Pricing excess articles and firm prices

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1. Excess articles are sold as is

Excess defense articles are assets beyond the approved force acquisition objective and approved force retention stock of the Defense Department components (FMR Vol. 15, Ch. 7, para. 15.3.1). The Financial Management Regulation (FMR) requires them to be sold in an "as is" condition. The cost of repairing, rehabilitating or modifying them is computed separately, as a service. How non-excess articles from stock are priced is covered in how items sold from stock are priced.

Excess articles may be sold at reduced prices to reflect depreciation for age and condition (FMR Vol. 15, Ch. 7, para. 15.3.2). Packing, crating and handling and transportation are computed on the original acquisition value, not the reduced price. The regulation explains that the effort involved is no less for an excess article, so those expenses do not decrease and must be recovered in full. The rule applies to procurement appropriations and the working capital fund alike.

2. The highest of three values

The selling price of an excess article, before any repair or modification costs, is the highest of three values (FMR Vol. 15, Ch. 7, para. 15.3.3). The first is market value, the price at which bona fide sales have been made for products of like kind, quality and quantity, with the nonrecurring cost recoupment charge assumed to be included. The second is scrap value, the amount expected from selling the asset at the end of its useful life, plus the recoupment charge and the last major overhaul costs. The third is fair value, the price in an arm’s length transaction between unrelated parties, plus the recoupment charge and prorated major overhaul costs.

Fair value is computed by multiplying the established inventory price by the fair value rate for the asset’s Federal Condition Code, set out in a table in the chapter (FMR Vol. 15, Ch. 7, para. 15.3.4). If the implementing agency (IA) proposes a price below the table’s 5 percent minimum threshold, or proposes to waive overhaul costs, it must send a detailed justification to the Defense Security Cooperation Agency (DSCA). If DSCA endorses the proposal, it forwards it to the Office of the Under Secretary of Defense (Comptroller) for final approval.

Overhaul costs are prorated between the most recent overhaul and the next scheduled one, or over the normal average interval if none is scheduled (FMR Vol. 15, Ch. 7, para. 15.3.5). A reasonable estimate from the usual overhaul facility may be used where actual costs are unavailable, and a period of at least five years where no maintenance schedule exists. Once accountability for excess items has passed to property disposal, the disposal manual governs, and packing, crating and handling is calculated on original acquisition value (FMR Vol. 15, Ch. 7, para. 15.3.6).

3. Asking for an exception

A request for an exception to the excess pricing policy must address five questions (FMR Vol. 15, Ch. 7, para. 15.3.7). One is whether the item has been screened for potential sale and whether any purchaser is interested at the price set under the established pricing policy. Another is whether the proposed price at least equals scrap value plus the recoupment charge. The request must also say whether the Defense Department would incur demilitarization costs if the item is sold, and how much. It gives the price to repair the item and that price as a percentage of original acquisition cost. Last, it states whether the sale has any other economic or political benefit.

4. Firm prices

Defense Department components may quote firm prices for items sold from stock and for in-house services (FMR Vol. 15, Ch. 7, para. 15.4.1). A firm price is not adjusted later, provided the purchaser accepts the Letter of Offer and Acceptance (LOA) before its expiration date. Firm prices may be quoted only for three things. They are actual or estimated replacement prices for procurement-funded end items or major items when based on budgetary data or contractor quotation, prices for items sold without replacement or as excess, and training tuition rates for the current year only.

The regulation explains the purpose (FMR Vol. 15, Ch. 7, para. 15.4.2). Firm pricing avoids the difficulties that would arise if prices were revised several times after acceptance because of later budget decisions. Firm prices may be quoted only after careful, coordinated development of the data. Firm-price offers other than for training must be coordinated at least with the Comptroller, the military departments’ financial management offices and DSCA. Every such offer carries a note that the pricing is firm, apart from the tuition rate adjustments the chapter allows, and will not change if the offer is accepted before it expires (FMR Vol. 15, Ch. 7, para. 15.4.3).

5. The nonrecurring cost charge on sales

Purchasers other than the American government must pay a fair price for the Defense Department’s nonrecurring investment in developing and producing major defense equipment (MDE), unless the charge is waived (FMR Vol. 15, Ch. 7, para. 15.5.1). MDE is Significant Military Equipment on the United States Munitions List with nonrecurring research, development, test and evaluation costs of $50 million or total production costs of more than $200 million. The charge does not apply to Building Partner Capacity cases.

The DSCA Director may waive the charge on sales, in writing (FMR Vol. 15, Ch. 7, para. 15.5.10.1). Any waiver needs the concurrence of the Comptroller and the Under Secretary for Acquisition and Sustainment or Research and Engineering, and an unresolved request goes to the Deputy Secretary of Defense (FMR Vol. 15, Ch. 7, para. 15.5.10.2). Articles delivered after November 30, 1989, on cases fully financed with non-repayable Foreign Military Financing or Military Assistance Program merger funds must be priced without the charge (FMR Vol. 15, Ch. 7, para. 15.5.10.3). How the charge is calculated is covered in how the nonrecurring cost charge is calculated.

Key terms

Excess defense article	An asset beyond the approved force acquisition objective and retention stock, sold as is.
Market value	The price of bona fide sales of products of like kind, quality and quantity.
Fair value	Inventory price multiplied by the fair value rate for the item’s Federal Condition Code.
Firm price	A price not adjusted later if the offer is accepted before it expires.
Major defense equipment	Significant Military Equipment above set development or production cost thresholds.

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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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