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International Acquisition - Offsets

AINT 005 - International Acquisition - Offsets
Definition

Direct Offset - Offset transactions that are directly related to the article(s) or service(s) exported or to be exported pursuant to the military export sales agreement. Direct offsets are usually in the form of co-production, subcontracting, training, licensed production, or possibly technology transfer, investment, or credit assistance.

Indirect Offset - Offset transactions that are unrelated to the article(s) or service(s) exported or to be exported pursuant to the military export sales agreement. The kinds of offsets that may be considered “indirect” include purchases, investment, training, credit assistance, and technology transfer.

Offset costs - the costs to the contractor of providing any direct or indirect offsets required (explicitly or implicitly) as a condition of a foreign military sale.

General Information

Offsets can be used on Foreign Military Sales (FMS) and Direct Commercial Sales (DCS) programs. They are a form of direct or indirect compensation that the selling company provides the purchasing government. Presidential policy and U.S. law states the decision whether to engage in offsets, and the responsibility for negotiating and implementing offset arrangements, reside with the companies involved. As a result, U.S. Government employees must take a hands-off approach in dealing with offset agreements.

However, the Defense Federal Acquisition Regulation Supplement (DFARS) does allow a U.S defense contractor to recover all costs incurred for offset agreements in DoD contracts written pursuant to a Letter of Offer and Acceptance (LOA) if it financed wholly with foreign government or international organization customer cash or repayable foreign military finance credits. Industry must disclose offset costs to the FMS customer and the DoD contracting officer so that they can be included in Price and Availability (P&A) data and in LOAs. The contracting officer must conduct a cost sufficiency review on direct offset costs, but indirect offset costs are deemed reasonable for the purposes of FAR parts 15 and 31 without further analysis assuming the conditions in DFARS 225.7303-2 are met.

A direct offset involves benefits or obligations, including supplies or services that are directly related to the item(s) being purchased and are integral to the deliverable of the FMS contract. For example, as a condition of a foreign military sale, the contractor may require or agree to permit the customer to produce in its country certain components or subsystems of the item being sold. Generally, direct offsets must be performed within a specified period because they are integral to the deliverable of the FMS contract.

An indirect offset involves benefits or obligations, including supplies or services that are not directly related to the specific item(s) being purchased and are not integral to the deliverable of the FMS contract. For example, as a condition of a foreign military sale, the contractor may agree to purchase certain manufactured products, agricultural commodities, raw materials, or services, or make an equity investment or grant of equipment required by the FMS customer, or may agree to build a school, road or other facility. Indirect offsets would also include projects that are related to the FMS contract but not purchased under said contract (e.g., a project to develop or advance a capability, technology transfer, or know-how in a foreign company). Indirect offsets may be accomplished without a clearly defined period of performance.

NOTE

Any technology transfers performed as part of an offset must be in accordance with proper export license approval process and are NOT part of FMS case transfer approval. 

 

If you have any questions, concerns, or would like to provide input to update this article, please contact the DAU International Center at [email protected].