Agents, commissions and contingent fees

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1. The fee that has to be declared

Selling defense equipment abroad often involves a local representative, usually paid out of the sale. The manual treats that payment as something the buying government must see and approve, not a private matter between a company and its agent.

The rule is short. Purchasers must approve contingent fees, including agent fees and sales commissions, before contract award (SAMM C6.3.7).

Before any of that, the representative has to pass a test. "The contracting officer or head of the procuring activity uses criteria contained in the FAR to determine if an agent(s) is bona fide" (SAMM C6.3.7). Only if the agent is bona fide do the disclosure rules that follow apply at all.

2. What the buyer is told, and when

Notice is owed before or with the agreement going out for signature, unless the purchaser has said otherwise (SAMM C6.3.7.1). For agent fees and commissions the notice must name the party and quantify the money: "the name and address of the agent(s); the estimated amount of the proposed fee, and the percentage of the sale price" (SAMM C6.3.7.1).

It must then say what the United States thinks of the figure, three ways. Either "appropriate officials of DoD consider the fee to be fair and reasonable" (SAMM C6.3.7.1), or part of it is considered fair and reasonable with a rationale given, or "the USG cannot determine the reasonableness of the proposed fee" (SAMM C6.3.7.1).

That assessment travels on the face of the document. "This statement is normally included as an LOA note, see Appendix 6" (SAMM C6.3.7.1), and the note may carry the contractor justification for the fee. It also records that accepting the agreement constitutes approval of the commissions and fees in it (SAMM C6.3.7.1).

So on a case with an agent fee, signature is not only acceptance of price and schedule. It is approval of a named intermediary and the percentage being taken.

3. Two approval thresholds

For most countries there is a money line. "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" (SAMM C6.3.7.2.2). Everything above that needs written approval, and all of it must be justified against the published procurement criteria.

For a defined group the threshold is zero. "The following countries must approve all contingent fees (regardless of dollar value) before they can be considered allowable FMS contract costs:" (SAMM C6.3.7.2.1), and the manual then names fifteen countries and entities. Any agreement offered to one of them that includes a contingent fee must carry the standard fee note.

Anyone selling into that group should read the list at the section itself rather than assume a small commission falls below a threshold. There is none to fall below.

4. Fees discovered late

Sometimes the fee is not known when the agreement goes out. The manual allows for it without relaxing the requirement: the purchaser should be notified as soon as the fees are known (SAMM C6.3.7.3).

The consequence lands on cost recovery. "To be allowable costs under the contract, the purchaser must approve the payments in writing before contract award" (SAMM C6.3.7.3), and "Contract award may be delayed pending a written response from the purchaser" (SAMM C6.3.7.3).

If no approval arrives, the work still goes ahead but the money does not. "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" (SAMM C6.3.7.3). The fee becomes the company problem rather than a recoverable cost.

5. When the agent fails the test

A worse outcome sits alongside it. If the agent is judged not bona fide for a reason other than the size of the fee, the sale itself stops until the money comes out: "an LOA cannot be offered until the unallowable costs are deleted by the contractor" (SAMM C6.3.7.5).

Correspondence on the subject is centrally coordinated. All correspondence with a purchaser about contingent fees on an agreement, and all notifications after the agreement, must be coordinated with the policy directorate (SAMM C6.3.7.4). For agent fees and commissions, "the written submission must contain a certification that the agent is bona fide in accordance with FAR criteria" (SAMM C6.3.7.4), together with the reasoning on whether the fee is reasonable, or an explanation of why that cannot be judged.

One point protects the company. A fee note in the agreement does not change whether the underlying data is proprietary under the statute on disclosure of confidential information (SAMM C6.3.7.6).

6. Grant money will not pay for it

Where the sale is financed by American grant or credit money, the rules tighten. "Contingent fees may not be funded with FMF funds" (SAMM C6.3.7.7). That financing is described in what foreign military financing is.

On direct commercial contracts the burden of proof is placed on the company. For non repayable credit, the contractor must disclose the fees in a certification, and "It is the responsibility of the contractor to prove that payments of any contingent fees are not financed" (SAMM C6.3.7.7.1) from that source.

For repayable credit a cap returns. "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" (SAMM C6.3.7.7.2), with the same requirement on the contractor to prove the money did not come from that source. The commercial route generally is compared in Foreign Military Sales or Direct Commercial Sales.

7. What an agent may and may not be

The starting position leaves little room. "For FMS, it is USG policy to deal directly with purchasers" (SAMM C6.3.7.8).

One agency role is recognized, and it is narrow and physical rather than commercial. "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" (SAMM C6.3.7.8) that the agent needs in order to manufacture, assemble, repair or rehabilitate items the purchaser has bought commercially. A published form letter is used to make that designation (SAMM C6.3.7.8).

Anything else is referred upward, to the general counsel and the policy directorate (SAMM C6.3.7.8). An agent appointed to receive parts is a recognized arrangement; an agent appointed to represent the partner in the sale is not.

8. What a supplier can take from this

A commission on a government to government sale is visible to the customer by design. The name of the agent and the percentage of the sale price go to the buying government, together with an American view on whether the fee is reasonable, and the buyer approves it by signing.

Two risks follow from poor timing. A fee identified late can delay award while written approval is chased, and if approval never comes the fee is not recoverable. And if the representative fails the bona fide test for any reason other than price, the agreement cannot be offered until the cost is stripped out.

Key terms

Contingent fee	A payment dependent on the sale, including agent fees and sales commissions, which the buyer must approve before award.
Bona fide agent	An agent that meets the published procurement criteria. Failing the test for reasons other than price stops the sale.
Allowable cost	A cost the contract will actually pay. An unapproved fee is expressly excluded from this.
Agent for receipt	The one recognized agency role: receiving government furnished items, spares or support for commercial work.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

How Sentfore supports this

A representative in country is not the same as support on the ground. Sentfore supports defense programs at the delivery end, providing secure transport, protective security, accommodation and site support in complex environments. Requirements can be sent through the contact page.