How the nonrecurring cost charge is calculated

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1. A share of the development bill

When the Defense Department sells major defense equipment (MDE), the purchaser pays a pro rata share of the Department’s nonrecurring costs of developing and producing it (FMR Vol. 15, Ch. 7, para. 15.5.1). Chapter 7 of Volume 15 of the Financial Management Regulation (FMR) explains how that share is worked out. The approved charge for each item is published in Appendix 1 of the Security Assistance Management Manual. Who pays the charge and when it can be waived are covered in pricing excess articles and firm prices.

2. The cost pool method

The share is found by a cost pool method (FMR Vol. 15, Ch. 7, para. 15.5.2.1). The nonrecurring research, development, test and evaluation (RDT&E) cost pool and the nonrecurring production cost pool are divided by the estimated number of benefiting units. Each component submits the computation to the Director of the Defense Security Cooperation Agency (DSCA) for approval, supported by an MDE calculation worksheet. The Director reviews each calculation and publishes the approved charge.

Each component must have a system to accumulate cost pools, recognize when a pool meets the recoupment thresholds, and calculate the charge when sales are anticipated (FMR Vol. 15, Ch. 7, para. 15.5.2.2). The charge must rest on the Department’s accounting records or budget justification documents. If adequate documentation is unavailable, the component calculates the share at 5 percent of the last known acquisition cost.

3. What goes in the research pool

The RDT&E pool holds costs funded by RDT&E appropriations to develop or improve the product or technology (FMR Vol. 15, Ch. 7, para. 15.5.3.1). The regulation uses the budget activities of the RDT&E appropriations. Costs in budget activities 3B, 4, 5, 6 and 7 are recouped and go into the pool (FMR Vol. 15, Ch. 7, para. 15.5.3.2). Costs in activities 1, 2 and 3A, meaning basic research, applied research and the research end of advanced technology development, may not. Every applicable nonrecurring effort counts, whether in-house or by several contractors (FMR Vol. 15, Ch. 7, para. 15.5.3.3).

Improvement programs that continuously improve safety, reliability, availability and maintainability over an item’s life are shared by all users (FMR Vol. 15, Ch. 7, para. 15.5.3.3). Normally each user pays a share of the annual cost through a Component Improvement Program or similar program. The pool includes the American investment projected up to the point when half of all deliveries to non-Defense purchasers will have occurred (FMR Vol. 15, Ch. 7, para. 15.5.3.3.2). The annual cost of running the program is then shared in proportion to the number of items each user holds (FMR Vol. 15, Ch. 7, para. 15.5.3.3.3).

4. What goes in the production pool

The production pool holds costs financed by procurement or operation and maintenance appropriations that benefit current and future production runs (FMR Vol. 15, Ch. 7, para. 15.5.4). The regulation lists preproduction costs such as tooling manufacture and tryout, and special tooling such as jigs, dies, fixtures and molds. Special test equipment, developmental production engineering and product improvement are included. So are destructive testing, pilot model testing covering qualification and first article testing, and license costs.

Two points of detail follow. Of license costs, only a lump sum fee counts as a nonrecurring production cost, while per-item royalties are recurring (FMR Vol. 15, Ch. 7, para. 15.5.4.8). Of the six kinds of product improvement, new or improved operational capability must be recovered in the selling price of a new model item if the item is MDE (FMR Vol. 15, Ch. 7, para. 15.5.4.5). Nonrecurring costs of major components restricted to government use are left out of the pools (FMR Vol. 15, Ch. 7, para. 15.5.5). The examples are nuclear devices, countermeasure devices, security devices, carrier-peculiar adaptations and special fuel tank devices.

5. Counting the benefiting units

Benefiting units include all known or projected Defense Department production quantities (FMR Vol. 15, Ch. 7, para. 15.5.6.1). Departmental quantities come from Selected Acquisition Reports or the procurement annex of the Future Years Defense Program, and foreign quantities from the components’ security assistance plans. For components, quantities follow the end items, with the example of 100 aircraft needing 150 spare engines, giving 250 engines (FMR Vol. 15, Ch. 7, para. 15.5.6.1.4). The DSCA Director settles disagreements over quantities, in coordination with the Comptroller and the Under Secretary for Acquisition and Sustainment or Research and Engineering (FMR Vol. 15, Ch. 7, para. 15.5.6.2).

6. Revisions, billing and reporting

A component may revise a charge at any time, and must do so after a significant change (FMR Vol. 15, Ch. 7, para. 15.5.7). A biennial review checks approved charges (FMR Vol. 15, Ch. 7, para. 15.5.7.2). A significant change is a new calculation differing by 30 percent from the current charge, a unit charge change of $50,000 or more, or a potential $5 million change in recoupment. When the price is reduced for age, condition or excess status, the same percentage reduction applies to the charge (FMR Vol. 15, Ch. 7, para. 15.5.7.1). A model change requires a recalculation (FMR Vol. 15, Ch. 7, para. 15.5.7.3).

The offer must include the specific charge, or an estimated rate if none is yet approved, and is later modified so that only the approved rate is billed (FMR Vol. 15, Ch. 7, para. 15.5.8). Revised charges apply only to new offers, never retroactively. Components report collections quarterly to DSCA within 45 days after each quarter (FMR Vol. 15, Ch. 7, para. 15.5.9.2).

A purchaser also pays for special development and production costs incurred for its own benefit (FMR Vol. 15, Ch. 7, para. 15.5.11.1), and the government is not charged for them even if it later adopts the feature (FMR Vol. 15, Ch. 7, para. 15.5.11.2). Such special costs can be recouped from later buyers where they exceed $50 million for a purchaser, or in aggregate for cooperative participants (FMR Vol. 15, Ch. 7, para. 15.5.11.3.1). Unless the Under Secretary of Defense for Policy authorizes otherwise, collection stops 10 years after the original purchaser accepted its offer (FMR Vol. 15, Ch. 7, para. 15.5.11.3.3).

Key terms

Nonrecurring cost recoupment	The charge recovering a share of development and production investment in MDE.
Cost pool	The accumulated nonrecurring research or production costs divided among benefiting units.
Benefiting units	All known or projected production quantities over which the pools are spread.
Component Improvement Program	A program through which users share the cost of continuing improvements.
Special costs	Development or production costs incurred for one purchaser’s own benefit.

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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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