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C6.3.1. Compliance with DoD Regulations and Procedures. Acquisition for FMS purchasers must be in accordance with DoD regulations and other applicable USG procedures. This affords the foreign purchaser the same benefits and protection that apply to DoD procurement and is one of the principal reasons why foreign governments and international organizations prefer to procure through FMS channels. FMS requirements may be consolidated with USG requirements or placed on separate contract whichever is more expedient and cost effective. Federal Acquisition Regulation (FAR) provisions applicable to the DoD also apply to FMS procurements. While all FAR and Defense FAR Supplement (DFARS) clauses apply to FMS procurements, Table C6.T1. lists selected sections with unique application to FMS.

C6.3.2. Submission of Certified Cost or Pricing Data. When foreign governments conduct a competition for a weapon system and a U.S. system is selected, that competition should determine the price to be paid. This is true even if the sale is then processed as a foreign military sale and even if DoD is buying the same item sole source. If the contracting officer determines that adequate price competition has occurred, the contractor will not be required to submit certified cost or pricing data. This policy is incorporated into the DFARS at 225.7303(b).

C6.3.3. Incentive Clauses. USG contracts may include incentive clauses for early performance. The Case Manager and contracting officer work together to make sure the contract and the LOA are consistent. A Technical Assistance Agreement (TAA) in support of a FMS LOA is not required during the period in which the FMS case and implementing USG FMS contracts and subcontracts are in effect if the LOA and the contract contain all of the information normally required by an export license; e.g. identification of exporter, specific service or information to be exported, intermediate consignees, end-use, and end-user. Under 22 CFR part 126.6, the LOA and the implementing contracts serve as the authorization for the transfers without a license, provided the transaction is fully documented. For services provided under a Pseudo LOA in support of a Building Partner Capacity (BPC) program, see Chapter 15.

Table C6.T1. Selected FAR and DFARS Sections Relevant to FMS Acquisition

Topic	FAR	DFARS
Acquisitions for FMS		Subpart 225.73
Contingent Fees (Agent Fees & Commissions)	Subpart 3.4	225.7303-4
Options FMS		Subpart 217.2
Costs of Doing Business with a Foreign Government		225.7303-2
Selling Costs/Expenses	31.205-38	225.7303-2(a)(1)
Other Than Full and Open Competition - International Agreement	6.302-4	206.302-4
Contract Type Risk – FMS		215.404.71-3(d)(1)(vii)
FMS Customer Involvement		225.7304
Source Selection		225.7304
Limitation of Liability		225.7305
Offset Arrangements		225.7306
Contract Clauses		225.7307
Applicability of Acquisition Warranty		225.7304
Pricing Acquisitions for FMS		225.7303
Buy America Act	Part 25
Balance of Payments Program		225.75

C6.3.4. Requests for Other than Full and Open Competition. The competitive procurement process is used to the maximum extent possible when procuring articles or services. The Competition in Contracting Act (CICA) (10 U.S.C. section 2304), however, provides certain limited circumstances in which the contracting activity can consider FMS purchaser requests for procurement using other than full and open competition (commonly referred to as “sole source”) when the contract to be awarded is expected to exceed the simplified acquisition threshold (Federal Acquisition Regulation (FAR) 2.101 and FAR Part 6). Contracts expected not to exceed that threshold are contracted for under FAR Part 13. One of CICA’s exceptions to full and open competition at 10 U.S.C. section 2304(c)(4) is implemented as the “International Agreement” exception in FAR 6.302-4 and the DoD FAR Supplement (DFARS) Subpart 206.302-4. An authorized official of the purchasing government may submit a written request, generally through the Security Cooperation Organization (SCO), that the Implementing Agency with procurement responsibility for the required item and/or service procure a defense article(s) and/or service(s) from a specific organization or entity, or that competition be limited to specific organizations or entities. The Defense Attaché or comparable purchaser’s representative in the United States may also submit these requests to the Implementing Agency. FMS customers need not provide a rationale for the request.

C6.3.4.1. Legal Requirements. The exception is available where either the terms of an international agreement or a treaty between the United States and a foreign government, or international organization or the written directions of a foreign government reimbursing the Implementing Agency for the cost of the acquisition of the supplies or services (such as a signed Letter of Offer and Acceptance (LOA)), require the use of other than competitive procedures (FAR 6.302-4). The use of other than competitive procedures for the acquisition must be documented in accordance with 10 U.S.C. section 2304(f)(2)(E); DFARS 206.302-4(c). The nature of this document may be described in Implementing Agency regulations.

