How to leverage Advanced Purchase Agreements for military supply

How to leverage Advanced Purchase Agreements for military supply

The war in Ukraine and growing geopolitical tensions have forced Europe to rethink its defense strategy to strengthen its ability to respond to crises. With demand for defense equipment surging, securing production capacity now depends on predictable financing, firm procurement commitments, and a balanced approach to risk-sharing between public and private actors.

The European response: EDIRPA and EDIP regulations to structure defense procurement

To address these challenges, the European Union has introduced new instruments to structure and accelerate military equipment procurement. Among them, the European Defence Industry Reinforcement through Common Procurement Act (“EDIRPA”), adopted in 2023, aims to encourage joint defense acquisitions among Member States.

EDIRPA is based on pooled military procurement, allowing at least three Member States to form a group and place joint orders through a contracting agent (a Member State, an international organization, or the European Defence Agency). This agent negotiates and finalizes contracts with suppliers on behalf of the participating states, ensuring better coordination and economies of scale.

The EU supports this mechanism by providing co-financing of up to 15-20% of the estimated procurement value. However, it does not directly conclude contracts on behalf of Member States. With a budget of €300 million, EDIRPA remains a temporary instrument (2023-2025), designed as an emergency response to immediate military needs.

To provide a long-term solution, the European Commission presented the proposal for a regulation establishing the European Defence Industry Programme and a framework of measures to ensure the availability and timely supply of defense products (“EDIP”) on March 5, 2024. This regulation has not yet been adopted.

Unlike EDIRPA, which is limited to a crisis period, EDIP aims to permanently structure and sustain joint military procurement efforts at the European level. To implement this vision, EDIP introduces specific contractual mechanisms that reinforce the European Commission’s role in structuring and facilitating defense procurement.

Key contractual mechanisms of EDIP

EDIP introduces several contractual mechanisms to streamline military procurement and strengthen industrial capacity.

First, Article 35 allows the European Commission to act as a central purchasing body, negotiating and directly buying defense products for or on behalf of participating Member States. The Commission forms a negotiation team of at least four specialized experts to ensure that the acquired equipment meets military requirements.

Second, Article 36 introduces the possibility for the European Commission to facilitate Advanced Purchase Agreements (“APAs”) within the framework of Article 35. These agreements enable Member States to commit to purchasing defense equipment before production begins, providing contractors with financial predictability. Negotiated by the Commission on behalf of participating states, APAs may also include advance payments, securing initial funding for production and reducing financial risk for manufacturers.

Finally, Article 37 establishes a system set up by the Commission to facilitate the conclusion of production procurement agreements. Within this framework, Member States, associated countries, and Ukraine can submit requests specifying their procurement needs in terms of volume, specifications, pricing, and duration, while contractors submit offers detailing available capacities and conditions. The Commission assesses these requests, matches suppliers with buyers, and facilitates contract negotiations. States can then request a joint procurement procedure through the Commission, as provided for in Article 35.

This innovative approach to defense seems to be broadly inspired by the contractual mechanisms put in place during the Covid-19 pandemic.

A precedent: the experience of APAs during the Covid-19 crisis 

The use of APAs in defense procurement finds a clear precedent in the mechanisms implemented during the COVID-19 pandemic, when the European Commission and Member States pooled resources to secure timely access to vaccines. At the time, the urgent need for safe and effective vaccines required a coordinated EU strategy to accelerate their development, manufacturing, and deployment.

To address this challenge, the Commission negotiated APAs with vaccine manufacturers, securing the right to purchase a specified number of doses within a given timeframe and at a predetermined price. In return, the EU provided upfront funding to support production. This risk-sharing mechanism enabled pharmaceutical companies to invest heavily in production capacity without fully bearing the financial risk of failure.

While the defense sector operates differently, the underlying objective of APAs remains the same: ensuring fast and predictable production by providing manufacturers with firm orders and financial guarantees. Just as vaccine APAs accelerated development, EDIP’s defense APAs aim to provide visibility for manufacturers, enabling them to scale up production capacity and respond swiftly to growing demand.

Another notable parallel is the role of the European Commission as a central purchasing body. In the vaccine strategy, the Commission coordinated procurement efforts for Member States, ensuring an equitable and efficient distribution of doses across the EU. Similarly, under Article 36 of EDIP, the Commission could negotiate defense APAs on behalf of Member States, ensuring a more structured, predictable, and efficient procurement process. Moreover, as with vaccines, the EU would have the ability to cover upfront payments to mitigate financial risks for manufacturers and encourage faster production.

The negotiation of APAs between pharmaceutical companies and the European Union during the COVID-19 pandemic was a valuable learning experience, providing insights into how to structure large-scale procurement agreements under conditions of uncertainty. The lessons learned from this process have helped refine contractual mechanisms, offering a clearer framework for balancing financial commitments, production risks, and delivery obligations. This knowledge can now be leveraged to better secure contractual relationships in the defense sector, ensuring that APAs under EDIP include well-defined terms that provide predictability for manufacturers.

