Impact of foreign military sales case payment schedule improvements on Defense Security Assistance Management System

DISAM Journal,  Spring, 2003  by David A. Rude,  Nels E. Berdahl

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The Defense Security Cooperation Agency (DSCA) continues to move ahead with improvements to the foreign military sales (EMS) program. DSCA Policy Memorandum 01-22 of 19 September 2001 represented the culmination of months of work by a multi-service finance Integrated Process Team (IPT) involving the Military Departments (MIL-DEPS) and Defense Finance Accounting Service-Denver (DFAS). Led by DSCA, the finance IPT policy package announced implementation of the Standby Letter of Credit (SBLC), and made several fundamental changes in payment schedules. The underlying payment schedule objective was to improve their usefulness and accuracy as a cash management tool while continuing to comply with the requirements of the Arms Export Control Act of 1976, as amended.

The Defense Security Assistance Management System (DSAMS) has now been modified to accommodate the policy changes prescribed in DSCA Memorandum 01-22. This article describes the changes in Letter of Offer and Acceptance (LOA) documents generated in DSAMS and provided to customers. For additional background information, readers are encouraged to review DSCA Memorandum 01-22 (including all attachments), which is posted on the DSCA website at http://www.dsca.mil under the Publications and Policy link. A separate DSCA policy memorandum amplifying key points from DSCA Policy Memorandum 01-22 and providing additional clarification, was scheduled for issuance in May 2003. DSAMS users should review the "What is New" section of the on-line DSAMS User's Guide (DSAMS Help) for guidance on the new functionality.

The basic DSAMS response document for countries without a SBLC is unchanged from the previous format. The term "Initial Deposit" is now used only on Letters of Intent, basic Leases, and basic cases without a Letter of Intent. While the format of the document has not changed, the calculations behind the payment schedule have changed significantly. These changes (Termination Liability and Line Level calculations) should result in payment schedules that are more closely aligned with actual cash requirements during the execution phase. A summary of those revised calculation methodologies is discussed below.

Termination liability is now calculated only against the base unit price for price element contract cost (CC). This change will adjust the dollar value subject to termination liability calculations in DSAMS. The use of contractor termination schedules is the preferred baseline document for calculating the termination liability that would apply at a given point in time for a specific EMS case. DSAMS now provides the user full capability to manually enter these termination liability values down to the sublime level.

DSCA Memorandum 01-22 also calls for a fundamental shift in payment schedule construction baselines from Case to Line Level. Implementing agencies now have the ability to enter line-specific expenditure forecasts with or without termination liability, and to apply line-specific payment curves to lines with a particular execution pattern.

On occasion, the FMS customer may submit a requested payment schedule for a given case. This schedule may be based on the customer's internal budgetary allocation, reflect other constraints, or may reflect a desire to pay on an accelerated basis. When approved by the appropriate U.S. government policy organization, DSAMS now provides the case manager with the ability to enter a "customer supplied" schedule. The customer supplied schedule must be compared with a U.S. government-developed payment schedule, which means that both schedules must be constructed in DSAMS (although only an approved customer supplied schedule will appear on the response document). if a customer supplied schedule is approved for use in the FMS case, a note will be included immediately following the schedule that identifies the name of the organization approving the schedule and also the comment "The U.S. government reserves the right to bill for additional amounts if, during the execution phase, actual costs materialize at a rate that cannot be supported by the customer-based schedule." Note: Both the "Planned Payment Schedule" for Japan and the U.S. government-developed payment schedule will continue to appear on the response document for Japan's EMS cases.

Standby Letter of Credit

Attachment 1 of DSCA Memorandum 01-22 provides policy guidance on implementing and managing SBLCs. For countries with an implemented SBLC, the LOA response document payment schedule will be printed in a five column format as shown in Figure 1. The termination liability amounts, by quarter, represent the amount of U.S. government requirements that are covered by the SBLC. The termination liability amounts are not included in the quarterly payment or in the U.S. government financial requirements values. The columns "Quarterly" and "U.S. Government Financial Requirements" represent the incremental and cumulative values, respectively, due from the customer on that case as of a given payment date.