Requirement That U.S. Companies Recover U.S. Government Research and Development Costs From Foreign Customers

In response to a congressional request, GAO reviewed whether regulations requiring Department of Defense (DOD) recoupment of commercial sales of research, development, and test and evaluation (RDT&E) costs, from foreign military sales customers, correctly implement U.S. law. GAO also reviewed DOD practices in the recoupment procedures.

The Arms Export Control Act states that letters of offer for government-to-government sale of defense articles or services should include appropriate charges for a proportionate amount of any nonrecurring costs of research, development, and production of major defense equipment. The act contains no requirement to recover a share of nonrecurring costs on commercial sales by defense contractors. However, GAO is unaware of any statute which prohibits DOD from recovering these costs from contractors or commercial sales. It is DOD policy to seek reimbursement from both domestic and foreign customers if nonrecurring RDT&E costs or nonrecurring production costs exceed $5 million. Although not legislatively mandated, GAO believes that it is appropriate for DOD to require contractors to pay the government a pro rata share of RDT&E and production investment costs when commercial sales are made by defense contractors. Further, unless the regulations governing recoupment of these costs are amended or determined to be invalid, the regulations must be followed by defense contractors. In future studies, GAO will consider whether specific legislation is needed to strengthen the government's ability to recover a fair share of nonrecurring costs associated with development and procurement of defense articles and services sold under commercial sales arrangements.