Offset Obligation in Defense Projects: Schedule, Budget, and Performance Implications

Abstract

Using the three criteria known as the “Iron Triangle,” this study examines and analyzes the ramifications and effects of offset constraints on defense projects. Such projects, managed vis-à-vis governments and international authorities, contend with a constraint that does not exist in other domains: offset, an obligation and condition for the sale of defense products to a purchasing government. The study combines qualitative tools, ten semi-structured interviews conducted with academics and professionals, with quantitative tools, surveys sent to project managers and other people employed in leading Israeli defense manufacturing companies. In-depth analysis of the responses and findings of the qualitative study reveals that offset risk must be managed as any other project risk. Its influence is evident in the failure to meet project budgets. This finding points to a factor to be considered when preparing for and managing a project, and even more during the early stages of examining a transaction, prior to acceptance. The present study examined three hypotheses, using chi-square tests of independence, goodness-of-fit tests, loglinear Poisson regression analyses and fluctuation charts. We found that low offset percentage levels are associated with low levels of project budget exception and with low levels of perception of project budget exception. No association was found between offset percentage and schedule, and between offset percentage and performance.

1. Introduction

In their efforts to ensure the successful completion of their tasks, project managers contend with various constraints and risks. Defense projects, which are mainly managed vis-à-vis governments and international authorities, entail an additional constraint. It is not a result of the task at hand or the surrounding conditions but rather a form of economic regulation imposed by the purchasing country—offset. The obligation to fulfill the conditions of an offset transaction—which is sometimes referred to as industrial cooperation [1]—is a contractual condition for the sale of security goods stipulated by the purchasing government. Accordingly, a foreign company that wins a contract to provide defense products must subsequently return part of the value via means other than monetary payment [2]. To improve our understanding of management issues in defense projects, we must examine how offset obligation influences the inherent difficulties of project management and the criteria for project success.

Many scholars have discussed the criteria for project success in general [3,4,5,6] and in defense projects in particular [7,8]. There is significant literature concerning the extensive topic of risk management and risk mitigation in projects. Indeed, the subject constitutes a chapter in its own right in the Project Management Body of Knowledge (PMBOK) [9]. While some (for example [10,11,12]) examine risk management in projects in general, others characterize and focus upon risk management in defense projects [13,14]. Yet, none of the studies concerning these topics examine offset, an external regulatory factor that significantly affects project risks, the supply chain, and project success. The innovation in our research is its focus on the impact offset has on the evaluation of defense projects.

Offset obligation is fulfilled via the supply chain and the selection of suppliers best suited to the project. Cheraghi et al. [15] consider at length the importance of supplier selection. Likewise, various scholars (for example, [15,16,17]) survey the criteria regarding the choice of optimal suppliers as partners.

2. Interdisciplinary Navigation

This article seeks to provide insights regarding the project portfolio management in areas beyond project management and its associated disciplines. Accordingly, the goal of this research is integrative. Indeed, knowledge has become increasingly dynamic, voluminous, and diverse. The importance of synthesis and interdisciplinary learning, which inform research, teaching, and practice, and thus enable critical reflection about our cumulative knowledge likewise grows. Therefore, critical and reflective synthesis of knowledge within and across disciplines plays a crucial role in scholarship. We attempt to realize this aspiration in the current paper by bridging between the disciplines of project management and economic regulation.

This study applies an integrative perspective to examine the influence of an economic regulatory element that varies mainly in terms of its magnitude, with minor differences in how it is fulfilled, based on the definitions given by different authorities. Essentially, this factor and its goal are similar in most countries and it has a broad impact on the management of defense projects. It is reasonable to presume that the insights provided by this study and their ramifications will stimulate thinking about project processes that are affected by offset obligation on the one hand, and on the other promote an examination of the regulatory need and its justification in the context of project ramifications.

The existing literature does not offer reliable information or theories regarding the ramifications of offset for project processes. Offset obligation is an innovative topic that affects globalization processes between countries, mostly in regards to defense industries, but not only. The impact of offset obligation on project success increases especially when the procurement obligation directly involves raw materials and project work packages. Therefore, this study endeavors to provide initial data on this topic and lead us to several conclusions, which will be presented below. We chose to conduct a comprehensive investigation of how the magnitude of offset obligation affects three basic and fundamental criteria used to measure project success [3]: schedule, budget, and project quality. Offset influences these three variables in the most direct manner. The results of this study, as presented below, reinforce the assumption that the offset obligation is particularly associated with project budget exceptions, one of the three project criteria examined here. Likewise, we studied offset as a risk and its execution vis-à-vis two variables: the magnitude of the offset compared to the magnitude and sale value of the project.

