© 2015 Textron Inc., Textron Systems Corporation, AAI Corporation, Overwatch Systems, Ltd., Avco Corporation, and TRU Simulation + Training, Inc. All rights

© 2015 Textron Inc., Textron Systems Corporation, AAI Corporation, Overwatch Systems, Ltd.,Avco Corporation, and TRU Simulation + Training, Inc. All rights reserved.

FMS V. DCS / OFFSETS


FMS or DCS•Foreign Military Sales (FMS)– Letter of Offer and Acceptance– Foreign Country US

•Direct Commercial Sale (DCS)– Contract– Foreign Country Textron


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


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


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


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)


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


Differences in Contracting Process

FMS DCSParties US Gov - Textron Foreign Country - TextronTerms FAR/DFARS NegotiablePayment Perf Based/Net 30 Advance/MilestonesApplicable Law US NegotiableBank Instruments N/A Payment LOC/Perf GuaranteeDelivery FOB Origin EXWORKS DDUInspection DCMA Witnessed ATP Textron ATP/ Count and ConditionAcceptance DD250 COA/CODData Licenses US Gov Unlimited License N/A


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


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. 106-113, 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 transferOffsets are a Requirement of International Defense Sales


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Types of Offsets


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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


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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

Offsets are industrial compensation practices required as a condition of purchase in sales of defense articles and/or defense services

Chile, Israel, Spain, Taiwan, Denmark, Norway, Colombia


Countries With Offset Requirements

South America

Europe

Asia PacificMiddle East

North America

Africa

Australia, India, South Korea, Malaysia New Zealand, Philippines, Taiwan, Thailand

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


Complexity of Offset Requirements

Obligation %

Project Type

PerformanceTerms

Offset Focus

30% 50% 100%

Increasing in amount of offset required

IndirectTechnology Transfer

Co-production, subcontracting

Increasing demands for direct defense manufacturing in-country

Best Efforts Liquidated Damages

Performance Penalties

Project Type

Multipliers Highest1x to 10x

Lowest.25x to 3x

Mid-Range1x to 5x

Foreign investment, tech transfer, exports, employment

Strengthen local defense industry, tech transfer, exports

Defense infrastructure, foreign investment, R&D, tech transfer

Increasing Demands for Performance Commitments & Penalties

Higher risk / higher multipliers ………………… lower risk / lower multipliers

Indirect DirectForm of Offset


Offset Fulfillment Methods

Method 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


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


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 225.7303-2(a)(3) modified to include “all” costs incurred for offset agreements


Under Secretary of Defense Memo


USG Policy and Guidance• Public Law 102-558 - 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

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


DSCA and DFARS Offset Policy• DFARS 225.7303-2(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 02-16 also breaks out handling of offset costs in 2 cases– Competitive procurements– Noncompetitive procurements


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.”


PCO Review of Offset Costs

•Reasonable•Allocable•Allowable• Interim Rule (effective June 2015) –Revises DFARS 225.7303-2, “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.


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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

Documents

© 2015 Textron Inc., Textron Systems Corporation, AAI Corporation, Overwatch Systems, Ltd., Avco Corporation, and TRU Simulation + Training, Inc. All rights