B-200308 L/M, OCT 27, 1981, OFFICE OF GENERAL COUNSEL

B-200308 L/M: Oct 27, 1981

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THE AMENDMENT CLARIFIES THE CIRCUMSTANCES UNDER WHICH SELLING COSTS ARE ALLOWABLE. OR OTHER FOREIGN SALES OF MILITARY PRODUCTS WERE NOT ALLOWABLE. WE INDICATED THAT WE DID NOT HAVE ANY COMMENTS ON THE PROPOSED AMENDMENT. WE ARE OPPOSED TO ELIMINATING THE PROVISIONS WHICH PROHIBIT THE ALLOWABILITY OF SELLING COSTS ASSOCIATED WITH FOREIGN MILITARY SALES OR OTHER SALES OF MILITARY PRODUCTS ABROAD. WE BELIEVE THAT THIS CHANGE WILL ENCOURAGE DEFENSE CONTRACTORS TO AGGRESSIVELY MARKET THEIR PRODUCTS AROUND THE WORLD AT GOVERNMENT EXPENSE. WE DO NOT BELIEVE THE ELIMINATION OF THE CURRENT PROHIBITION IS ADVISABLE EVEN THOUGH SUCH FOREIGN SALES MAY RESULT IN A LOWER OVERALL COST TO THE GOVERNMENT FOR PURCHASES OF PRODUCTS ALSO SOLD ABROAD.

B-200308 L/M, OCT 27, 1981, OFFICE OF GENERAL COUNSEL

DIGEST: UPON FURTHER REFLECTION GAO OPPOSES PROPOSED AMENDMENT TO DEFENSE ACQUISITION REGULATION SEC. 15-205.37, THE COST PRINCIPLE COVERING SELLING COSTS, WHICH ELIMINATES CURRENT PROHIBITION AGAINST ALLOWABILITY OF SELLING COSTS ASSOCIATED WITH FOREIGN MILITARY SALES OR OTHER SALES OF MILITARY PRODUCTS ABROAD. GAO FAVORS RETAINING CURRENT PROHIBITION AGAINST ALLOWABILITY OF SELLING COSTS ASSOCIATED WITH MILITARY SALES ABROAD.

MR. JAMES T. BRANNAN, DIRECTOR:

BY LETTER DATED SEPTEMBER 2, 1980, YOU REQUESTED OUR COMMENTS ON A PROPOSED AMENDMENT TO DEFENSE ACQUISITION REGULATION (DAR) SEC. 15 205.37, THE COST PRINCIPLE COVERING SELLING COSTS. THE AMENDMENT CLARIFIES THE CIRCUMSTANCES UNDER WHICH SELLING COSTS ARE ALLOWABLE. THE AMENDMENT ALSO ELIMINATES THE CURRENT PROVISIONS OF DAR SEC. 15 205.37(B) WHICH PROVIDED THAT SELLING COSTS INCURRED IN CONNECTION WITH POTENTIAL AND ACTUAL FOREIGN MILITARY SALES UNDER THE ARMS EXPORT CONTROL ACT, 22 U.S.C. SEC. 2751 ET SEQ. (1976), OR OTHER FOREIGN SALES OF MILITARY PRODUCTS WERE NOT ALLOWABLE.

ON OCTOBER 16, 1980, WE INDICATED THAT WE DID NOT HAVE ANY COMMENTS ON THE PROPOSED AMENDMENT. UPON FURTHER REFLECTION, HOWEVER, WE ARE OPPOSED TO ELIMINATING THE PROVISIONS WHICH PROHIBIT THE ALLOWABILITY OF SELLING COSTS ASSOCIATED WITH FOREIGN MILITARY SALES OR OTHER SALES OF MILITARY PRODUCTS ABROAD. WE BELIEVE THAT THIS CHANGE WILL ENCOURAGE DEFENSE CONTRACTORS TO AGGRESSIVELY MARKET THEIR PRODUCTS AROUND THE WORLD AT GOVERNMENT EXPENSE. IN OUR OPINION, MARKETING TACTICS MAY CONFLICT WITH FOREIGN POLICY GOALS AND OBJECTIVES, ESPECIALLY IN DEVELOPING COUNTRIES OR SENSITIVE MIDDLE EAST AREAS. THUS, WE DO NOT BELIEVE THE ELIMINATION OF THE CURRENT PROHIBITION IS ADVISABLE EVEN THOUGH SUCH FOREIGN SALES MAY RESULT IN A LOWER OVERALL COST TO THE GOVERNMENT FOR PURCHASES OF PRODUCTS ALSO SOLD ABROAD.

WE UNDERSTAND THAT THE PROPOSED AMENDMENT IS STILL UNDER CONSIDERATION. WE HOPE THESE COMMENTS WILL RESULT IN A DECISION TO MAINTAIN THE CURRENT PROHIBITION AGAINST THE ALLOWABILITY OF SELLING COSTS ASSOCIATED WITH SALES OF MILITARY EQUIPMENT ABROAD.