Offsets Calculus: The Compliance Variable

The Defense Industry does not offer many opportunities for unbridled creativity, except in one place: offsets. For the uninitiated, offsets are contractual obligations where the purchaser attempts to “offset” the cost of the contract by mandating that a portion of the work be performed locally. There are two flavors of offsets: direct and indirect. Direct offsets mean the indigenized work is directly related to the commodities being procured, whereas indirect offsets do not need to be directly related. Offsets are multi-faceted, making the calculus to determine the appropriate solution complex for all parties involved.

While indirect offsets deliver limitless prospects, they are relatively rare. Direct offsets are far more commonplace, and present defense companies with the following challenge: what parts of the commodity can be directly offset? What items are at a “high technology” level and will interest the purchaser? How can the company establish this business relationship quickly and efficiently?  The overall solution is complicated (multi-variate level complicated), but the export compliance implications of the commodity being offset should be considered as a vital variable in this equation.

Part of the direct offset calculus is the export of the commodity and the technical information associated with it. Providing a direct offset of an International Traffic in Arms Regulations (ITAR) United States Munitions List (USML) controlled item requires potentially umpteenth export approvals over the lifespan of the contract.  Each of these export approvals has their own data gathering and record keeping requirements associated with it, not to mention the possible technology security and foreign disclosure (TSFD) policies that must support the offset. All said and done, the schedule, cost, and resourcing needs required to maintain ITAR compliance through the life of the contract are quite extensive. Alternatively, items controlled under the Export Administration Regulations (EAR) Commerce Control List (CCL) are still subject to export approval, but have far fewer record keeping requirements, have more exceptions available for possible use, and have a substantially shorter approval turn-around time when compared to the ITAR.

At this point, an offset savvy individual may delicately mention that “yes, this is true, but my customer is interested in only high technology offsets.” This is a valid point. Countries are astute in their offset requirement and mandate offsets of higher technology such as satellite assemblies, avionics, communications equipment, or circuit card assemblies. Nevertheless, by no means does that require that those commodities need to be ITAR controlled.

That brings us to parting wisdom: When determining direct offsets, peek at the classifications of the commodities in the Bill of Material. As offset negotiations begin, start with the least export-restrictive items, EAR99 or non-600 series items. If the right level of technology still cannot be met with those commodities, open the aperture to 600 series items, but consider the additional export restrictions associated with these commodities.  You will be glad you did.