C6.3.4.1.1. The exception may be applied to LOAs funded with nonrepayable FMF or MAP funds when requested in writing by the foreign country. Purchaser requests for procurements from foreign sources of supply using other than full and open competition may be considered only with the concurrence of DSCA (Strategy Directorate and Office of the General Counsel). See Section C4.4.1. An Offshore Procurement Determination is required for any proposed procurement from foreign sources of supply if the procurement will be funded with FMF. See Section C9.7.2.7.3.

C6.3.4.1.2. This exception is not available for use with Building Partner Capacity (BPC) programs, which are funded with U.S. appropriations. See Table C15.T4, line 11, for guidance to the BPC Requesting Authority on sole source procurement.

C6.3.4.2. Timing of Requests. Official written direction to use other than full and open competition should be submitted in the LOR, or it can be submitted separately with a reference to the LOR. The designation of a procurement to be conducted using other than full and open competition for an LOA that has already been accepted by the purchaser would be an exception to policy subject to acceptance by the Implementing Agency. If this situation occurs, the LOA may be amended to include the designation for other than full and open competition. A Modification may be used instead of an Amendment if the request for other than full and open competition is made by the official who requested the LOA, his or her replacement, or an official known to have equivalent or greater authority than the official who signed the LOA.

C6.3.4.3. Policy Requirements. Requests for other than full and open competition using the authority of 10 U.S.C. section 2304(c)(4) should be to meet the objective requirements of the purchaser and not for improper or unethical considerations. USG representatives must remain objective in providing options or recommendations to the partner and may not solicit requests for other than full and open competition. In general, the USG does not investigate the circumstances behind a foreign purchaser’s request to use other than full and open competition, and DoD contracting agencies are encouraged to defer to a foreign purchaser’s requests under the International Agreement exception to the extent that they are not aware of any indication that such requests violate U.S. law or ethical business practices. The Implementing Agency must consult with its counsel on cases where facts indicate that granting a request to use other than full and open competition may violate U.S. law or ethical business practices. If the Implementing Agency determines that a request to use other than full and open competition should not be approved, the memorandum informing the purchaser must be coordinated with DSCA (Operations and Strategy Directorates).

C6.3.4.4. Subcontracts. The FMS customer may also request that a subcontract be placed with a particular firm. The contracting officer should honor subcontract placement requests from the FMS customer regarding a subcontract only if the LOA or other written direction sufficiently fulfills the requirements of FAR Subpart 6.3 (see DFARS 225.7304(a)). Risks associated with the designation of subcontractors should be conveyed to the FMS purchaser. If problems occur in the performance or integration of the component, the FMS purchaser must bear the increased costs of correcting the problem. The purchaser should be advised of this potential expense when the sole source designation is requested.

C6.3.4.5. LOA Note for Other than Full and Open Competition. The applicable LOA document must identify the designated source. See Appendix 6 for the LOA note wording.

C6.3.4.6. Coordination with Contracting Offices. The Implementing Agency sends the request for other than full and open competition to the contracting office for information and advice. The Implementing Agency also sends a copy of the implemented LOA document (containing the source designation) to the contracting officer. This is especially important when the contracting activity is separate from the activity responsible for the LOA (e.g., LOAs prepared by a MILDEP that contain items procured by the Defense Logistics Agency (DLA)).

C6.3.5. FMS Purchaser Involvement. Discussions are held with the purchaser during the development of the LOA and prior to actual implementation to ensure requirements are clear and understood. Once the LOA is signed, the purchasing activities of defense components and prime contractors implement FMS requirements using normal procurement and contract management procedures in accordance with the FAR and other directives and contractual provisions. The IA should ensure that sufficient details are included in the LOA to allow the U.S. contracting officer to negotiate and award a contract without requiring foreign country representation or direct involvement in the formal negotiation process. If the foreign purchaser wants to participate in the negotiation process, the following policies apply.

C6.3.5.1. Source Selection. The DoD Components do not accept directions from the FMS purchaser as to source selection decisions or contract terms (other than the special contract provisions and warranties referred to in condition 6.1 of the LOA), nor is the FMS purchaser permitted to interfere with a prime contractor’s placement of its subcontracts. However, to the extent permitted in Section C6.3.4., the DoD Components may honor an FMS purchaser’s sole source request for the designation of a particular prime or subcontract source for defense articles or defense services.

