FMS DCS Textron System.ppt

© 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

Systems, Ltd.,
FMS or DCS
•Foreign Military Sales (FMS)
– Letter of Offer and Acceptance
– Foreign Country US
•Direct Commercial Sale (DCS)
– Contract
– Foreign Country Textron

Systems, Ltd.,
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

Systems, Ltd.,
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

Systems, Ltd.,
FMS or DCS
•Export Control
– DSP-5
• 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

Systems, Ltd.,
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)

Systems, Ltd.,
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

Systems, Ltd.,
Differences in Contracting Process
FMS DCS
Parties US Gov - Textron Foreign Country - Textron
Terms FAR/DFARS Negotiable
Payment Perf Based/Net 30 Advance/Milestones
Applicable Law US Negotiable
Bank Instruments N/A Payment LOC/Perf Guarantee
Delivery FOB Origin EXWORKS DDU
Inspection DCMA Witnessed ATP Textron ATP/ Count and Condition
Acceptance DD250 COA/COD
Data Licenses US Gov Unlimited License N/A

Systems, Ltd.,
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

Systems, Ltd.,
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
transfer
Offsets are a Requirement of International Defense Sales

Systems, Ltd.,
Types of Offsets
11

Systems, Ltd.,
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
12

Systems, Ltd.,
The Many Faces of Offset
13
Finland, Switzerland, UK
UAE, Greece, South Korea, Saudi Arabia,
India, Brazil
Canada
Hungary, Romania, Lithuania
Industrial Participation
Offset
IndustrialCooperation
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

Systems, Ltd.,
Countries With Offset Requirements
South America
Europe
Asia Pacific
Middle 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

Systems, Ltd.,
Complexity of Offset Requirements
Obligation %
Project Type
Performance
Terms
Offset Focus
Increasing in amount of offset required
Increasing demands for direct defense manufacturing in-country
Project Type
Multipliers
Increasing Demands for Performance Commitments & Penalties
Higher risk / higher multipliers ………………… lower risk / lower multipliers
Indirect Direct
Form of Offset

Systems, Ltd.,
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

Systems, Ltd.,
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

Systems, Ltd.,
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

Systems, Ltd.,
Under Secretary of Defense Memo

Systems, Ltd.,
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
mportant 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

Systems, Ltd.,
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

Systems, Ltd.,
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.”

Systems, Ltd.,
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.

Systems, Ltd.,
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
24

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