international organization if the LOA is financed wholly with foreign government or international organization customer cash or repayable foreign military finance credits.

(iii) The U.S. Government assumes no obligation to satisfy or administer the offset agreement or to bear any of the associated costs.

(iv) Indirect offset costs are deemed reasonable for purposes of FAR parts 15 and 31 with no further analysis necessary on the part of the contracting officer, provided that the U.S. defense contractor submits to the contracting officer a signed offset agreement or other documentation showing that the FMS customer has made the provision of an indirect offset a condition of the FMS acquisition. FMS customers are placed on notice through the LOA that indirect offset costs are deemed reasonable without any further analysis by the contracting officer.

(4) Costs thatare the subject of advance agreement under the appropriate provisions of FARPart 31; or where the advance understanding places a limit on the amounts ofcost that will be recognized as allowable in defense contract pricing, and theagreement contemplated that it will apply only to DoD contracts for the U.S.Government's own requirements (as distinguished from contracts for FMS).

(b) Costs not allowable under FAR part 31 are not allowable in pricing FMS contracts, except as noted in paragraphs (c) and (e) of this section.

(c) The limitations for all contractors described in231.205-18(c)(iii) and (iv) do not apply to FMS contracts, except as provided in225.7303-5. The allowability of independent research and development (IR&D) costs and bid and proposal (B&P) costs on contracts for FMS not wholly paid for from funds made available on a nonrepayable basis is limited to the contract’s allocable share of the contractor’s total IR&D expenditures and total B&P expenditures. In pricing contracts for such FMS—

(1) Use the bestestimate of reasonable costs in forward pricing; and

(2) Use actualexpenditures, to the extent that they are reasonable, in determining finalcost.

(d) Under paragraph(e)(1)(A) of Section 21 of the Arms Export Control Act (22 U.S.C. 2761), theUnited States must charge for administrative services to recover the estimatedcost of administration of sales made under the Arms Export Control Act.


(e) The limitations in 231.205-1 on allowability of costs associated with leasing Government equipment do not apply to FMS contracts.

225.7303-3 Government-to-government agreements.

If agovernment-to-government agreement between the United States and a foreign government for the sale,coproduction, or cooperative logistic support of a specifically defined weaponsystem, major end item, or support item, contains language in conflict with theprovisions of this section, the language of the government-to-governmentagreement prevails.

225.7303-4 Contingent fees.

(a) Except as providedin paragraph (b) of this subsection, contingent fees are generally allowableunder DoD contracts, provided--

(1) The fees arepaid to a bona fide employee or a bona fide established commercial or sellingagency maintained by the prospective contractor for the purpose of securingbusiness (see FAR Part 31 and FAR Subpart 3.4); and

(2) Thecontracting officer determines that the fees are fair and reasonable.

(b)(1) Under DoD 5105.38-M, LOAs for requirementsfor the governments of Australia, Taiwan, Egypt, Greece, Israel, Japan, Jordan,Republic of Korea, Kuwait, Pakistan, Philippines, Saudi Arabia, Turkey, Thailand,or Venezuela (Air Force) shall provide that all U.S. Government contractsresulting from the LOAs prohibit the reimbursem*nt of contingent fees as anallowable cost under the contract, unless the contractor identifies thepayments and the foreign customer approves the payments in writing beforecontract award (see 225.7307(a)).

(2) For FMS tocountries not listed in paragraph (b)(1) of this subsection, contingent feesexceeding $50,000 per FMS case are unallowable under DoD contracts, unless thecontractor identifies the payment and the foreign customer approves the paymentin writing before contract award.

225.7303-5 Acquisitions whollypaid for from nonrepayable funds.

(a) In accordance with22 U.S.C. 2762(d), price FMS wholly paid for from funds made available on anonrepayable basis on the same costing basis with regard to profit, overhead,IR&D/B&P, and other costing elements as is applicable to acquisitionsof like items purchased by DoD for its own use.

(b) Direct costsassociated with meeting a foreign customer’s additional or unique requirementsare allowable under such contracts.Indirect burden rates applicable to such direct costs are permitted atthe same rates applicable to acquisitions of like items purchased by DoD forits own use.

