How the administrative surcharge is applied

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1. A charge on every case

An administrative surcharge is added to every Foreign Military Sales (FMS) case to recover Defense Department expenses, unless it is waived under legal authority (FMR Vol. 15, Ch. 7, para. 5.0). Chapter 7 of Volume 15 of the Financial Management Regulation (FMR) sets out how the surcharge applies, and the Security Assistance Management Manual gives the current rates. The statute behind it requires administrative services to be charged on an average percentage basis to recover the full estimated costs of administering sales, excluding a share of fixed base operations costs (FMR Vol. 15, Ch. 7, para. 3.1.2.1). What the charge pays for is covered in what goes into the price, and what can be waived.

2. The rate depends on the date

A line keeps the surcharge rate in force when the purchaser accepted it, and the regulation records each rate since 1970 (FMR Vol. 15, Ch. 7, para. 5.1.1). For new lines accepted on or after June 1, 2018, the rate is a uniform 3.2 percent (FMR Vol. 15, Ch. 7, para. 5.1.1.1). From November 1, 2012 to May 31, 2018 it was 3.5 percent (FMR Vol. 15, Ch. 7, para. 5.1.1.2). From August 1, 2006 to October 31, 2012 it was 3.8 percent (FMR Vol. 15, Ch. 7, para. 5.1.1.3). During that period program management lines were no longer used for new cases, and services beyond those the surcharge covered went on well-defined lines.

Earlier rates applied by implementation date (FMR Vol. 15, Ch. 7, para. 5.1.1.4). The rate was 2.5 percent for standard lines implemented from June 1, 1999 to July 31, 2006 (FMR Vol. 15, Ch. 7, para. 5.1.1.4), and 3 percent from October 1, 1977 to May 31, 1999 (FMR Vol. 15, Ch. 7, para. 5.1.1.5). From March 10 to September 30, 1977 it was 2 percent for offers signed by the implementing agency (FMR Vol. 15, Ch. 7, para. 5.1.1.6). From January 29, 1970 to March 9, 1977 it was 2 percent, unless the military department found that too low or too high for a case, when actual administrative expenses could be used (FMR Vol. 15, Ch. 7, para. 5.1.1.7).

3. Changes within scope keep the old rate

Modifications for cost increases within the scope of the offer keep the surcharge rate of the lines being modified (FMR Vol. 15, Ch. 7, para. 5.1.1). For a supporting contract, a within-scope change is a unilateral change within the general scope, under the changes clause. The regulation lists cost growth and equitable price adjustments, such as cost overruns, and extensions of the period of performance for the existing statement of work. Delays beyond the contractor’s control, without its fault or negligence, are included. A change in scope, by contrast, is a material change to the product or service from the original purpose of a case line or note.

4. Other rates

A surcharge of 5 percent is added to the basic sales price of the initial on-hand portion of a cooperative logistics supply support arrangement (FMR Vol. 15, Ch. 7, para. 5.1.2). For lines accepted before August 1, 2006, nonstandard articles and services carried a 5 percent surcharge (FMR Vol. 15, Ch. 7, para. 5.1.3). The standard rate applied instead where a contractor, rather than a Defense component doing extra work, was the source of supply, or where a management line on the offer recovered the costs of supporting the nonstandard sale.

5. What the surcharge must recover

Component administrative costs must include a pro rata share of manpower and contractor-provided support for security assistance administrative functions (FMR Vol. 15, Ch. 7, para. 5.2.1). They may not include costs the regulation treats as above-the-line case costs, or Defense Department mission costs. The personnel share covers everyone performing and supporting security assistance duties, whether the work supports many purchasers or one case (FMR Vol. 15, Ch. 7, para. 5.2.2). Organizations giving general administrative support must recoup their full cost, excluding a share of fixed base operations (FMR Vol. 15, Ch. 7, para. 5.2.3).

6. Cases closed with little or nothing delivered

When a case closes, the government keeps enough to pay its estimated administrative costs, even if nothing was delivered (FMR Vol. 15, Ch. 7, para. 5.3.1). The nonrefundable minimum is the greatest of three amounts. One is the small case management line, where applicable, combined with the surcharge value. Another is half of the surcharge estimated on the case, and the third is the standard surcharge percentage of the expended value.

The Defense Security Cooperation Agency (DSCA) may approve a lower minimum where actual administrative costs are clearly less, or where the case was canceled for the government’s convenience (FMR Vol. 15, Ch. 7, para. 5.3.2). A case manager wanting to close a case at zero delivered value must get DSCA approval (FMR Vol. 15, Ch. 7, para. 5.3.3). For cases with an ordered value of $25,000,000 or more closing with nothing delivered, the implementing agency recommends a nonrefundable surcharge amount for DSCA approval (FMR Vol. 15, Ch. 7, para. 5.3.5). Cases canceled for the government’s convenience may not incur an administrative cancellation fee, but the surcharge assessed needs DSCA approval (FMR Vol. 15, Ch. 7, para. 5.3.4).

7. When the surcharge is waived

Where a statute allows the surcharge to be waived or reduced on a case, the waived amount normally has to be reimbursed to the surcharge account (FMR Vol. 15, Ch. 7, para. 5.4.1). The implementing agency proposing the case obligates its own current appropriations for the full waived amount when the case is implemented, and the accounting office bills it quarterly. The offer package cites the authority, the amount waived and the obligating document in a case note, with a copy of the certified funding document (FMR Vol. 15, Ch. 7, para. 5.4.2).

Key terms

Administrative surcharge	The percentage charge on case lines that recovers the cost of administering sales.
Within-scope change	A contract or case change that keeps the original line’s surcharge rate.
Nonrefundable minimum	The administrative amount kept when a case closes, even with nothing delivered.
Small case management line	A minimum charge line included on cases accepted from August 2006, with its use suspended from July 2012.
Waived surcharge	A surcharge relieved by statute, normally reimbursed by the implementing agency.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

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Administrative charges sit alongside the practical costs of delivery. Sentfore works at the delivery end of defense programs in difficult environments, providing secure movement, protective security, facilities and life support. Requirements can be sent through the contact page.