C6.3.5.2. Negotiations. During the contracting process between the contractor and the DoD, the contracting officer should consult with the FMS purchaser about major contractual matters, especially any matter that could be perceived as inconsistent with or significantly different from the LOA. As specified in the DFARS 225.7304(b), FMS purchasers should be encouraged to participate with USG acquisition personnel in discussions with industry to develop technical specifications, to establish delivery schedules, identify any special warranty provisions or other requirements unique to the FMS purchaser, and review prices of varying alternatives, quantities, and options needed to make price-performance tradeoffs. The degree of participation of the FMS purchaser during contract negotiations is left to the discretion of the contracting officer after consultation with the contractor. USG personnel should not release any contractor proprietary data, except in those limited cases where the contractor authorizes release of specific data. The U.S. contracting officer may, upon the purchaser’s request and at his or her discretion, provide the purchaser a version of the SOW that redacts any information companies deem proprietary, and any information that cannot be released under technology security and foreign disclosure policy as information only and not for general comment. International customers may have 30 days to comment on areas where they can demonstrate that there is a significant deviation from the LOA. Requests by the FMS purchaser for rejection of any bid or proposal will not be honored. Any questions regarding these provisions are forwarded to the Director, DSCA.

C6.3.6. Requests for Contractual Data.

C6.3.6.1. Price Information. If the purchaser requests additional information concerning FMS contract prices, the contracting officer should, after consultation with the contractor, provide sufficient information to demonstrate the reasonableness of the price and reasonable responses to relevant questions concerning contract price. This may include tailored responses, top level pricing summaries, historical prices, or an explanation of any significant differences between the actual contract prices and the estimated contract price included in the initial LOA price.

C6.3.6.2. Contractual Documents. Since all pertinent information and contractual obligations between the DoD and the purchaser are identified in the LOA, there is no need to provide a copy of the contract to the purchaser. If the contract is unclassified and only includes requirements for the requesting country, release can be considered subject to restrictions on release of contractor proprietary information. Releasable information does not include internal documentation such as negotiation or pricing memoranda. If the contract is classified, contains USG requirements, or contains other purchaser requirements, release is not authorized. Any questions or requests for exceptions to these provisions must be forwarded to DSCA (Office of the General Counsel).

C6.3.7. Contingent Fees. Purchasers must approve contingent fees (to include agents’ fees and sales commissions) prior to contract award. See DFARS 225.7303-4. The contracting officer or head of the procuring activity uses criteria contained in the FAR to determine if an agent(s) is bona fide. If the agent is bona fide, the following policies apply to the inclusion of these fees in FMS cases.

C6.3.7.1. Prior Notification of Fees to Purchaser. Purchasers must be advised of all contingent fees (including agents’ fees and sales commissions) associated with an FMS case prior to or in conjunction with LOA submission to the purchaser unless the purchaser has indicated otherwise. For agents’ fees and sales commissions, such notices include: the name and address of the agent(s); the estimated amount of the proposed fee, and the percentage of the sale price; and a statement indicating one of the following: appropriate officials of DoD consider the fee to be fair and reasonable; or, a portion of the proposed fee is considered to be fair and reasonable (provide rationale); or the USG cannot determine the reasonableness of the proposed fee. This statement is normally included as an LOA note, see Appendix 6. The note may include the contractor’s justification for the proposed fee and other data requested by the purchaser. The note also includes a statement that purchaser acceptance of the LOA constitutes the purchaser’s approval of the sales commissions and fees involved.

C6.3.7.2. Purchaser Approval Thresholds.

C6.3.7.2.1. The following countries must approve all contingent fees (regardless of dollar value) before they can be considered allowable FMS contract costs: Australia, Egypt, Greece, Israel, Japan, Jordan, Korea (Republic of), Kuwait, Pakistan, Philippines, Saudi Arabia, Taiwan, Thailand, Turkey, and Venezuela. Any LOA offered to these countries or entities that include contingent fees, must include the applicable contingent note identified in Appendix 6.

C6.3.7.2.2. Sales commissions and fees applicable to FMS contracts for other countries cannot exceed $50,000 per contract (including all modifications and subcontracts thereto), per country, unless these fees have been identified and approved in writing by the purchaser before contract award. All such contingent fees must be justified and supported based on the criteria cited in the FAR and DFARS.

C6.3.7.3. Post-LOA Notification to Purchaser. If contingent fees (including agents’ fees and sales commissions) are not identified prior to sending the LOA to the purchaser for signature, the purchaser should be notified as soon as the fees are known. To be allowable costs under the contract, the purchaser must approve the payments in writing before contract award. Contract award may be delayed pending a written response from the purchaser. If written approval is not obtained, the contract can be awarded but must include a provision that the unapproved contingent fees are not allowable costs.

C6.3.7.4. DSCA Coordination. For LOAs that include contingent fees (regardless of dollar value of the case), all correspondence with a purchaser on the subject of contingent fees relative to Price and Availability (P&A) data or an LOA, and all post-LOA notifications about contingent fees must be coordinated with DSCA (Strategy Directorate). For agents’ fees and sales commissions, the written submission must contain a certification that the agent is bona fide in accordance with FAR criteria, and must include the rationale for reasonableness of the fee or an explanation if the reasonableness of the fee cannot be determined.

