1. FMS v. DCS / Offsets

2. Foreign Military Sales (FMS)
FMS or DCS
Foreign Military Sales (FMS)
Letter of Offer and Acceptance
Foreign Country US
Direct Commercial Sale (DCS)
Contract
Foreign Country Textron

3. Foreign Country Preference
FMS or DCS
Foreign Country Preference
Competition or Sole-Source
US Contractors only or International
Integrated Weapon System
Separate OEMs or Single Integrator?
USG Stock/Supplies or Textron Provided?
Timing
DCS- Export Licensing, Negotiation of Terms and Conditions
FMS- Certified USG Proposal, Competition Requirements, Audit/Evaluation
Terms and Conditions
DCS- Negotiable Based Upon Foreign Country Standard Terms
FMS- USG LOA Terms
Payment Schedule
DCS- Negotiable
FMS- US Treasury Deposit

4. FMS or DCS US Gov Preference
Department of State and/or DSCA can require FMS-Only
Export Licenses
Defense Articles
Defense Services
Technical Data
Congressional Notification
Defense Articles or Services Greater than $50M USD
All Items on US Munitions List
Significant Military Equipment (SME) to be Manufactured Abroad
Identified by Asterisk on US Munitions List
Major Defense Equipment (MDE) Greater than $14M USD
SME with Non-Recurring R&D Greater than $50M USD; or
SME with Total Production Cost Greater than $200M USD

5. FMS or DCS Export Control DSP-5 DSP-85 DSP-73 DSP-61 DSP-83
Unclassified Hardware
Permanent Export
DSP-85
Classified Hardware
Permanent Export/Import and Temporary Import
DSP-73
Temporary Export
DSP-61
Temporary Import
DSP-83
Non-Transfer and Use Certificate
All SME Exports
Technical Assistance Agreement (TAA)
Defense Services
Technical Data

6. Export License Process
FMS or DCS
Export License Process
Department of State (DOS)
DoD Directorate of Defense Trade Controls (DDTC)
Other State Department Offices (DOS)
Intelligence Agencies
Defense Technology Security Agency (DTSA)
Military Departments (DOD)
Defense Agencies (DOD)
Joint Chiefs of Staff (JCS)
DDTC
Secretary of Defense (OSD)

7. Congressional Notification Process
FMS or DCS
Congressional Notification Process
Department of State (DOS)
DoD Directorate of Defense Trade Controls (DDTC)
National Security Council (NSC)
Office of Management and Budget (OMB)
Legislative Affairs Bureau (DOS)
International Relations Committee (House of Representatives)
Foreign Relations Committee (Senate)
Assistant Secretary of State for Legislative Affairs (DOS)
DDTC

8. Differences in Contracting Process

9. Differences in Contracting Process
FMS US Gov Proposal Process
Certified Cost or Pricing Data
Auditable Format
Cost Evaluation by Element of Cost
DCAA Audit
Bases of Estimate (BOEs)
DCS Proposal
Contract Line Item Price Data
Customer Format

10. Offsets are a Requirement of International Defense Sales
What is an Offset
Industrial/Commercial benefits provided to foreign governments as inducement or condition to purchase military goods or services,
Includes benefits such as co-production, licensed production, subcontracting, technology transfer, in-county procurement, marketing and financial assistance, and joint ventures.
(Defense Offsets Disclosure Act of 1999, Pub. L , section 1243(3)). There are three types of offsets: direct offsets, semi-direct offsets and indirect offsets.
Direct Offset
e.g. production in-country of components or subsystems of the item being sold and technology transfer
Semi-Direct Offset
e.g., Defense products and services not related to components or subsystems being sold
Indirect Offset
e.g. purchase of manufactured commercial products, foreign direct investment, education, training, market / export assistance, technology transfer
Offsets are a Requirement of International Defense Sales

11. Types of Offsets

12. Objectives of Offsets
Boost the domestic economy and defense industry by channeling activity to local companies.
Transfer of advanced technology and technological know-how to local companies and training of the local workforce.
Import substitution in order to minimize the balance of payments impact generated by military purchases.
Create sustainable business partnerships
Increase the country’s self sufficiency and independence from foreign suppliers

13. The Many Faces of Offset
Finland, Switzerland, UK
UAE, Greece, South Korea, Saudi Arabia, India, Brazil
Canada
Hungary, Romania, Lithuania
Industrial Participation
Offset
Industrial Cooperation
Industrial Benefits
Industrial Compensation
Industry Involvement
Australia
Offsets have many different names in the global marketplace
Chile, Israel, Spain, Taiwan, Denmark, Norway, Colombia
Offsets are industrial compensation practices required as a condition of purchase in sales of defense articles and/or defense services

14. Countries With Offset Requirements
North America
Europe
Middle East
Asia Pacific
South America
Africa
Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, Germany, Greece, Hungary, Italy, Lithuania, Netherlands, Norway, Poland, Portugal, Romania, Slovenia South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom
Brazil, Canada, Chile, Colombia
Israel, Kuwait, Oman, Saudi Arabia, UAE
Australia, India, South Korea, Malaysia New Zealand, Philippines, Taiwan, Thailand

15. Complexity of Offset Requirements
Form of Offset
Indirect
Direct
Obligation %
30%
50%
100%
Increasing in amount of offset required
Project Type
Project Type
Technology Transfer
Co-production, subcontracting
Indirect
Increasing demands for direct defense manufacturing in-country
Multipliers
Highest
1x to 10x
Mid-Range
1x to 5x
Lowest
.25x to 3x
Higher risk / higher multipliers ………………… lower risk / lower multipliers
Performance
Terms
Liquidated Damages
Performance Penalties
Best Efforts
Increasing Demands for Performance Commitments & Penalties
Offset Focus
Foreign investment, tech transfer, exports, employment
Defense infrastructure, foreign investment, R&D, tech transfer
Strengthen local defense industry, tech transfer, exports

