DFARS Part 225 covers Foreign Acquisition. The rules regarding purchasing items and services for foreign ally nations have always been pretty simple. Even though the foreign country is financing all or part of the buy, DOD Contracting Officers (COs) must use DOD rules when procuring FMS items.
This doesn’t always go over very well in cultures where the commercial marketplace does not determine the prices that are paid. Pricing structures can easily be based on family ties, social castes, and religious beliefs as much as any business rules.
Based on the exemption at FAR 6.302-4, International Agreement, ally countries are allowed to request specific contractors with little to no justification as to why. They are not required to go through the rigorous justifications required of other “sole source” acquisitions. This can lead to businesses going into countries and “selling” them their products and services using handshake agreements. These “agreements” become Letters of Offer and Acceptance (LOAs) whereby the country specifically requests company X to provide the item or service for their country on an exclusive basis.
The Defense Security Cooperation Agency (which oversees DOD’s FMS acquisition processes) uses the Security Assistance Management Manual (SAMM) FMS acquisition processes. It requires the following statement on each LOA: “The Department of Defense is not a party to any offset agreements/arrangements that may be required by the purchaser in relation to the sales made in this LOA and assumes no obligation to administer or satisfy any offset requirements or bear any of the associated costs. To the extent that the purchaser requires offsets in conjunction with this sale, offset costs may be included in the price of contracts negotiated under this LOA. If the purchaser desires visibility into these costs, the purchaser should raise this with the contractor during negotiation of offset arrangements.”
However, that does not relieve the DOD Contracting Officers from negotiating with the companies to determine price fair and reasonableness and best value for the foreign partners. Because the DOD COs must follow DOD rules.
A previous office where I worked was almost 100% FMS and it was a new experience for me. Within our building were Foreign Liaison Officers (FLOs) from various partner nations and they wanted to be very involved in each acquisition. Many were astute business men and women, but some of them were in the “my country is paying for it so I get to make all the decisions” mindset.
One of the most difficult costs for DOD COs to “allow” and determine “fair” was the charge for “offsets”. It took a while for folks to explain this term to me because it sure sounded like a bribe.
Indirect offset agreements are side deals that some foreign military sales hinge on that are not related to the items/service being purchased. Under indirect offset agreements, the foreign buyer negotiates a purchase from a U.S. supplier and the U.S. supplier agrees to buy products or services from, or make some investment in, the foreign country. This maintains the balance of trade according to the foreign countries.
As you can imagine, since the DOD CO was never involved in this agreement and the “offset” costs can often be substantial based on the overall value of the acquisition, it was difficult to determine whether the costs were allowable or fair and reasonable.
An interim rule effective 2 Jun 15 revises DFARS 225.7303-2, “Cost of doing business with a foreign government or an international organization,” by adding paragraph (a)(3)(iii) to provide guidelines to contracting officers when an indirect offset is a condition of a Foreign Military Sales (FMS) acquisition.
A reference to the Defense Security Cooperation Agency manual is also updated at DFARS 225.7301. This interim rule specifically addresses indirect offsets as they are applied to the Defense Security Cooperation Agency’s FMS cases.
The new paragraph in DFARS 225.7303-2(a)(3)(iii) states:
“All offset costs that involve benefits provided by the U.S. defense contractor to the FMS customer that are unrelated to the item being purchased under the LOA (indirect offset costs) are deemed reasonable for purposes of FAR part 31 with no further analysis necessary on the part of the contracting officer, provided that the U.S. defense contractor submits to the contracting officer a signed offset agreement or other documentation showing that the FMS customer has made the provision of an indirect offset of a certain dollar value a condition of the FMS acquisition. FMS customers are placed on notice through the LOA that indirect offset costs are deemed reasonable without any further analysis by the contracting officer.”
Based on the new language, DOD COs no longer have to worry about whether these offset costs are allowable as long as the contractor provides a signed agreement stating that the offset of a certain dollar value is a condition of the sale.
Overall, I think this will make our foreign partners happy since they never thought we should be all up in their business anyway. However, I’ll bet there will be some DOD COs who will cringe when they see these offset costs and have no capability to make a recommendation on whether they should or should not be allowed or how much they should be….