C6.3.7.5. Disallowance of Contingent Fees. The contracting officer cannot approve as allowable costs any contingent fees not approved by the purchaser. If the contracting officer or procurement activity determines the agent is not bona fide for reasons other than fee reasonableness, an LOA cannot be offered until the unallowable costs are deleted by the contractor.

C6.3.7.6. Proprietary Information. Inclusion of an LOA note with respect to contingent fees (including agents’ fees and sales commissions) should not be deemed, with respect to distribution and availability of LOAs, as altering the proprietary nature, if any, of such data for the purpose of 18 U.S.C. 1905.

C6.3.7.7. Contingent Fees for Commercial Contracts. Contingent fees may not be funded with Foreign Military Financing (FMF) funds.

C6.3.7.7.1. FMF Credit Non-Repayable. In a certification to DSCA (Direct Commercial Contracts), the contractor must disclose contingent fees for contracts financed with FMF Credit Non-Repayable funds. It is the responsibility of the contractor to prove that payments of any contingent fees are not financed with FMF Credit Non-Repayable funds.

C6.3.7.7.2. FMF Credit Repayable. In a certification to DSCA (Direct Commercial Contracts), the contractor must disclose contingent fees for contracts financed with FMF Credit Repayable funds. Contingent fees in direct commercial contracts financed with FMF Credit Repayable funds must be limited to $50,000 per contract for countries other than those specifically listed in the DFARS. It is the responsibility of the contractor to prove that payments of any contingent fees are not financed with FMF Credit Repayable funds.

C6.3.7.8. Appointment of an Agent. For FMS, it is USG policy to deal directly with purchasers. An agent may be designated by the purchaser to act as an agent for the receipt of FMS Government Furnished items, Spares, and/or Support items that are required by that agent to enable the manufacture and/or assembly or repair and/or rehabilitation of defense items procured on a direct basis by the foreign purchaser. Questions regarding agency relationships for any other purposes should be directed to DSCA (Office of the General Counsel and Strategy Directorate). Figure C6.F1. should be used to designate an agent.

Figure C6.F1. Form Letter - Appointment of an Agent

Full Size Image PDF Version of Figure

C6.3.8. Warranties. The DoD obtains the same warranties for FMS as it does for itself. These warranties are exercised within the Supply Discrepancy Report (SDR) process. The purchaser may request performance warranties, which are provided and paid for on the LOA as a defense service. Any warranty in addition to the LOA Standard Terms and Conditions, Section 6, is described in a note on the LOA. See Appendix 6. The IA must inform the purchaser, either in the LOA note or by documentation such as a technical bulletin accompanying the item when shipped, of any steps necessary to maintain or exercise rights under these additional warranties. The purchaser must submit an SDR within the time limitations of a warranty applicable to an item.

C6.3.9. Offsets. DFARS 225.7303-2(a)(3) allows U.S. contractors to recover, under FMS contracts based on LOAs financed wholly by purchaser cash or repayable FMF credits, costs of any offsets that are associated with those contracts. USG agencies may not enter into or commit U.S. firms to any offset agreement. Any purchaser requesting offset arrangements in conjunction with FMS should be informed that the responsibility for negotiating offset arrangements and satisfying all related commitments resides with the U.S. firm involved. It is the responsibility of the IA to specify to DSCA, in the transmittal of any Congressional Notification, in the LOA and in any subsequent LOA Modification or Amendments, whether offset costs have been or will be included, and the amount, if known. Non-repayable FMF credits may not be used to pay any costs associated with offset agreements.

C6.3.9.1. Offset Costs. Offset costs, provided by industry, should be included as part of the line item(s) unit cost in P&A data and in estimated prices quoted in the LOAs.

C6.3.9.2. Procurements. The USG position is stated in section 2.8 of the Standard Terms and Conditions. It is the contractor's responsibility to inform the IA when estimated offset costs are included in the FMS pricing information that the contractor has provided. The contractor must disclose the amount of the estimated offset costs included the price to the USG contracting officer. The costs should be included before transmittal of the LOA for acceptance. Requests to include costs after LOA acceptance require an LOA Modification or Amendment. An offset note is included on the LOA. See Appendix 6.

C6.3.9.3. Disclosure of Offset Information. It is inappropriate for USG personnel to discuss with the purchaser the nature or details of an offset arrangement. However, if known, the fact that offset costs have been included in the P&A or LOA price estimate may be confirmed, should the purchaser inquire. The purchaser should be directed to the U.S. contractor for answers to all questions associated with offset agreements, including questions regarding their costs. IA involvement in any discussion of offset costs (beyond confirmation of the inclusion of these costs in price estimates) must be avoided.

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