16. Offset Fulfillment Methods
Definition
Co-production, subcontracting or licensed production
Local production of the complete or of part of the defense equipment that is being supplied under the procurement contract.
Technology transfer
May take the form of research and development conducted abroad, technical assistance provided to the subsidiary or joint venture of overseas investment
Training
Training related to the production or maintenance of the exported defense item. Training, may also be required in unrelated areas, such as computer training, foreign language skills, or engineering capabilities
Investments
Investment taking the form of capital invested to establish or expand a subsidiary or joint venture in the foreign country
Donations
Cash or in-kind contributions. Can range from donation of excess military equipment to charitable donations.
Credit assistance
Credit assistance includes direct loans, brokered loans, loan guarantees, assistance in achieving favorable payment terms, credit extensions, and lower interest rates.
Offset credit purchases
Purchase of offset credits from offset services providers or offset obligors

17. US Gov Hands Off Approach
No agency of the U.S. Government shall encourage, enter directly into, or commit U.S. firms to any offset arrangement in connection with the sale of defense goods or services for foreign governments
US Government assumes no obligation to satisfy or administer the offset requirement or to bear any of the associated costs
No involvement with the negotiation of the offset agreement itself between the company and the FMS customer, and no role in judging the merits of these agreements

18. Limited to Admin Costs Only?
Prior to 1995
DFARS language had limited recovery by a US contractor to the administrative costs to administer specific requirements of its offset agreement
31 May 1995
Director of Defense Procurement clarified that US contractors may recover the full cost necessary to implement an offset agreement
Policy change deemed necessary because defense companies doing business with FMS countries had to pass costs for offsets demanded by the countries in return for buying U.S. defense systems on to all customers, including DoD, in the form of indirect costs
US Gov position is that the US taxpayer should not pay any offset costs in connection with a foreign military sale
DFARS (a)(3) modified to include “all” costs incurred for offset agreements

19. Under Secretary of Defense Memo

20. USG Policy and Guidance
Presentation Title
April 26, 2017
USG Policy and Guidance
Public Law President’s Offset Policy
No agency of the USG shall encourage, enter directly into, or commit US firms to any offset arrangement in connection with the sale of defense goods or services to foreign governments;
USG funds shall not be used to finance offsets in security assistance transactions . . .
The decision whether to engage in offsets, and the responsibilities for negotiating and implementing offset arrangements, reside with the companies involved
Important for PCO to ensure that all of the Contractor’s obligation/cost are covered
directly by the foreign-funded FMS otherwise increased indirect rates could affect
other USG contracts funded by the US taxpayers
Speaker Name

21. DSCA and DFARS Offset Policy
Presentation Title
April 26, 2017
DSCA and DFARS Offset Policy
DFARS (a)(3)
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 customer cash or repayable foreign military finance credits.
DSCA MEMO 02-16, dated 22 May 2002, SAMM E-Change 31
“It is inappropriate for USG personnel to discuss with the FMS customer the nature or details of an offset arrangement. However, if known, the fact that offset costs have been included in the P&A or LOA price estimate will be confirmed should the Purchaser inquire. Purchaser should be directed to the US contractor for answers to all questions regarding its offset arrangement, including questions regarding what might be included in these costs.“
“Offset costs should be included as part of the line item(s) unit cost in P&A data and in estimated prices quoted in the LOAs.”
DSCA MEMO also breaks out handling of offset costs in 2 cases
Competitive procurements
Noncompetitive procurements
Speaker Name

22. DSCA and DFARS Offset Policy
Presentation Title
April 26, 2017
DSCA and DFARS Offset Policy
Competitive Procurements (SAMM Para 80106)
“. . . The USG will normally not have visibility as to whether offset costs are included in the price Requests to include these costs after LOA acceptance will not be allowed. No notes will be included in the LOA concerning offset costs.”
Noncompetitive Procurements (SAMM Para 80106)
“. . . it is the contractor’s responsibility to inform the implementing agency when estimated offset costs have been included in the FMS pricing information The USG contracting officer is responsible for determining if costs included are reasonable and allocable -- the same as any other element of cost in the contract Requests to include these costs after LOA acceptance will require an LOA modification.”
Note on Offset Costs in LOA’s (SAMM Para 80106)
“. . . If the Purchaser desires visibility into these costs, this should be discussed with the contractor at the time the offset agreement is signed. The contracting officer will ensure that the offset costs priced into the FMS contract are reasonable and consistent with the offset agreement.”
Speaker Name

23. PCO Review of Offset Costs
Reasonable
Allocable
Allowable
Interim Rule (effective June 2015)
Revises DFARS , “Cost of doing business with a foreign government or an international organization”
When the provision of an indirect offset is a condition of the FMS acquisition, and provided that the U.S. defense contractor submits to the contracting officer an offset agreement or other substantiating documentation, the indirect offset costs are deemed reasonable for the purposes of FARpart 31.

24. Example Offset Guidelines
Objective to expand the industrial base, increase participation by the private sector, and to secure technology transfer and investment opportunities for Saudi nationals.
Offset obligation equal to 40% of contract value
Offset required for supply contracts with value > SR 400M (US$107M)
Joint ventures encouraged with 50/50 capital structure (Saudi investors / Contractor group)
Multipliers range from 1 to 4 for employment, training, donations, R&D
Multipliers higher for investments depending on capital structure (mix of equity and debt financing)
10 Year offset period of performance
No bank guarantees required and no penalties provisions for non-performance
Offset non-performance will be considered in future supply contract awards