SUBPART 225.73--ACQUISITIONS FOR
FOREIGN MILITARY SALES
(Revised September 14, 1999)
225.7300 Scope of subpart.
(a) This subpart contains policies
and procedures for acquisitions for foreign military sales (FMS) under
the Arms Export Control Act (22 U.S.C. Chapter 39). Section 22 of the Arms
Export Control Act (22 U.S.C. 2762) authorizes DoD to enter into contracts
for resale to foreign countries or international organizations.
(b) This subpart does not apply to-
(1) FMS made from inventories or stocks;
(2) Acquisitions for replenishment of
inventories or stocks; or
(3) Acquisitions made under DoD cooperative
logistic supply support arrangements.
(a) The U.S. Government sells defense
articles and services to foreign governments or international organizations
through FMS agreements. The agreement is documented in a Letter of Offer
and Acceptance (LOA) (see DoD 5105.38-M, Security Assistance Management
Manual). The LOA-
(1) Lists the items and services, estimated
costs, and terms and conditions of the sale;
(b) Acquisitions for FMS are conducted
under the same acquisition and contract management procedures as other
(2) Is presented to the foreign customer;
(3) Provides for signature of the foreign
customer to indicate acceptance.
(c) Solicitations shall separately identify
known FMS requirements and the FMS customer.
(d) Contracts for known FMS requirements
shall clearly be marked "FMS requirement" on the face of the contract along
with the FMS customer and the case identifier code.
On FMS programs that will require an
acquisition, the contracting officer assists the departmental/agency activity
responsible for preparing the LOA by-
(a) Working with prospective contractors
225.7303 Pricing acquisitions for FMS.
(1) Identify, in advance of the LOA,
any unusual provisions or deviations;
(b) Working with the departmental/agency
activity responsible for preparing the LOA to-
(2) Advise the contractor if the departmental/agency
activity expands, modifies, or does not accept any requirements proposed
by the contractor;
(3) Identify any logistics support necessary
to perform the contract; and
(4) For acquisitions over $10,000 that
are to be awarded noncompetitively, asking the prospective contractor(s)
for information on price, delivery, and other relevant factors. The request
for information must identify the fact that the information is for a potential
foreign military sale and must identify the foreign customer.
(1) Assist, as necessary, in preparation
of the LOA;
(2) Identify and explain all unusual
contractual requirements or requests for deviations; and
(3) Assist in preparing the price and
(a) Price FMS contracts using the same
principles as are used in pricing other defense contracts. Application
of the pricing principles in FAR Parts 15 and 31 to an FMS contract may
result in prices that differ from other defense contract prices for the
same item due to the considerations in this section.
225.7303-1 Contractor sales to other
(b) If the foreign government has conducted
a competition resulting in adequate price competition (see FAR 15.403-1(b)(1)),
the contracting officer must not require the submission of cost or pricing
data. The contracting officer should consult with the foreign government
through security assistance personnel to determine if adequate price competition
If the contractor has made sales of
the item required for the foreign military sale to foreign customers under
comparable conditions, including quantity and delivery, price the FMS contract
in accordance with FAR Part 15.
225.7303-2 Cost of doing business
with a foreign government or an international organization.
(a) In pricing FMS contracts where
non-U.S. Government prices as described in 225.7303-1 do not exist, except
as provided in 225.7303-5, recognize the reasonable and allocable costs
of doing business with a foreign government or international organization,
even though such costs might not be recognized in the same amounts in pricing
other defense contracts. Examples of such costs include, but are not limited
(1) Selling expenses (not otherwise
limited by FAR Part 31), e.g.-
(b) Costs not allowable under FAR Part
31 are not allowable in pricing FMS contracts, except as noted in paragraph
(c) of this subsection.
(i) Maintaining international sales
and service organizations.
(2) Product support and post-delivery service
expenses, such as-
(ii) Sales commissions and fees in accordance
with FAR Subpart 3.4.
(iii) Sales promotions, demonstrations,
and related travel for sales to foreign governments. Paragraph 126.8 of
the International Traffic in Arms Regulations (ITAR) (22 CFR Part 121)
may require Government approval for these costs to be allowable. If Government
approval is required for promotion or demonstration costs to be allowable,
the approval must be obtained.
(iv) Configuration studies and related
technical services undertaken as a direct selling effort to a foreign country.
(i) Operations or maintenance training,
training or tactics films, manuals, or other related data; and
(3) Offset costs.
(ii) Technical field services provided
in a foreign country related to accident investigations, weapon system
problems, operations/tactics enhancement, and related travel to foreign
(i) A U.S. defense contractor may recover
all costs incurred for offset agreements with a foreign government or international
organization if the LOA is financed wholly with customer cash or repayable
foreign military finance credits.
(4) Costs that are the subject of advance
agreement under the appropriate provisions of FAR Part 31; or where the
advance understanding places a limit on the amounts of cost that will be
recognized as allowable in defense contract pricing, and the agreement
contemplated that it will apply only to DoD contracts for the U.S. Government's
own requirements (as distinguished from contracts for FMS).
(ii) The U.S. Government assumes no
obligation to satisfy or administer the offset requirement or to bear any
of the associated costs.
