How items sold from stock are priced

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1. What counts as a sale from stock

Section 21 of the Arms Export Control Act, 22 U.S.C. 2761, authorizes sales of defense articles from Defense Department stock to eligible foreign governments and international organizations (FMR Vol. 15, Ch. 7, para. 15.1). Chapter 7 of Volume 15 of the Department of Defense Financial Management Regulation (FMR) sets the prices. A sale from stock includes every sale of items from Defense Department inventories, whether delivered from storage or from procurements started to keep inventory at adequate levels. Procurements made specifically for a Foreign Military Sales (FMS) requirement, other than cooperative logistics supply support arrangements, are not sales from stock. Procurements to replace stock sold are not FMS new procurements either.

The price depends on which kind of article is sold (FMR Vol. 15, Ch. 7, para. 15.2.1). Non-excess defense articles are assets within the approved force acquisition objective and approved force retention stock of the Defense Department components. They also include articles procured in anticipation of military assistance or sales requirements under cooperative logistics arrangements, or under a military assistance or sales order. The selling price is fixed when the item is dropped from inventory, or when the Letter of Offer and Acceptance (LOA) is prepared if a firm price is quoted. How excess articles and firm prices are handled is covered in pricing excess articles and firm prices.

2. Working capital fund items

Articles from the Defense Working Capital Fund (DWCF) are priced when they are dropped from inventory (FMR Vol. 15, Ch. 7, para. 15.2.2.1). The standard price is adjusted to include an amount for unfunded civilian retirement and post-retirement health benefits. If a purchaser returns a reparable DWCF item for repair or replacement, the overhaul is priced as a service. The replacement or exchange item is priced at the exchange price or net price, meaning standard price less credit, adjusted for the same retirement and benefits costs (FMR Vol. 15, Ch. 7, para. 15.2.2.2).

A purchaser in a cooperative logistics arrangement is an invested participant (FMR Vol. 15, Ch. 7, para. 15.2.2.3). It may return a fully serviceable reparable item to the DWCF activity for credit when the item is within the activity’s approved acquisition objective. Credit is issued only after the item is received and inspected. Since October 1, 2001, petroleum, oil and lubricants have been sold at replacement cost during the period of sale plus associated overhead, instead of at standard prices (FMR Vol. 15, Ch. 7, para. 15.2.2.4).

3. Articles that will not be replaced

For articles outside the working capital fund, the price turns on whether the item will be replaced (FMR Vol. 15, Ch. 7, para. 15.2.3). If, when the sale agreement is made, the implementing agency (IA) does not intend to replace the article, the price is its actual value (FMR Vol. 15, Ch. 7, para. 15.2.3.1). That is the Defense Department’s acquisition cost less any depreciation. The price is the most recent actual procurement cost of the series and model, plus later modifications or improvements and the applicable nonrecurring cost recoupment charge (FMR Vol. 15, Ch. 7, para. 15.2.3.1.1). Reductions may be made where age or condition makes a real difference in utility or desirability between units (FMR Vol. 15, Ch. 7, para. 15.2.3.1.2).

The cost of the last major overhaul or outfitting before the sale is added and is not reduced for age or condition (FMR Vol. 15, Ch. 7, para. 15.2.3.1.3). It is prorated over the interval between the last overhaul and the next scheduled one. Where no future overhaul is scheduled, the normal average interval is used (FMR Vol. 15, Ch. 7, para. 15.2.3.1.3.1), and where no maintenance schedule exists, at least five years (FMR Vol. 15, Ch. 7, para. 15.2.3.1.3.4). For a naval vessel 20 or more years old and 3,000 tons or less, the actual value is not less than the greater of scrap value or fair value, including conversion costs (FMR Vol. 15, Ch. 7, para. 15.2.3.1.4).

Where the purchaser pays with its own national funds, proceeds from articles sold without intent to replace go into the Special Defense Acquisition Fund (FMR Vol. 15, Ch. 7, para. 15.2.3.1.5). Where the funds are American grant assistance, including Building Partner Capacity funds, the proceeds go to the Treasury as miscellaneous receipts.

4. Articles that will be replaced

If the IA intends to replace the article to address a loss of capability or readiness, the charge follows a set order (FMR Vol. 15, Ch. 7, para. 15.2.3.2). The first measure is the estimated cost of replacing it with the identical type, model and series, less depreciation of the article sold. If that will not meet the IA’s needs, the measure is the estimated cost of a newer model, modified version or variant that is a functional equivalent, less depreciation. If neither is obtainable, the charge is the last acquisition cost of the article sold, less depreciation. The proceeds go into the current procurement account needed to replace the article.

A newer model is a functional equivalent if it lets the IA meet the same operational objectives under similar constraints, with the AIM-9M replaced by the AIM-9X as the example (FMR Vol. 15, Ch. 7, para. 15.2.3.2.5). A guided missile replacing an unguided one, or a vertical take-off aircraft replacing a conventional one, is not. The regulation adds that sales from stock must not be used to upgrade an IA’s stock at the purchaser’s expense (FMR Vol. 15, Ch. 7, para. 15.2.3.2.5.1). Where the price may be substantially higher than the actual value, the purchaser must be made fully aware of the difference, and clearly want to proceed, before any binding agreement.

Where stock must be replaced through accelerated procurement and normal pricing will not recover the cost, an exception to pricing policy is requested from the Office of the Under Secretary of Defense (Comptroller) (FMR Vol. 15, Ch. 7, para. 15.2.3.2.5.2). Normally the exception adds a replacement factor or delays final pricing until the replacement contract is financially complete.

5. Dissimilar items and munitions

Congress authorizes replacement of material using proceeds from sales of dissimilar or modified items (FMR Vol. 15, Ch. 7, para. 15.2.3.2.6). The replacement must be a later series, a modified version of the same basic model, or an acceptable substitute. The examples are selling a C-130A and buying a C-130E, or selling an M-48 tank and buying an M-60. Buying an upgrade or modification kit is not a replacement. Serviceable munitions retain their full value and are not depreciated on standard timetables (FMR Vol. 15, Ch. 7, para. 15.2.4).

Key terms

Sale from stock	A sale of items from Defense Department inventories, not from procurement made for the purchaser.
Non-excess article	An asset within the approved force acquisition objective and retention stock.
Actual value	Acquisition cost less depreciation, charged when the article will not be replaced.
Functional equivalent	A newer model or variant that meets the same operational objectives under similar constraints.
Net price	Standard price less credit, used for exchange of reparable working capital fund items.

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.

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