In short, this article is divided into five sections. Following this introduction, the second section provides a survey of existing literature, introduces the topic under study, and explains various project-related concepts: offset, measures of success, risk management, and choice of suppliers. The third section outlines the methodology, presenting the research plan and the variables examined. The fourth section presents the findings and results of the study: the different distribution of the variables—Project budget exception and Perception of project budget exception within the projects group having a offset percentage of up to 30%. The fifth section, the discussion and recommendations, suggests how scholars in the field of project management can use these findings and derive insights from them. This section also contains proposals for further research.

3. Literature Review

3.1. Offset

The competitive nature of the international defense market led to the development of new purchasing models that employ an arsenal of carefully considered, economically-driven methods. As such, the “rules” of offset constitute part of normal trade relations and are increasingly considered an innovative and effective marketing mechanism to capture a large portion of a new market or maintain traditional markets.

Considering the offset processes in the EU, many states have a strong national interest in maintaining offset as a method for purchasing modern defense products and in building their defense forces. In their offset policies, states seek to purchase weapons and technology, while at the same time encouraging investment activities that will benefit their defense interests [18]. Offset transactions provide a window of opportunity to obtain core defense technologies from more advanced states [19].

Counter-trade is a general term used to describe non-routine trade practices that entail some degree of reciprocity between the parties involved. In the first half of the previous century, counter-trade meant, among other things, the direct exchange of goods and services—often simultaneously and without any monetary transactions [20]. “Counter-trade” is a generic term used in the civil sector while the term “offset” is employed in the defense industry [21].

An offset is an industrial or trade compensation arrangement in which a purchasing government requires a foreign supplier/company that has won a large public contract to provide materials and/or services for the country’s defense forces. This compensation arrangement is in fact a prerequisite stipulated by the purchaser, according to which the foreign company or supplier returns part of the purchase value via means other than financial payment [2]. In general, an offset agreement requires that a foreign company or supplier invest in the purchasing country or spend a certain percentage of the sale value therein [22]. Such arrangements usually yield technological or industrial benefits for the purchasing country, for example: the acquisition of technology and new capabilities, support for key sectors, and the creation of jobs [23].

Offset agreements have manifold goals. They are designed to limit and reduce the vast expenses involved in defense purchases; to ensure that some of the money paid by the government (in some cases by the defense forces) will be balanced by a flow of foreign investments; to justify to the local population the purchase of foreign goods; to maintain foreign currency reserves; to obtain expensive and advanced technologies; to impart technological and manufacturing knowledge; to increase the skills and capabilities of the local workforce, especially in the industrial sector; to create new job opportunities and maintain local employment, in particular for small- and medium-sized businesses; and to strengthen the existing defense industry [1,22].

In offset agreements, value differs from cost. The purchasing country focuses on the value of the transaction, while the selling company/supplier concentrates on the cost of complying with the agreement. Offset arrangements are of greater value to the purchasing country because they offer a chance to acquire intangible assets, including technology, the ability to manufacture parts, and more [19]. When the purchasing state views an offset arrangement as highly valuable or desirable, it is likely to offer to multiply values for certain activities, thus increasing the value of the offset for the supplier. This incentivizes the selling company/supplier to provide goods in the framework of an offset obligation [24]. This incentive has recently been emphasized by the US Department of Commerce, stating that the multiplier is a factor applied to the actual value of certain offset transactions to calculate the credit value earned. Foreign purchasers use multipliers to provide firms with incentives to offer offset that benefit targeted areas of economic growth. When a (positive) multiplier is applied to the price of a service or product offered as an offset, the defense firm receives a higher credit value toward fulfillment of an offset obligation than would be the case without the application of a multiplier [25]. From the seller’s perspective, despite the cost involved in such obligation, this constitutes an opportunity to cultivate potential business and marketing opportunities in the purchasing state, to develop new suppliers (for the most part at lower costs), and to establish new international cooperation and/or joint endeavors [22].

