What do the Foreign Military Sales surcharges pay for?

Contract administration services (CAS) surcharges are collected and charged by DOD to reimburse FMS and BPC costs incurred by DOD-contracting organizations in accomplishing contract administration, quality control, and contract audit efforts on DOD procurement contracts. The CAS surcharge is added to the LOA blocks (4)(a) and (4)(b) unit and extended costs for all articles and services from procurement. DFAS SCA recovers the cost of CAS by applying a percentage surcharge to the delivery transactions reflecting disbursements to contractors for FMS and BPC procurements on which applicable CAS surcharges have not been waived. For pricing the FMS or BPC case, the surcharge is based on the estimated contract cost; at billing, the surcharge will be applied to the actual contract cost. For the United States Army Corps of Engineers (USACE), quality assurance and inspections and some (e.g., post-contract award actions) of the contract administrative services costs are included in its supervision and administration costs charged to the case line, so separate additional CAS quality assurance and inspection and contract management do not apply to USACE cases or lines, but CAS contract audit still applies. PROS and the U.S. Coast Guard (USCG) case procurement lines also have exceptions to normal CAS case and line charges. The contract administration surcharge is subject to waiver, in whole or in part, if reciprocal agreements exist.

The issue of other costs in both commercial contracts and FMS agreements requires clarification. As stated in Section 3 of the LOA standard terms and conditions, the USG conducts FMS on a non-profit basis. Except for specific statutory exemptions, all USG expenses for FMS must be recovered from the international partner. The FMS administrative surcharge and FMS contract administration services costs that are added to the basic price of an FMS agreement recover the cost of the following

• Pre-LOR and Case development
• Case implementation
• Case management
• Contract negotiation
• Contract management and auditing
• Financial management
• Processing reports of discrepancy
• Case reconciliation/closure

Contract administration is an integral part of the FMS process. The international partner is entitled to this service as part of the FMS purchase. LOA standard term and condition 1.2 states, “When procuring for the international partner, DOD will, in general, employ the same contract clauses, the same contract administration, and the same quality and audit inspection procedures as would be used in procuring for itself.”

In the LOA, the international partner is charged a Contract Administration Service (CAS) fee for FMS materiel and services delivered from procurement. The CAS fee has three primary cost components:

1. Contract administration

2. Quality assurance

3. Contract audit

When contract administration is performed outside of the U.S., a fourth CAS fee component (OCONUS CAS) will be applied.

A brief description of the content for each CAS fee element is provided below.

• Contract administration includes financial services, contract management, review of contractor systems, price and cost analysis, negotiation of contract changes pursuant to the changes clause, final determination of cost allowability, termination settlements, plant clearance and disposal of contract inventories, and administration of government property.
• Quality assurance consists of inspection, testing, evaluation, and continuous verification of contractors’ inspection systems or quality assurance programs. When unfavorable conditions are detected, requirements for corrective action are initiated by the contractor. All FMS requirements have the same quality assurance processes applied that the DOD utilizes for its own contracts. The quality assurance function includes the USG inspecting and ultimately accepting or rejecting the contractor’s performance under provisions of the contract. At the point of acceptance, the USG takes title to the materiel, which subsequently transfers to the international partner at the manufacturer’s loading facility prior to shipment per LOA standard term and condition 5.1. USG acceptance of performance is documented by either a DD Form 250, “Material Inspection and Receiving Report,” or by generating a Receiving Report acceptance within the Wide Area Workflow system.
• Contract audit consists of financial services provided by DCAA in connection with the negotiation, administration, and settlement of contracts and subcontracts; these include evaluating the acceptability of costs claimed or proposed by contractors and reviewing contractor cost control systems.

Within the DOD, the Defense Contract Management Agency (DCMA) is typically responsible for contract administration services. Before contract award, DCMA provides advice and services to help PCOs construct effective solicitations, identify potential risks, select the most capable contractors, and write contracts that meet international partner needs. After contract award, DCMA monitors contractor performance and management to ensure that cost, product performance, and delivery schedules follow the terms and conditions of the contracts.

The Defense Contract Audit Agency (DCAA) provides both pre-award and post-award contract audit and financial advisory services in support of DOD acquisitions for FMS.

The three MILDEPs manage approximately 95 percent of FMS and Building Partner Capacity (BPC) cases. Accordingly, the offices that support Security Assistance, for the most part, overlay the existing domestic infrastructure. As one might expect from such an arrangement, the policies, databases, and organizational elements used to manage FMS vary among MILDEPs.

With the support of the system program management office team, the program manager is responsible for leading the program through the remaining phases, decision reviews, and acquisition milestones of the defense acquisition system process. In addition, the program management office remains in place to manage all the technical and life-cycle sustainment aspects of the system after the system is delivered to U.S. forces. The program management office will also be responsible for acquiring any additional quantities for the DOD as well as potentially developing improved or modified configurations.

If the U.S. agrees to sell the system through FMS, the FMS acquisition will be accomplished with support by the same program management office that is managing the system for the DOD. The system program management office may acquire the FMS requirements either as separate individual procurements or by consolidating the FMS requirements with DOD requirements on the same U.S. contract.

The Defense Contract Management Agency (DCMA) provides Contract Administration Services (CAS) to international partners who elect to purchase their defense articles and/or services through Direct Commercial Sales (DCS). International partners’ government representatives may possess all the skills and abilities to negotiate a favorable contract with U.S. industry, but the subsequent process for DCS contract administration, quality control, inspection, acceptance, and audit functions may present both a logistical and financial barrier. The U.S. contractor may perform work at multiple geographically dispersed locations. Thus, it may be difficult and expensive for international partners to conduct these functions throughout the U.S. DCMA provides a cost-effective option to the international partner by providing contract administration, oversight, and quality inspection services.