There is no single pricing rule for every government-to-government (G2G) defence contract. In the U.S. Foreign Military Sales (FMS) system, the government develops an estimated case price from the source of supply, applicable contract-pricing rules, direct charges and surcharges. DFARS Subpart 225.73 applies normal defence-contract pricing principles and recognises certain reasonable, allocable FMS costs. The buyer should test the estimate, funding schedule and cost-change exposure before accepting the offer.
What you will learn
- How FMS estimates are assembled when competition does not establish the price.
- Why a Letter of Offer and Acceptance records estimated costs, and what that means for the buyer's exposure.
- Why offsets need governance outside the base FMS process, and what the buyer should prepare before acceptance.
Written by the G2G Deal Design practicepowerabode DMCC's neutral buy-side practice for government-to-government procurement. We hold no position in the transactions we advise on — no cargo, no supplier, no equity. People, standards and certifications.
How is a G2G defence contract priced without a competitive tender?
Pricing moves from bid comparison to an evidence-based estimate. In a competitive tender, qualifying offers help establish price reasonableness. Without that comparison, the buyer has to examine how the offer was built. Under U.S. FMS, contracts are priced using the same principles as other defence contracts. Where non-U.S. Government prices do not exist, DFARS 225.73 also recognises reasonable and allocable costs specific to doing business with a foreign government.
- No competing bid means no market-clearing price to reference
- The estimate may combine stock, procurement, services, transport and programme surcharges
- Comparable sales, scope assumptions and cost components become the practical tests of reasonableness
The resulting offer is formalised through a specific instrument, but that instrument does not always make the quoted amount firm.
What is a Letter of Offer and Acceptance, and how does it set price?
A Letter of Offer and Acceptance (LOA) records the articles, services, estimated costs and standard terms offered through U.S. FMS. Acceptance implements the government-to-government case, but the quoted amount is normally an estimate rather than a fixed final price. The Defense Security Cooperation Agency's Security Assistance Management Manual (SAMM) states that final adjustments are established during case execution or after delivery, and that the purchaser remains responsible for the full case cost.
| Competitive tender | LOA-based G2G deal |
|---|---|
| Price reasonableness tested across bids | Estimated case price built from applicable pricing rules and charges |
| Multiple suppliers compete | One supplying government |
| Award follows the tender's evaluation method | LOA acceptance implements the FMS case; final cost may change |
Because the LOA creates a funding commitment without necessarily fixing the final amount, the pricing discipline behind the estimate matters enormously.
What pricing discipline does DFARS 225.73 apply?
It tells U.S. contracting officers to apply established defence-contract pricing principles to FMS acquisitions. The rules are not a buyer guarantee and do not turn an LOA estimate into a price cap. They do, however, create a documented acquisition process with several relevant mechanics:
- FMS contracts use the same core pricing principles as other U.S. defence contracts
- Where adequate price competition exists, certified cost or pricing data is not required; without it, other cost or pricing analysis may be needed
- Contingent fees are controlled through dedicated FMS clauses and disclosure rules
These controls govern the U.S. acquisition. They do not mean every underlying negotiation record or contractor-proprietary detail will be released to the foreign purchaser.
What pricing information should a government request when there's no competing bid?
A buyer should request enough releasable information to understand the estimate, while recognising that proprietary contractor data may be withheld. SAMM permits a detailed description of major cost components when the purchaser asks, unless the information is proprietary and not releasable. Useful requests include:
- The major components included in each estimated line price
- The source-of-supply and vendor-estimate assumptions behind the offer
- Direct charges, accessorial charges, surcharges and the payment schedule
- The process for amendments, funding calls and final case-cost adjustments
The buyer can then compare the package with analogous cases, public contract data and its own should-cost model. The aim is not to claim access to every internal record; it is to make the assumptions, exclusions and cost-change risks visible before acceptance.
How do offset and local-content obligations affect the final price?
Offsets sit outside the core government-to-government pricing framework, which creates a governance gap the buyer needs to close separately. Under current U.S. policy, the government does not encourage, enter into or commit contractors to FMS offset arrangements. The companies involved decide whether to offer offsets and remain responsible for negotiating and implementing them.
- Offset commitments may be a condition of the defence purchase even when they are not managed by the U.S. Government
- Offset costs can still affect the economics of an FMS contract
- Local-content commitments need their own milestones, credit rules, reporting and verification
The U.S. Bureau of Industry and Security describes offsets as industrial compensation required as a condition of purchasing defence articles or services from abroad. That separate bargain needs a separate governance record.
What should a government's negotiating team prepare before signing?
The strongest position comes from treating the LOA as a funding and risk decision, not a catalogue price. A prepared negotiating team typically arrives with:
- A request for releasable pricing detail already submitted, with a clear deadline for response
- Benchmark reference points from comparable past deals, where available
- A defined position on offset scope and local-content verification, negotiated as part of the same process rather than left for later
- A written view of amendment, payment, cancellation and final-cost exposure under the proposed terms
- A decision on whether to negotiate directly or have an independent advisor shadow the process — useful when political ownership needs to stay visibly with the government's own team
Structured preparation separates a defensible decision from an offer accepted because there is no alternative on the table. For the wider set of buyer-side mechanics across G2G deals, the G2G Deal Design insights hub covers pricing, governance and negotiation across energy, infrastructure and defence.
Key takeaways
- No tender means a different evidence base: test the estimate through pricing rules, comparable cases, cost components and assumptions.
- The LOA price is usually an estimate: the purchaser remains exposed to final case costs, subject to later adjustments and refunds.
- DFARS creates process discipline, not a price guarantee: it governs the U.S. acquisition and may not expose proprietary contractor records.
- Offsets need their own governance: define milestones, credit rules and verification outside the base FMS process.
- Prepare before acceptance: benchmark references, scope choices and cost-change scenarios should be ready before the funding commitment is made.