(c) The cost limitations for major contractors
on independent research and development and bid and proposal (IR&D/B&P)
costs for projects that are of potential interest to DoD, in 231.205-18(c)(iii),
do not apply to FMS contracts, except as provided in 225.7303-5. The allowability
of IR&D/B&P costs on contracts for FMS not wholly paid for from
funds made available on a nonrepayable basis shall be limited to the contract's
allocable share of the contractor's total IR&D/B&P expenditures.
In pricing contracts for such FMS-
(1) Use the best estimate of reasonable
costs in forward pricing.
(d) Under paragraph (e)(1)(A) of Section
21 of the Arms Export Control Act (22 U.S.C. 2761), the United States must
charge for administrative services to recover the estimated cost of administration
of sales made under the Arms Export Control Act.
(2) Use actual expenditures, to the
extent that they are reasonable, in determining final cost.
If a government-to-government agreement
between the United States and a foreign government for the sale, coproduction,
or cooperative logistic support of a specifically defined weapon system,
major end item, or support item, contains language in conflict with the
provisions of this section, the language of the government-to-government
225.7303-4 Contingent fees.
(a) Except as provided in paragraph
(b) of this subsection, contingent fees are generally allowable under DoD
contracts, provided the fees are determined by the contracting officer
to be fair and reasonable and are paid to a bona fide employee or a bona
fide established commercial or selling agency maintained by the prospective
contractor for the purpose of securing business (see FAR Part 31 and FAR
225.7303-5 Acquisitions wholly paid
for from nonrepayable funds.
(b)(1) Under DoD 5105.38-M, LOAs for
requirements for the governments of Australia, Taiwan, Egypt, Greece, Israel,
Japan, Jordan, Republic of Korea, Kuwait, Pakistan, Philippines, Saudi
Arabia, Turkey, Thailand, or Venezuela (Air Force) must provide that all
U.S. Government contracts resulting from the LOAs prohibit the reimbursement
of contingent fees as an allowable cost under the contract, unless the
payments have been identified and approved in writing by the foreign customer
before contract award (see 225.7308(a)).
(2) For FMS to countries not listed
in paragraph (b)(1) of this subsection, contingent fees exceeding $50,000
per FMS case shall be unallowable under DoD contracts, unless payment has
been identified and approved in writing by the foreign customer before
(a) In accordance with 22 U.S.C. 2762(d),
FMS wholly paid for from funds made available on a nonrepayable basis shall
be priced on the same costing basis with regard to profit, overhead, IR&D/B&P,
and other costing elements, as is applicable to acquisitions of like items
purchased by DoD for its own use.
225.7304 Source selection.
(b) Direct costs associated with meeting
a foreign customer's additional or unique requirements will be allowable
under such contracts. Indirect burden rates applicable to such direct costs
shall be permitted at the same rates applicable to acquisitions of like
items purchased by DoD for its own use.
(c) A U.S. defense contractor may not
recover costs incurred for offset agreements with a foreign government
or international organization if the LOA is financed with funds made available
on a nonrepayable basis.
(a) FMS customers may request that
a defense article or defense service be obtained from a particular contractor.
In such cases, FAR 6.302-4 provides authority to contract without full
and open competition. The FMS customer may also request that a subcontract
be placed with a particular firm. The contracting officer shall honor such
requests from the FMS customer only if the LOA or other written direction
sufficiently fulfills the requirements of FAR Subpart 6.3.
225.7305 Limitation of liability.
(b) Do not allow representatives of
the FMS customer to-
(1) Direct the deletion of names of
firms from bidders mailing lists or slates of proposed architect-engineer
firms. (They may suggest the inclusion of certain firms);
(c) Do not accept directions from the FMS
customer on source selection decisions or contract terms (except that,
upon timely notice, the contracting officer may attempt to obtain any special
contract provisions and warranties requested by the FMS customer).
(2) Interfere with a contractor's placement
of subcontracts; or
(3) Participate in the price negotiations
between the U.S. Government and the contractor.
(d) Do not honor any requests by the
FMS customer to reject any bid or proposal.
The contracting officer must advise
the contractor whenever the foreign customer will assume the risk for loss
or damage under the appropriate limitation of liability clause(s) (see
FAR Subpart 46.8). Consider the costs of necessary insurance, if any, obtained
by the contractor to cover the risk of loss or damage in establishing the
FMS contract price.
225.7306 Exercise of options for
Consider changes to cost and profit
attributable to pricing differences between U.S. and FMS requirements when
exercising an option to satisfy an FMS requirement. Also consider such
changes if the option is already identified for FMS, but it is exercised
for country B requirements instead of the country A requirements for which
it was priced.
225.7307 Offset arrangements.
In accordance with the Presidential
policy statement of April 16, 1990, DoD does not encourage, enter into,
or commit U.S. firms to FMS offset arrangements. The decision whether to
engage in offsets, and the responsibility for negotiating and implementing
offset arrangements, resides with the companies involved.
225.7308 Contract clauses.
(a) Use the clause at 252.225-7027,
Restriction on Contingent Fees for Foreign Military Sales, in all solicitations
and contracts for FMS.
(b) Use the clause at 252.225-7028,
Exclusionary Policies and Practices of Foreign Governments, in all solicitations
and contracts for the purchase of goods and services for international
military education training and FMS.