Government Contracting:

Reimbursement of Foreign Selling Costs

NSIAD-91-1: Published: Jun 7, 1991. Publicly Released: Jun 7, 1991.

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Pursuant to a legislative requirement, GAO assessed the effect of legislation providing for the reimbursement of Department of Defense (DOD) contractors for costs they incurred in promoting the export of U.S. defense industry products, focusing on whether the implementing regulations provided appropriate: (1) incentives to stimulate exports and provide cost savings; and (2) criteria to ensure that allowable costs would provide future cost savings to the government.

GAO found that: (1) 1989 DOD appropriation and authorization acts provided for a 3-year trial period for allowing reimbursement for export promotion costs; (2) 35 of 36 surveyed defense businesses indicated that foreign selling cost reimbursement was unlikely to stimulate exports of defense industry products; (3) none of the businesses believed that the 110-percent reimbursement ceiling significantly affected their foreign marketing decisions; (4) the reimbursement policy did not appear to greatly influence the businesses' expenditure levels or budget projections; (5) the Congressional Budget Office's study of the budgetary impact of foreign sales cost reimbursement concluded that such reimbursement would cost the government from $80 million to more than $300 million, and that it was unlikely that foreign sales would increase sufficiently to offset those costs; (6) review of the overhead claims of 12 defense businesses indicated that the ratio of foreign selling costs to foreign sales was significantly higher than the ratio of domestic selling costs to domestic sales; (7) most of those 12 businesses believed that government reimbursement for foreign selling costs would improve their competitive position in foreign markets; and (8) before the U.S. government started reimbursing contractors for foreign sales costs, foreign customers reimbursed those costs when businesses allocated them to the foreign contracts.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The recommendation was to let the legislation provision sunset, and for DOD to revise regulations accordingly. Congress followed the recommendation to let the legislative provision expire. DOD has indicated that regulations will not be revised.

    Matter: Congress should allow section 2324(f)(5) of title 10, United States Code, to cease to be effective in 1991 as provided in the legislation.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: The recommendation was to let the legislation provision sunset, and for DOD to revise regulations accordingly. DOD has evaluated the recommendation and, at its own discretion, decided not to revise regulations.

    Recommendation: If Congress does not extend the subject legislation, the Secretary of Defense should take appropriate steps to have the federal acquisition regulation (FAR) amended to make foreign selling costs unallowable on U.S. government contracts. The regulation should make it clear that foreign selling cost are allowable on foreign sales contracts to the extent that they meet the other FAR tests for allowability.

    Agency Affected: Department of Defense


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