Key considerations for defense manufacturers in APAs

For defense manufacturers, APAs provide financial security and demand predictability, but they require careful structuring to ensure a balanced allocation of risks and obligations. Several aspects should be carefully negotiated to secure favorable terms:

• Minimum order quantity (“MOQ”) & reserved volume

Military production requires long ramp-up periods and significant capital investment. When negotiating an APA, it is important to define a firm MOQ to ensure a baseline commitment from buyers. If a reserved volume is included, clear terms should specify how any reserved capacity production may vary and whether unpurchased volumes can be sold to third parties to mitigate financial exposure. Ensuring that firm orders are confirmed well in advance, and providing contractual flexibility in production and delivery schedules, will also help

• Option for additional orders

Defense demand can fluctuate based on operational needs, making it  advisable to include flexibility for additional orders beyond the firm commitment and reserved volume. Introducing clauses that allow parties to negotiate in good faith any order exceeding the initial agreement can provide manufacturers with opportunities to scale production while ensuring they are not obligated to fulfill unexpected demand under unfavorable conditions. If a Member State urgently requires additional armored vehicules for example, the APA should include a mechanism to expand production capacity without disrupting initial commitments. These types of provisions allow a rapid and structured response to evolving military needs.

• Order flexibility & cancellations

Military procurement programs face budgetary constraints and shifting priorities. Manufacturers should ensure that cancellations or reductions in orders are only permitted in exceptional cases, such as force majeure, and are not allowed for convenience. If a defense system is rendered obsolete due to evolving military requirements or technological advancements, predefined compensation mechanisms, such as cancellation fees and revised delivery schedules, will help mitigate financial losses. Clear provisions on acceptable cancellation events and requirements for prior written notice should also be established.

• Regulatory considerations and export controls

Defense procurement is subject to strict regulatory frameworks, including export controls, embargoes, end-use restrictions, and technology transfer limitations. These constraints can significantly impact the production, delivery, and international sales of military equipment and its components. Manufacturers and Member States must anticipate these regulatory requirements when structuring APAs to ensure compliance and prevent disruptions. Limitations on the destination of exported goods, authorized end-users, and approved deployment scenarios should be carefully assessed.

Failure to adequately address regulatory constraints can lead to delays, financial penalties, or even contract termination. APAs should therefore include clear provisions on compliance obligations, defining responsibilities for obtaining necessary licenses, securing regulatory approvals, and managing import/export authorizations. Given the evolving nature of defense regulations, contracts should also incorporate contingency measures to address potential changes in legal requirements or geopolitical restrictions that could affect the execution of the agreement.

• Preparedness fee

A preparedness fee is necessary to support the manufacturing and supply of the reserved volume, particularly in the defense sector, where securing critical materials, specialized components, and maintaining a skilled labor force are essential to ensuring production readiness. The amount should be defined in the APA, taking into account the reserved volume and MOQ. This fee should be due from the effective date of the APA and remain payable regardless of whether an order form is placed by a Member State. It should be nonrefundable, except for the portion that is neither committed nor incurred at the time of termination or expiry of the APA.

• Quality control and risk management

Defense manufacturers should maintain autonomy in quality control and ensure that any rejection of non-conforming products follows a structured process. The agreement should prevent automatic returns and instead allow for a joint investigation process to determine appropriate resolutions.

• Pricing and payments

Clearly defining pricing structures based on MOQ and reserved volume is particularly relevant in the defense industry, where high development costs, long production cycles and specialized components require significant upfront investment. Negotiating structured payment schedules with predefined milestones will provide financial stability and secure predictable revenue stream. The contract must also include protections against late payments, the validity of which will need to be assessed taking into account the specific constraints applicable to public procurement.

• Supply chain considerations

Defense manufacturers should anticipate that, in principle, production sites will need to be located within the European Union (but exceptions apply). This requirement necessitates proactive supply chain planning, including adjustments at the level of subcontractors to ensure compliance with EU regulations and procurement expectations. Additionally, defense manufacturers should account for obsolescence management in their supply chain strategies. Given the long lifecycle of military equipment, it is essential to secure long-term availability of critical components, anticipate technology refresh cycles, and establish contingency plans to mitigate risks associated with supplier discontinuation or regulatory changes. Failure to do so could result in production bottlenecks, increased costs, or supply disruptions, undermining the effectiveness of APAs in ensuring timely and predictable defense procurement.

• Intellectual property considerations

Defense manufacturers entering into APAs should carefully assess the ownership and licensing of intellectual property (“IP”) associated with defense equipment. Given the strategic nature of military procurement, Member States may seek access to technical data, software, and design rights to ensure operational sovereignty and maintenance capabilities. Contracts should clearly define whether IP rights remain with the manufacturer, are transferred to the purchasing states, or are subject to a license agreement. Additionally, defense manufacturers should anticipate potential restrictions on technology sharing, export controls, and third-party licensing to safeguard proprietary innovations while complying with EU and national security regulations. Failure to address these considerations could lead to disputes over IP access, limitations on future commercial use, or regulatory barriers affecting the execution of APAs.

For any inquiries regarding this topic or the contractual framework of advanced purchase agreements, please do not hesitate to contact one of the authors or your usual contact at Hogan Lovells.

Authored by Mikael Salmela, Maimouna Goudiaby, Charlotte Le Roux, and Camille Raymond.