Offsets · 1 of 3
An offset is not a discount, a bribe or a favor. It is a defined regulatory term. The Bureau of Industry and Security defines the term in a single line: "Compensation practices required as a condition of purchase in either government-to-government or commercial sales" of defense articles and services, and of certain items controlled on the Commerce Control List (15 CFR 701.2).
Two features of that sentence carry the weight. The compensation is required as a condition of purchase, which is what separates an offset from ordinary commercial goodwill. And it applies to government to government and commercial sales alike, so the obligation does not disappear because a sale runs through the Foreign Military Sales system.
The regulation defines an offset agreement in one sentence: "Any offset as defined above that the U.S. firm agrees to in order to conclude a military export sales contract" (15 CFR 701.2).
The definition is drafted to catch soft commitments as well as hard ones. It covers agreements whether they are best effort undertakings or carry penalty clauses. A supplier that has promised to try, without promising to succeed, has still entered an offset agreement for regulatory purposes.
That matters more than it sounds. Reporting obligations and cost treatment attach to the existence of the agreement, not to how enforceable it is.
The regulation splits offsets into two kinds by their relationship to the thing being sold. The definition of a direct offset reads: "An offset transaction directly related to the article(s) or service(s) exported or to be exported pursuant to the military export sales agreement" (15 CFR 701.2).
The definition of an indirect offset is the mirror image: "An offset transaction unrelated to the article(s) or service(s) exported or to be exported pursuant to the military export sales agreement" (15 CFR 701.2).
The distinction is about subject matter, not about size or value. Local assembly of the aircraft being sold is direct. Investment in an unrelated local industry, arranged to satisfy the same commitment, is indirect. Both count.
The scope is set by another defined term. Military export sales are defined as follows: "Exports that are either Foreign Military Sales (FMS) or commercial (direct) sales". Two categories of goods are covered. The first is defense articles and services as defined by the Arms Export Control Act and the International Traffic in Arms Regulations. The second is items controlled under a Commerce Control List classification carrying the numeral six as its third character (15 CFR 701.2).
A supplier working out whether it sits inside this regime has two things to establish. The first is the nature of the item, which must be a defense article or defense service, or a controlled item in that Commerce category. The second is the identity of the buyer, which must be a foreign country or a foreign firm (15 CFR 701.3). The route the sale takes does not change either answer.
This is the point most often misunderstood, and the regulation and the acquisition rules are consistent about it.
The regulation's definition of a prime contractor reads: "A firm that has a sales contract with a foreign entity or with the U.S. Government for military export sales" (15 CFR 701.2). It is that firm which enters the offset agreement.
The Defense Federal Acquisition Regulation Supplement states the government's position plainly. In accordance with a Presidential policy statement of 16 April 1990, "DoD does not encourage, enter into, or commit U.S. firms to FMS offset arrangements", and responsibility for deciding whether to engage in offsets, and for negotiating and implementing them, rests with the companies involved (DFARS 225.7306).
The same supplement describes an offset agreement as the contractual arrangement between the Foreign Military Sales customer and the United States defense contractor. It identifies the offset obligation the customer has imposed and the contractor has accepted as a condition of purchase. Those agreements, it says, "are distinct and independent of the LOA and the FMS contract" (DFARS 225.7303-2(a)(3)(i)).
It then draws the consequence for the government. "The U.S. Government assumes no obligation to satisfy or administer the offset agreement or to bear any of the associated costs" (DFARS 225.7303-2(a)(3)(iii)).
So on a Foreign Military Sales case there are two agreements running in parallel. The United States government sells to the partner government under a Letter of Offer and Acceptance. The supplier separately promises the partner government something else entirely. The first is covered in how an FMS case is built. The second sits between the two commercial parties, and that separation is deliberate.
The regulatory terms above rest on a statute that is not part of the arms transfer machinery at all. Section 723 of the Defense Production Act of 1950 reaches a firm that enters a contract for the sale of a weapon system or defense related item to a foreign country or foreign firm. If that contract is subject to an offset agreement exceeding $5,000,000 in value, the firm must furnish information about the sale to the official named in the implementing regulations (50 U.S.C. 4568(c)(1)).
The same provision directs the Secretary of Commerce to prescribe what must be furnished, and to protect the information from public disclosure unless the firm that supplied it authorizes release (50 U.S.C. 4568(c)(2)). Part 701 is the result. That is why the definitions live in a Commerce regulation rather than in the Arms Export Control Act. It is also why the office a supplier deals with on offsets is the Bureau of Industry and Security, not the Defense Security Cooperation Agency.
Everything downstream turns on these terms. Whether a supplier must report a commitment depends on whether it meets the definition of an offset agreement and on its value. Whether the cost of meeting it can be recovered depends on how the underlying case is financed, which is covered in the United States position on offsets.
A commitment made informally, in a negotiation, by a person who did not think they were creating an offset agreement, is still capable of being one. The regulation asks what was agreed and why, not what it was called.
| Offset | Compensation required as a condition of purchase in a defense sale. 15 CFR 701.2. |
|---|---|
| Direct offset | An offset transaction directly related to the item being exported. |
| Indirect offset | An offset transaction unrelated to the item being exported. |
| Military export sales | Foreign Military Sales or commercial sales of defense articles and services, or of the relevant Commerce controlled items. |
| Prime contractor | The firm holding the sales contract with the foreign entity or with the United States government. |
| BIS | Bureau of Industry and Security, the Commerce bureau that administers 15 CFR part 701. |
Every statement above links to the document behind it. The full source list for this piece is on the sources page.
This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.
Offset commitments are industrial promises made in one country and carried out in another. Sentfore works at the delivery end of defense programs in difficult environments, providing secure movement, protective security, facilities and life support around equipment and people once they arrive. Requirements can be sent through the contact page.