DEFENSE SECURITY COOPERATION AGENCY 2800 DEFENSE PENTAGON WASHINGTON, D.C. 20301-2800	6/15/2000

MEMORANDUM FOR :

MEMORANDUM FOR DEPUTY UNDER SECRETARY OF THE ARMY
(INTERNATIONAL AFFAIRS)
ATTN: SAUS-IA-SZ
DEPARTMENT OF THE ARMY

DIRECTOR, NAVY INTERNATIONAL PROGRAMS OFFICE
DEPARTMENT OF THE NAVY

DEPUTY UNDER SECRETARY OF THE AIR FORCE
(INTERNATIONAL AFFAIRS)
DEPARTMENT OF THE AIR FORCE

DIRECTOR, DEFENSE LOGISTICS AGENCY

DIRECTOR, NATIONAL IMAGERY AND MAPPING AGENCY

DIRECTOR, DEFENSE THREAT REDUCTION AGENCY

DIRECTOR, DEFENSE REUTILIZATION AND MARKETING SERVICE

DEPUTY DIRECTOR FOR SECURITY ASSISTANCE, DEFENSE FINANCE AND ACCOUNTING SERVICE - DENVER CENTER

DIRECTOR, DEFENSE CONTRACT MANAGEMENT AGENCY

SUBJECT :

Firm Fixed Price (FFP) and Not to Exceed (NTE) Letter of Offers and Acceptance

REFERENCE :

1. DSCA White Paper. 26, Jan 99, " Pricing, Finance and USG Cost Recovery"

As part of our FMS reinvention efforts, I initiated a staff study focused on exploring the efficacy of expanded use of Firm Fixed Price (FFP) and Not to Exceed (NTE) price estimates in Letters of Offer and Acceptance (LOAs). We did this because customers expressed concern that price uncertainties associated with LOA estimates make it very difficult for countries to budget for FMS purchases.

Finding of this effort are not revolutionary. We discovered that the basic underpinnings of in-place legislation and policy are sound and provide us more flexibility that we initially expected. Still, there is room for improvement in this area if we take advantage of available authorities.

We first examined current regulatory guidance on quotation of Not to Exceed (NTE) and Firm Fixed Prices (FFP), past programs that have employed NTE pricing and DoD contract experience in support of FMS programs. We learned that 80% of all FMS contract let in 1999 in support of LOAs were, in fact, firm fixed price. It is important to note, however, that most of the work associated with negotiating and concluding these firm fixed price contracts was done after the LOAs were signed.

We next looked at any cases where most or all of an LOA was offered to a customer on an FFP/NTE basis. We found only one such case - the Dutch Apache Helicopter - where 92% of the case value was quoted on a NTE basis (the remaining lines were estimates). We found that the Army (Apache) and Navy (Cobra) expended significant resources to create a non-standard LOA, which incorporated a significant number of commercial terms and conditions. This resulted in one of the most expensive set of LOAs ever offered by the USG, involving a level of effort costing several million dollars. This effort was financed entirely with FMS administrative funds with no guarantee the U.S. would win the competition. Clearly, if procedures were implemented to develop NTE process for LOAs of all major programs, this would have a substantial impact on security cooperation resources, which are essentially a "zero sum game."

We also reviewed the legal and regulatory authorities that support use of Firm Fixed Price quotation for LOAs. No legal authorities exist to provide FFP LOA quotations for articles where the source of supply is from new procurement. However, authorities are present in Section 21 of the Arms Export Control Act and Section 0703 of the DoD Financial Management Regulation ("DoDFMR"), DoD 7000.14-*R, to quote firm fixed prices for defense articles sold from stock (except Working Capital Find items). Such prices are not subject to further adjustment providing the purchasing nation accepts the LOA before the expiration date. Offers of such sales are to be coordinated with the DoD Component comptrollers, the DSCA and OUSD Comptroller.

As a result of the above, the following guidance on use of FFP and NTE LOAs is effective immediately:

1. Absent financial arrangements to mitigate risks associated with FFP quotation, FFP LOAs for new procurement of articles and services will not normal be used. This does not preclude a FFP contract being negotiated in support of a signed LOA.
2. Maximum use will be made of FFP sales from stick in accordance with paragraph 070303 of Chapter 7, Volume 15 of the "DoDFMR." LOAs for FFP sales from stick shall include the following: "Additional Terms and Conditions for Firm Fixed Price Sales of Articles from the Stocks of the Department f the (identify the military department) : Pricing data presented herein are firm for the LOA (or in the case of specific line items only, "for lone item numbers xxx of the LOA") and will not be changed, provided this LOA is accepted before its expiration date."
3. Use of NTE prices for lines of LOAs for new procurement will be used on a "by exception" basis and only with the prior approval of the Director, DSCA. Generally, NTE LOAs will be approved only to support U.S. competitiveness, as required.
4. Customers may request an NTE LOA. However, customers will bear any incremental cost to develop a NTE LOA through an FMS case for defense services. Implementing agencies will forward such requests to develop the NTR LOA, to Director DSCA for approval.

Prevailing legal and financial policy experience on what may be permissible dealing with firm fixed price offers (there exists no guidance for "not to exceed" offers since this is a coined term) has evolved on a case-by-case basis. As a consequence, during briefing sand presentations of findings and recommendations on the staff study, a number of questions were frequently asked concerning the details, scope and attendant procedures that have been used to develop this policy. Attached is a two-page list of frequently asked questions with answers to clarify a number of points.

As we gain insights and more experience in the expanded use of eligible FFP and NTE LOAs we will revisit this guidance to determine if new legal or regulatory authorities are required to fulfill our mission.

MICHAEL S. DAVISON, JR.
LIEUTENANT GENERAL, USA
DIRECTOR

ATTACHMENT : 
As stated