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FMS — A DoD interim rule would alter indirect offset cost reasonableness evaluations

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The Department of Defense (DoD) issued an interim rule Tuesday amending DFARS 225.7303-2 to instruct contracting officers to accept all indirect offset costs imposed in Foreign Military Sales (FMS) acquisitions as reasonable without performing a cost reasonableness analysis. This new rule should reduce transaction costs for contractors, as it removes some DoD oversight from FMS offset agreements and, therefore, obviates the need for data calls and other effort that contractors provide as support for the contracting officer’s reasonableness evaluation.

Many governments require foreign defense contractors to “offset” the value of a procurement through any number of transactions intended to turn at least some of that value back around to benefit domestic economic activity. These transactions may directly support the overall defense project, or they may be “indirect offsets” wholly unrelated to the underlying procurement. Though the United States does not impose offset requirements in its own contracts, it allows foreign nations to request through the FMS program both direct and indirect offset requirements by including them in the FMS Letter of Offer and Acceptance (LOA) and related DoD contract.

Until now, U.S. contracting officers were required by FAR parts 15 and 31 to determine price reasonableness regarding all aspects of FMS contracts, including indirect offset costs. Recognizing that these contracting officers have little or no insight into the pricing of indirect offsets – which are negotiated directly between the contractor and the foreign government – the interim rule eliminates this price reasonableness determination. Now, contracting officers are to deem reasonable “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,” so long as the contractor submits a signed offset agreement or other documentation showing that an indirect offset of a certain dollar value is a condition of the FMS acquisition. Contractors must remember that the interim rule applies only to indirect offsets, and contracting officers will continue to scrutinize direct offset costs for reasonableness in accordance with FAR part 31.

Sparked by a “recent and foreseeable trend” of increasingly complex indirect offsets desired by FMS customers, this rule will go into effect immediately to “allow DoD contracting officers to finalize pending negotiations for FMS contracts to support U.S. allies and partners, and maintain bilateral relationships.” However, the Defense Acquisition Regulations System is accepting comments until August 3, 2015 before issuing a final rule.