Army Underpricing of Machine Guns Sold to Foreign Governments

An October 1977 report recommended that the Army rebill foreign military sales customers approximately $60.7 million for the value of M-2 50-caliber machine guns sold at less than replacement prices. These contracts were made in 1973 and 1974, and deliveries to customers took place from September 1974 to May 1977. The Department of Defense (DOD) took the position that replacement prices should be charged only on machine guns sold since December 1974. This would preclude any repricing on the above sales since all offers and acceptances took place before December 1974. A review of pertinent laws and regulations indicated that: (1) under Army Regulation 795-14, issued June 3, 1974, the Army apparently had the option of determining the standard price either at the time the offer was prepared with a reasonable specified acceptance date or at the time the item was dropped from inventory; and (2) the ambiguity regarding the time of determination of price was not clarified by DOD until Jun 17, 1975. Therefore, charges for machine guns shipped after June 1975 should have reflected their replacement cost. The Secretary of Defense should attempt collection action and establish mechanisms to immediately notify foreign military sales customers of price changes when asset positions indicate future replacement procurement of U.S. stocks.