(c) A U.S. defense contractor may not recover costsincurred for offset agreements with a foreign government or internationalorganization if the LOA is financed with funds made available on a nonrepayablebasis.

225.7304 FMS customerinvolvement.

(a) FMS customers mayrequest that a defense article or defense service be obtained from a particularcontractor. In such cases, FAR 6.302-4provides authority to contract without full and open competition. The FMS customer may also request that asubcontract be placed with a particular firm.The contracting officer shall honor such requests from the FMS customeronly if the LOA or other written direction sufficiently fulfills therequirements of FAR Subpart 6.3.

(b) FMS customers shouldbe encouraged to participate with U.S. Government acquisition personnel indiscussions with industry to--

(1) Developtechnical specifications;

(2) Establishdelivery schedules;

(3) Identify anyspecial warranty provisions or other requirements unique to the FMS customer;and

(4) Reviewprices of varying alternatives, quantities, and options needed to makeprice-performance tradeoffs.

(c) Do not disclose to the FMS customer any data, including certified cost or pricing data, that is contractor proprietary unless the contractor authorizes its release.

(d) Except as providedin paragraph (e)(3) of this section, the degree of FMS customer participationin contract negotiations is left to the discretion of the contracting officerafter consultation with the contractor.The contracting officer shall provide an explanation to the FMS customerif its participation in negotiations will be limited. Factors that may limit FMS customerparticipation include situations where--

(1) The contractincludes requirements for more than one FMS customer;

(2) The contractincludes unique U.S. requirements; or

(3) Contractorproprietary data is a subject of negotiations.

(e) Do not allowrepresentatives of the FMS customer to—

(1) Direct theexclusion of certain firms from the solicitation process (they may suggest theinclusion of certain firms);

(2) Interferewith a contractor's placement of subcontracts; or

(3) Observe or participate in negotiations between the U.S. Government and the contractor involving certified cost or pricing data, unless a deviation is granted in accordance with subpart 201.4.

(f) Do not acceptdirections from the FMS customer on source selection decisions or contractterms (except that, upon timely notice, the contracting officer may attempt toobtain any special contract provisions, warranties, or other uniquerequirements requested by the FMS customer).

(g) Do not honor anyrequests by the FMS customer to reject any bid or proposal.

(h) If an FMS customer requests additional data concerning FMS contract prices, the contracting officer shall, after consultation with the contractor, provide sufficient data to demonstrate the reasonableness of the price and reasonable responses to relevant questions concerning contract price. This data--

(1) May includetailored responses, top-level pricing summaries, historical prices, or anexplanation of any significant differences between the actual contract priceand the estimated contract price included in the initial LOA; and

(2) May beprovided orally, in writing, or by any other method acceptable to thecontracting officer.

225.7305 Limitation ofliability.

Advise the contractor whenthe foreign customer will assume the risk for loss or damage under theappropriate limitation of liability clause(s) (see FAR Subpart 46.8). Consider the costs of necessary insurance, ifany, obtained by the contractor to cover the risk of loss or damage inestablishing the FMS contract price.

225.7306 Offset arrangements.

In accordance with the Presidential policystatement of April 16, 1990, DoD does not encourage, enter into, or commit U.S. firms to FMS offset arrangements. The decision whether to engage in offsets,and the responsibility for negotiating and implementing offset arrangements,resides with the companies involved. (Alsosee 225.7303-2(a)(3).)

225.7307 Contract clauses.

(a) Use the clause at252.225-7027, Restriction on Contingent Fees for Foreign Military Sales, in solicitations and contracts, including solicitations and contracts using FAR part 12 procedures for the acquisition of commercial products and commercial services, that are for FMS. Insert in paragraph (b)(1) of the clause the name(s) of any foreign country customer(s) listed in 225.7303-4(b).

(b) Use the clause at252.225-7028, Exclusionary Policies and Practices of Foreign Governments, in solicitations and contracts, including solicitations and contracts using FAR part 12 procedures for the acquisition of commercial products and commercial services, that are for the purchase of supplies and services for international military education training and FMS.

SUBPART 225.73  ACQUISITIONS FOR FOREIGN MILITARY SALES (2024)
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