The transaction is planned and implemented using offset plans. These plans, which are compiled especially for the implementation of the proposal by the candidate company/supplier, entail the execution of transactions and/or certain activities as direct or indirect compensation for the fulfillment of the purchasing agreement. The offset plan, which represents the supplier’s obligation, is a condition for the execution of the agreement to supply the goods, and it is fulfilled via orders from local industry and/or other transactions and activities conducted by the supplier. The extent of the offset plan is defined as a relative part of the sale value of the contract to provide materials and/or services for the purchasing state’s defense forces.

Offset transactions can be divided into main two types:

• Direct Offset—The supplier fulfills obligations to develop the defense industrial and technological base in the purchasing country. This is achieved by realizing offset projects or offset plans directly connected to the provision of defense products and their use by the purchasing country’s defense forces. They focus on weapons and military supplies and generally involve the granting of licenses, sharing information or technology, investment, credit support, training, joint production, subcontractors, and more.
• Indirect Offset—These transactions are not directly connected to the provision of defense products. The seller provides goods or services unconnected to military items, according to the trade agreement. For the most part they assume the form of manufacture under license, technology transfer, investment, credit support, training, purchases, etc. [18,25].

Apart from this division into direct and indirect offset transactions, such agreements can be categorized according to the nature of the transaction: sharing technology and information, support of research and development, direct foreign investment, advancing exports, and others [1].

States use various terms to describe their offset programs. For example, in Sweden such transactions are known as “industrial cooperation” (IC) or “industrial participation” (IP), emphasizing the aspects of cooperation and long-term business relations that characterize such arrangements, as opposed to short-term transactions [1].

3.2. A Successful Project—The “Iron Triangle”

Project management implements an assortment of tools and techniques, such as the Critical Path Method (CPM) and matrix organization structure, to direct the deployment of various resources in realizing a unique, complex, one-time aim within the constraints of time, cost, and quality. Every task requires a certain combination of working tools and structured techniques, in accordance with its environment and its life cycle, from inception to completion [3]. This definition of project management includes several criteria for measuring success, which are known as the “Iron Triangle,” which were outlined by Oisen [26] and continue to serve as project management criteria to this day.

Although scholars have suggested different criteria for success in project management, Oisen’s criteria—time, cost, and quality—continue to be implemented in many projects and included in project descriptions [3]. Significantly, while various factors for success or failure have been developed and adopted, and changes to the criteria for success have been suggested based on the factors above, these original criteria remain unchanged.

In a study of project managers’ experience of projects, White and Fortune [27] found that the majority of project managers reported using the Iron Triangle as their primary criteria defining project success. According to research by Müller and Turner [28], the Iron Triangle is valued by both experienced and inexperienced project managers. Across industries, the Iron Triangle criteria are the most commonly cited measures of project success [29]. Berssaneti and Carvalho [30] found that project management maturity is linked to the Iron Triangle. The persistent popularity of the Iron Triangle framework may be the result of its simplicity.

According to Martinsuo et al. [31] evaluating the success of a project should not be limited to assessing the goals achieved when the project is completed. Rather, benefits ought to be compared to costs and value over the entire lifecycle of the project, and the original value expectations of various stakeholders. The prevailing perception equates the value of a project with its the “worth” or the worth of its deliverables. The evaluation considers not only immediate outputs of the project, but also the subsequent outcomes (i.e., advantages and disadvantages of using those deliverables throughout their lifetime [32]), and the client’s willingness to pay for the deliverable [33]. Bakens et al. [34] stress the importance of effective communications with stakeholders when determining the value and benefits of a project. Other research considers project value and its relationship to risk management [35].

The Iron Triangle, also referred to as the “Triple Constraint,” has been and still is an indisputably central aspect of project management. Despite a significant body of research asserting that the Iron Triangle does not tell the whole story of project success measurement, these criteria still maintain a preeminent place in our understanding of whether a project has been delivered as planned [36].

3.3. Success in Defense Projects

Defense projects differ from other industrial projects in at least two important ways. First, defense projects are usually large, complex, and interdisciplinary. Second, they employ innovative technologies to obtain the desired operative performance, and as such they entail greater technological risks [13]. In addition, two other aspects that characterize the defense industries were pointed out by Rodríguez-Segura et al. [37]—long lead times (several years), and closely regulated control processes monitored by customers. These characteristics and the stakeholders’ involvement are essential for success when developing projects.

