Pricing equipment sold from stock

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1. One decision before anything is priced

When a partner government buys equipment that already exists in American inventory, the price is not simply what the item is worth. It depends on a decision taken before any figure is calculated. Selling from stock under the arms export control act, "the IA must determine whether to categorize an FMS sale as one with intent to replace or not to replace" (SAMM C9.4.8).

The question is whether the United States intends to buy something to fill the hole. If it does, the buyer funds the replacement. If it does not, the buyer pays for the item as it stands. Everything else in the section follows from that fork.

Selling from stock is one of two supply routes on a case, the other being procurement from a contractor. The difference matters elsewhere as well, and is covered in what goes into the price.

2. No intent to replace: the item as it is

Where there is no intention to replace at the time the agreement is entered into, "then the price charged to the purchaser will be the actual value of the defense article being sold" (SAMM C9.4.8.1), which the manual defines as acquisition cost less depreciation.

That is the cheaper outcome for a buyer, and it is why older equipment sold with no replacement in prospect can look like good value. What happens to the money depends on whose money it was. Proceeds from a sale paid for with the purchaser’s own national funds go into the special defense acquisition fund (SAMM C9.4.8.1.1).

Grant funded sales are treated differently, and the distinction is statutory rather than administrative. Proceeds from sales funded by American grant assistance, including financing and capacity building funds, "must be deposited into the U.S. Treasury as miscellaneous receipts, per 31 U.S.C. 3302(b)" (SAMM C9.4.8.1.1). Grant money returns to the treasury rather than being recycled into acquisition.

3. Intent to replace: a strict order of three

Where the agency does intend to replace the article, to address a loss of capability or readiness, the charge to the buyer is the cost of that replacement (SAMM C9.4.8.2). Three methods are listed, and they are a sequence rather than a menu.

The first is like for like. "The estimated amount to replace the article sold with the identical type, model, and series of defense articles, less any depreciation of the article sold, OR" (SAMM C9.4.8.2.1).

The second is available only where the first will not do. Where an identical article will not meet agency requirements, the charge is the estimated amount needed to replace it with a newer model, modified version or variant. That substitute must serve as a functional equivalent, and depreciation still comes off (SAMM C9.4.8.2.2).

The third applies only when neither of the others can be obtained: "the amount equal to the last acquisition cost of the article sold, less any depreciation of such article" (SAMM C9.4.8.2.3).

Here the money moves again. Proceeds from a sale with intent to replace go into the current procurement account needed to fund that replacement (SAMM C9.4.8.3). The buyer is, in effect, paying for the American purchase that restores the inventory.

4. What counts as a functional equivalent

The second method turns on a defined term, and the definition is about purpose rather than resemblance. A newer model, modified version or variant is a functional equivalent if it allows the agency to meet the same operational objectives as the article sold, under similar constraints. The example given is one air to air missile variant replaced by its successor (SAMM C9.4.8.4).

Two kinds of improvement break the equivalence. One is achieving the same objective in an advanced or fundamentally different way, illustrated by a guided missile against an unguided one. The other is achieving distinct objectives beyond what the original could do, illustrated by an aircraft capable of vertical take off against one limited to horizontal. In either case "the desired article will not be considered a functional equivalent" (SAMM C9.4.8.4).

Failing the test does not stop the agency buying the better item. It only changes what may be charged. Where such an article is acquired as a replacement, "the amount charged to the purchaser must still comply with the pricing parameters detailed in Section C9.4.8.2.1. through Section C9.4.8.2.3" (SAMM C9.4.8.4.1). The upgrade is not funded by the foreign buyer.

5. When the price exceeds the value

Replacement pricing can produce an uncomfortable result. A used item can carry the price of a new one, because what is being funded is the new one. The manual requires that this be said out loud.

Where a replacement sale results in a price substantially higher than the actual value of the article sold, "the IA administering FMS will ensure that the purchaser is fully aware of the cost-value differential and clearly desires to proceed with a transaction despite such differential prior to entering into any binding FMS agreement" (SAMM C9.4.8.5).

More striking is what the manual tells the agency to explain. The price reflects the requirement to minimize readiness impacts on the American force, and the purchaser may realize greater value by declining the sale from stock and obtaining the articles by other means (SAMM C9.4.8.5). A government manual instructing its own staff to point a customer towards an alternative route is unusual, and it reflects the fact that stock sales exist to serve readiness as much as sales. The commercial alternative is compared in Foreign Military Sales or Direct Commercial Sales.

6. Munitions do not age

One category is carved out of the depreciation arithmetic entirely. "Munitions that are serviceable retain their full value and should not be depreciated in accordance with standard depreciation timetables" (SAMM C9.4.8.6).

The logic is that a round either works or it does not. A serviceable round twenty years old does the same job as a new one, so there is nothing to write down. The definition of munitions is taken from statute, and the manual adds that the separate restrictions on selling particular categories of munitions still apply regardless (SAMM C9.4.8.6). Those restrictions are described in what may not be purchased.

7. What a supplier can take from this

The price of an item drawn from American stock says more about the replacement plan than about the item. Two partners buying the same equipment in the same condition can face materially different prices, because one sale is being backfilled and the other is not.

That has a practical consequence for anyone quoting alongside a stock sale. Where replacement pricing applies, a new build commercial offer may be competitive on price and better on delivery, and the manual itself expects the buyer to be told so. Where no replacement is intended, the stock price is hard to beat.

Key terms

Intent to replace	The decision, taken when the agreement is entered into, that determines how a stock sale is priced.
Actual value	Acquisition cost less depreciation, the price where no replacement is intended.
Functional equivalent	A newer model meeting the same operational objectives under similar constraints.
Cost-value differential	The gap a purchaser must be made aware of before signing, where replacement pricing applies.

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.

How Sentfore supports this

Equipment from stock can move faster than new production, which shifts the delivery problem forward. 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.