Managing the administrative surcharge account

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1. The account that pays for the program

The administrative surcharge on Foreign Military Sales cases is credited to its own account (FMR Vol. 15, Ch. 3, para. 4.8.1.1). Budget authority for the program’s administrative expenses is built from those collections (FMR Vol. 15, Ch. 2, para. 3.6). Section C9.15 of the Security Assistance Management Manual sets how the Defense Security Cooperation Agency (DSCA) manages it (SAMM C9.15). It works with two bounds, a safety level below and an upper control above, and a cycle of annual, monthly and five-year reviews. How the surcharge itself is priced on a case is covered in what goes into the price, and what can be waived.

DSCA prepares the annual budget request for the trust fund’s obligational and outlay authority (FMR Vol. 15, Ch. 2, para. 2.1.1). It reviews, approves and distributes funding for the administrative surcharge, the security cooperation organizations, Building Partner Capacity, the Special Defense Acquisition Fund and the contract administration surcharge accounts.

2. The safety level

The manual defines the safety level as a strategic reserve of operating capital, sufficient to manage the program through changing business conditions and keep the account solvent (SAMM C9.15.1.1). DSCA sets it at eighteen months of operational funding, based on the annual budget requirements authorized under the Foreign Assistance Act (SAMM C9.15.1.2). The manual explains the length. Eighteen months gives time to recognize volatility, develop and apply new business strategies, and allow the orderly disposition of cases under active agreements.

The calculation is simple arithmetic on a published figure (SAMM C9.15.1.3). DSCA takes the administrative operating ceiling in the annual State and foreign operations appropriations act for the coming fiscal year. It divides that amount by 12 to get a monthly figure, then multiplies by 18. The safety level is set before the fiscal year starts and sent to the Defense Finance and Accounting Service (DFAS), so that the account keeps that balance.

The Financial Management Regulation describes the same method from the finance side (FMR Vol. 15, Ch. 2, para. 2.1.2). It states that the safety level represents 18 months of operational funding, set before the close of the fiscal year and forwarded to DFAS. It ties the figure to the amount that may be obligated for expenses under section 21(e)(1)(A) of the Arms Export Control Act, as stated in the Foreign Military Financing section of that appropriations act (FMR Vol. 15, Ch. 2, para. 2.1.2.1). It adds that any change to the calculation method must go to the Comptroller’s office for review and approval (FMR Vol. 15, Ch. 2, para. 2.1.2.2).

3. The upper control

The account also has a ceiling. The manual calls it a financial management tool "to guard against surcharge over collections" (SAMM C9.15.2.1). It is meant to keep DSCA from collecting more than it needs to resource the sales community. Together, the two bounds form what the manual calls a control box (SAMM C9.15.2.2). If annual collections move outside normal variation, the box signals a dramatic change in the operating environment. That may call for a response such as an out-of-cycle comprehensive review of how much surcharge is being collected.

The upper control starts from the same appropriation ceiling (SAMM C9.15.2.3). DSCA multiplies it by five years. The five-year figure matches the intended interval between comprehensive reviews.

4. What sets off an early review

Both bounds are evaluated in the first quarter of each fiscal year (SAMM C9.15.1.4 and SAMM C9.15.2.4). The review draws on the annual assessment report on the account, the final report of prior year sales and the sales forecast. It also uses the results of the budget and program review cycle.

DSCA also watches for events that justify an immediate review outside the cycle (SAMM C9.15.1.4). The manual lists a change in relations with the top sales customers, such as sanctions, measured against sales figures. It also lists regional conflict, and sales that lag the forecast significantly, for example by more than 3 months.

5. The annual assessment and the monthly check

The annual assessment takes place in the first quarter of the current fiscal year (SAMM C9.15.3.1). DSCA uses the year-end balance of the account from DFAS and the DFAS report of undelivered articles and services on every open case. It adds forecast sales for the current and future years, and projected future expenses from the budget and program objective memoranda. Those inputs go into a DSCA forecast model that projects the account’s balance.

The assessment ends in an annual report (SAMM C9.15.3.1.1). It is used to monitor the account’s health over the previous year, and details financial activity, opening and closing balances and any surcharge rate change put in place. A monthly review then checks whether the assessment’s results still hold (SAMM C9.15.3.2). It looks at relations with the top five customers, regional conflicts, the global economy, forecast sales lagging by more than 3 months, and asymmetric threats that require new defense articles and services.

6. The five-year review

Absent a rate change or a breach of either bound, a comprehensive review of the account takes place every five years after the previous one (SAMM C9.15.3.3). It looks at the previous 60 months of rate data. The Director of DSCA may bring it forward or delay it, but a delay must carry a justification signed by the Director. After an out-of-cycle rate change, the next comprehensive review comes five years after the change, to give time to judge the new rate (SAMM C9.15.3.3.1).

DSCA performs the review and may invite outside participants for an independent view. The manual names the Naval Postgraduate School and private industry as examples (SAMM C9.15.3.3.2). The review includes a detailed analysis of the surcharge rate, and an examination of the upper control, the safety level and their assumptions (SAMM C9.15.3.3.3).

Key terms

Administrative surcharge account	The trust fund account that receives the administrative surcharge and pays for running the program.
Safety level	A reserve of eighteen months of operational funding, the account’s lower bound.
Upper control	The account’s ceiling, five times the annual administrative operating ceiling.
Control box	The range between the two bounds that signals when collections have moved outside normal variation.
Comprehensive review	The five-year review of the surcharge rate and both bounds.

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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