Offsets · 2 of 3
The United States government does not negotiate offsets and does not commit companies to them. The Defense Federal Acquisition Regulation Supplement puts it in one sentence. In accordance with the Presidential policy statement of 16 April 1990, "DoD does not encourage, enter into, or commit U.S. firms to FMS offset arrangements", and the decision whether to engage in offsets, together with responsibility for negotiating and implementing them, resides with the companies involved (DFARS 225.7306).
That is a position about participation, not about payment. The government stays out of the negotiation. It still has to decide how the resulting costs are treated when it prices a contract placed on a partner government's behalf, and the rules on that are precise.
Foreign Military Sales contracts are priced under a general instruction to recognize the extra cost of selling abroad. Where non-government prices do not exist, contracting officers are to recognize the reasonable and allocable costs of doing business with a foreign government or international organization. The supplement adds that this holds "even though such costs might not be recognized in the same amounts in pricing other defense contracts" (DFARS 225.7303-2(a)). The exception to that instruction is the grant funded case described in section 4 below.
The supplement then lists examples. International sales and service organizations, sales commissions and fees, sales promotion, configuration studies, operations and maintenance training, technical field services abroad. Offsets appear on that list as item (3) (DFARS 225.7303-2(a)(3)).
Where the partner government is paying with its own money, or with credit it has to repay, the rule is permissive and unqualified. "A U.S. defense contractor may recover all costs incurred for offset agreements with a foreign government or international organization if the LOA is financed wholly with foreign government or international organization customer cash or repayable foreign military finance credits" (DFARS 225.7303-2(a)(3)(ii)).
In commercial terms the partner government is paying for its own offset program through the price of the equipment. That is the ordinary outcome, and the acquisition rules do not treat it as a problem.
The answer reverses when the case is financed with United States grant money. "A U.S. defense contractor may not recover costs incurred for offset agreements with a foreign government or international organization if the LOA is financed with funds made available on a nonrepayable basis" (DFARS 225.7303-5(c)).
That sits inside a wider pricing regime for grant funded cases which comes from statute. Contracts implementing sales wholly paid for from funds made available on a nonrepayable basis are priced on the same costing basis as like items bought by the Department of Defense for its own use. The statute names the elements: profit, overhead, independent research and development, bid and proposal, and other costing elements (22 U.S.C. 2762(d)(1)). Direct costs of meeting a purchaser's additional or unique requirements remain allowable, at the same indirect rates (22 U.S.C. 2762(d)(2)).
The logic is straightforward once stated. Where American appropriations are paying, the price is built as if the Department were buying for itself, and the cost of an industrial commitment made to the partner government is not part of that. What the same funding source changes elsewhere on a case is set out in what non-repayable funding changes on a case.
Which of the two rules applies is fixed by how the Letter of Offer and Acceptance is financed. That is settled between the partner government and the United States government rather than by the supplier, and it is settled before a bid is priced.
The exposure is asymmetric. A commitment priced on the assumption that its cost is recoverable, on a case that turns out to be grant financed, is a commitment the supplier absorbs. The offset agreement remains enforceable against the supplier by the partner government whatever the funding decision does to cost recovery, because the two instruments are separate.
Contracting officers are ordinarily required to test whether a cost is reasonable. For indirect offsets the supplement removes that step under a stated condition. Indirect offset costs "are deemed reasonable for purposes of FAR parts 15 and 31 with no further analysis necessary on the part of the contracting officer" (DFARS 225.7303-2(a)(3)(iv)). The condition is documentary. The contractor submits a signed offset agreement, or other documentation, showing that the customer made the indirect offset a condition of the acquisition.
Customers are told this in advance. The same paragraph records that Foreign Military Sales customers are placed on notice through the Letter of Offer and Acceptance that indirect offset costs are deemed reasonable without further analysis by the contracting officer.
The practical effect is that the argument about an indirect offset is not about whether its cost was sensible. It is about whether the documentation establishes that the customer required it.
Cost recovery is the limit of the government's involvement. "The U.S. Government assumes no obligation to satisfy or administer the offset agreement or to bear any of the associated costs" (DFARS 225.7303-2(a)(3)(iii)).
So there is no forum inside the Foreign Military Sales system for an offset dispute. If a partner government considers an offset commitment unmet, the remedy runs against the supplier under the offset agreement itself. The definitions that govern that agreement are set out in what an offset is and who is party to it.
Two points follow for anyone reading a case file. The absence of an offset from the Letter of Offer and Acceptance says nothing about whether one exists. And the presence of an offset commitment does not make the United States government a party to it, however large the commitment is relative to the case.
| LOA | Letter of Offer and Acceptance, the government to government agreement that records a Foreign Military Sales case. |
|---|---|
| Nonrepayable funds | Money provided on a grant basis, which triggers the pricing rule at 22 U.S.C. 2762(d). |
| DFARS | Defense Federal Acquisition Regulation Supplement, at Subpart 225.73 for Foreign Military Sales. |
| IR&D and B&P | Independent research and development, and bid and proposal, two of the costing elements named in the statute. |
| Allocable cost | A cost assignable to a contract under the cost principles in FAR part 31. |
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.
Pricing and cost recovery are settled long before anything ships. Sentfore works after that point, on the movement, protection and sustainment a program depends on once equipment and people reach a difficult country. Its principals have worked on overseas defense and security programs in those environments. Requirements can be sent through the contact page.