Pricing a new procurement for a sale

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1. Full contract cost, and costs that can move

When the Defense Department buys new equipment or services for a Foreign Military Sales customer, the price follows section 16 of Chapter 7 of Volume 15 of the Financial Management Regulation. Articles bought for cash sales under 22 U.S.C. 2762 are priced to recover the full contract cost to the Department (FMR Vol. 15, Ch. 7, para. 16.0). That includes recurring contract support costs and the applicable surcharges.

The price is not frozen at signature. Costs may be revised for increases in labor and materials, or for other changes in production and procurement costs (FMR Vol. 15, Ch. 7, para. 16.0). The purchaser is obligated to pay any damages or costs arising from its own cancellation of the contract, which is termination liability. Surcharges are added to contract cost and included in billings for incurred costs.

2. The same cost principles as for American use

Articles are priced on the same cost principles used in Department contracts for items bought for its own use (FMR Vol. 15, Ch. 7, para. 16.1.1). Other reasonable, allowable and allocable contractor costs and risks are recognized as the Federal Acquisition Regulation (FAR) and its defense supplement (DFARS) permit. The exception is a purchase wholly funded by non-repayable Foreign Military Financing. How a company takes part in supplying a sale is covered in how a US company supplies a Foreign Military Sale.

If the buyer’s trust fund account lacks the cash to meet current requirements, the Defense Security Cooperation Agency (DSCA) must act (FMR Vol. 15, Ch. 7, para. 16.1.2). Through the component contracting officer, it starts contractual actions that balance cash requirements with available funds, unless the statutory emergency provision in section 2762(b) applies. The regulation adds that this should not happen without notice to the purchaser.

The price must also include recovery of nonrecurring research, development, test and evaluation costs and nonrecurring production costs, as the governing directive specifies (FMR Vol. 15, Ch. 7, para. 16.2).

3. Contract administration services

The Defense Finance and Accounting Service recovers contract administration services costs through a percentage surcharge on disbursements to contractors on sales procurements, unless those services have been waived (FMR Vol. 15, Ch. 7, para. 16.3.1). The collections go into an account used to reimburse the Department components that do the work.

Waivers under 22 U.S.C. 2761(h) have firm edges (FMR Vol. 15, Ch. 7, para. 16.3.2). A waiver applies only to cost elements approved for the entire Letter of Offer and Acceptance, not to a single line or sub-line. Waivers are case-based and apply to new cases implemented on or after the approved date. "They are not retroactive nor applied to amendments on cases implemented prior to the waiver" (FMR Vol. 15, Ch. 7, para. 16.3.2). The waived element is charged to Department appropriations, and billings to the trust fund for waived charges are rejected.

Support for a foreign government’s own commercial contracts is itself a sale of services (FMR Vol. 15, Ch. 7, para. 16.4). The Defense Contract Management Agency performs it. Its hours are accumulated and billed at a contract administration hourly rate that the Comptroller’s office publishes each fiscal year.

4. Government furnished material and engineering

Government furnished material taken from inventory is billed to the case as work in process when a depot ships it to the contractor (FMR Vol. 15, Ch. 7, para. 16.5.1). It is billed at the same price as a direct sale plus accessorial costs. Material supplied by another contractor is billed as work in process when that contractor is paid (FMR Vol. 15, Ch. 7, para. 16.5.2). Contracts with such suppliers should cite the trust fund directly as the financing source to the maximum extent possible. Recovered precious metals supplied to a contractor are valued at the market price on the date supplied (FMR Vol. 15, Ch. 7, para. 16.5.3).

Engineering services that the Department provides or funds to solve problems during a production run are allocated to purchasers by the number of their items in the run (FMR Vol. 15, Ch. 7, para. 16.6.1). Where a contractor is the source for nonstandard items, the contract price normally includes the extra cost of researching and buying them (FMR Vol. 15, Ch. 7, para. 16.6.3). Any reasonable allocation method is acceptable, and the test of reasonableness is acceptance by the Defense Contract Audit Agency.

5. Customization, diversions and foreign production

Deviations from the American configuration, and special technical data a foreign government wants, are charged to that government (FMR Vol. 15, Ch. 7, para. 16.7). Items diverted from a military department’s delivery schedule and replaced by later production are priced at the higher of current production cost or replacement production cost (FMR Vol. 15, Ch. 7, para. 16.8). Where the buying government produces part of the quantity itself, those costs are computed separately under its own cost methods, as accepted by the United States (FMR Vol. 15, Ch. 7, para. 16.9).

6. Interest penalties and final prices

The trust fund pays or reimburses any Prompt Payment Act interest penalties incurred on sales procurements (FMR Vol. 15, Ch. 7, para. 16.10.1). Each accountable station reports those penalties to DSCA within 30 days after each quarter, by number of transactions, amount and reason (FMR Vol. 15, Ch. 7, para. 16.10.2). The fourth quarter report doubles as the annual report, due 45 days after the fiscal year ends (FMR Vol. 15, Ch. 7, para. 16.10.3).

Final prices come later than deliveries. Components are to make every effort to obtain the final price for contract-supplied items within 180 days of reported delivery (FMR Vol. 15, Ch. 7, para. 16.11). Estimated price codes are approved for reporting deliveries of major end items if no actual price code is available within 30 days after shipment. Their use becomes mandatory if none is available within 90 days.

Key terms

Full contract cost	The contract cost to the Department plus recurring support costs and surcharges, the basis for pricing a new procurement.
Termination liability	The damages and costs a purchaser owes if it cancels the contract.
Contract administration services (CAS)	Quality assurance, inspection, administration and audit of contracts, recovered by a surcharge unless waived.
Work in process	The billing status of government furnished material when it is shipped to, or paid for from, a contractor.
Estimated price code	A code used to report a major end item delivery before its final price is known.

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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