This blog was written by a guest author.
The Department of Defense has, by practical necessity, had to keep certain systems in use much longer than originally intended. Also in developing systems the DOD has sold many of these systems, under Foreign Military Sales (FMS) to bolster US foreign policy goals. This led to a unique opportunity for the off parts of an older system to FMS customers purchasing the same system still in use by the USN 40 plus years after its development.
The USN has been using the Harpoon anti-ship missile since the 70’s. The weapon continues to be sold to FMS countries today. Given the age of the system, obsolescence of certain parts was becoming a problem for the manufacturer. In 2012 the USN and the manufacturer entered into a unique relationship where older Harpoon missiles would be used to supply parts for the manufacture of new Harpoon missiles. The proceeds of this effort would be used to increase the reliability of the USN Harpoons still in use by the Navy. This would be accomplished using the authority found in the US Code 40 U.S.C. § 503, Exchange or sale of similar items. GSA and DoD have additional regulations that govern these exchanges which flow from this authority.
What the Navy and the manufacturer agreed to was to harvest” a defined list of parts from Harpoon missiles that were not being maintained, but were not excess. In return the Navy would get a reliability upgrade kit for its Harpoons installed in some of the active inventory. This became the basis of a “Sales Exchange Agreement” between the Navy and the manufacturer.
It is important to note that these exchanges can only be “property for property”. The property cannot excess but must be obsolete or unserviceable. Agencies cannot receive services for the property, i.e. can’t trade tires for getting your lawn cut. Also the property being exchange must be similar in nature, i.e. can’t trade computers for tires. The USN in developing this agreement would be getting Harpoon parts back for Harpoon parts but not the exact part, meeting the requirements of the regulations.
In developing this agreement, the valuation of the property being sold off by the government is essential since by the law the agency must demonstrate the “economic advantage” of such an exchange. The view of the contracting and legal community for the Navy was focused on cost of material. Potential cost savings derived from getting new equipment was not viewed as a basis for determining value. Determining the value of old equipment which still may have some usefulness can be difficult. Since the Harpoon was in production there was recent price history for the parts being harvested from the sale of new missiles. This became the basis of the valuation of the USN property. Using price history and other price analysis techniques may be useful in developing a valuation of the property.
The agreement that the Navy and the manufacture crafted is complicated and is still ongoing. There are a number of unique aspects to this effort which requires some management over the life of the agreement. Industry will only be open to these types of exchanges if it is of benefit to the company. Having a market to sell the parts in made it good business sense to execute this particular agreement. This can be a win-win for both parties under the right circumstances.