When seeking to identify the critical management factors for the success of defense projects, it is necessary first to define the meaning of the term “success.” The success of a project is perceived differently by each one of the interested groups (shareholders, managers, end users), and, therefore, the criteria to measure the project’s success must reflect these different perspectives. However, it is difficult to combine numerous perspectives into a single test, and, therefore, assessors usually employ simplified/superficial formulae to rate the success of the project.

Recognizing the limits of these simple/superficial approaches in assessing a project’s success, additional measures have been added, and these are now often employed in studies of project management. Based on the literature review, seven main criteria for measuring the success of projects can be discerned, five of which are used frequently: (1) technical achievements; (2) efficiency; (3) managerial and organizational ramifications (mainly customer satisfaction); (4) personal growth of the project team members; (5) the manufacturer’s abilities and business achievements. The variety of means available to assess organizational success led several researchers to gather them into separate bunches that share basic dimensions [7].

Pinto and Slevin [8] conducted an interesting study regarding the various measures of success. They suggested that the relative importance of each dimension changes over time. At the outset of the project, operational, timetable, budgetary, and technical achievements are most important. However, at later stages, external factors such as customer needs and satisfaction become more significant. Rodríguez-Segura et al. [37] indicate that the meanings of these success criteria differ for each stakeholder and stage of the project’s life cycle for each type of project. They suggest that two factors—project management and the satisfaction of the customer and end user—are necessary for success. The most relevant combination of factors is one in which customer and end user, project management, and project policies are the most influential factors. Project management and project policies provide the characteristics necessary to ensure a robust and well-structured project.

3.4. Project Risk Management

Many projects suffer from timetable delays, overspending, failure to obtain the desired aims, and even abandonment. Likewise, it is possible that they will not meet the technical blueprint or provide the intended benefits. The cost of failure leads to rethinking, analysis, and efforts to understand what facilitates project success.

Companies aspire to succeed in all projects and have become less willing to accept failure [10]. Consequently, project managers are under pressure to minimize the risks of failure. The increasing pressure to produce successful projects underscores the need for everyone involved in the project to consider the accompanying risks and how these can be effectively managed and minimized. According to the Association for Project Management (APM) [38], all projects are risky by nature, because they are unique, limited, complex, based on assumptions, and executed by human beings. Therefore, management of project risks must be structured into project management and implemented throughout the entire life cycle of the project.

Bai, Dai and Zhu [39] proposed a multi-phase risk-management method in which the assessment of risks is divided into two phases: the initial risk evaluation at the beginning of a project, which can be quantified by the combination of probability and loss, and the identification of the risks remaining after implementing the mitigation measures selected in the first phase, which also considers mitigation costs. They further proposed that the two-phase risk-evaluation process can be infinitely extended. The novelty of this proposed method is its combination of a dynamic risk-management system with timely reassessment of new risks, and the continuous tracking of risks until they become negligible.

Understanding that projects are associated with risks due to the existence of uncertainties and unknowns, risk management assumes a significant role in project success [40]. To increase the chances of success, it is necessary to understand the possible risks and assess them methodically and quantitatively, while observing the reasons for the risk and possible outcomes. Thereafter, those involved must select the optimal methods to tackle these risks [12].

Occurrence and assessment of a project risk is a combination of an event that is unanticipated or unwanted, likelihood of its occurrence, and its impact on project execution. Thus, identifying, analyzing, and responding are the essential elements of risk mitigation planning. For a proper risk analysis, three actions are essential [41]:

• Identifying a risk event or undesirable change;
• Assessing the probability of its occurrence;
• Evaluating its impact on key project success factors (scope, cost, time, and quality).

Project managers have greater opportunities to identify risks during the initial stages of a project as compared to later stages of the project. If one can identify, analyze, and develop a risk response plan during the initial stages of the project, the risk impact can be minimized or avoided. However, if a risk is identified during the later stages of a project, consequences associated with late identification and response could derail the project and will have a negative impact on project cost, schedule, and deliverables [40].

Project risks are likely to arise due to the task itself, which can be characterized by uncertainty, complexity, and urgency; a lack of resources; or other constraints, such as expertise, policy, security/safety, or environmental dangers. Although it is impossible to avoid risks entirely (just as no one can avoid natural disasters or fires), it is certainly possible to prepare for them by adding risk management elements to the project plan, and by using mechanisms, backup, and external sources that will protect the organization if and when something goes awry [42].

Kordova and Fridkin [43] illuminate and point out the risk management process in defense projects. These projects combine complex defense systems, e.g., radars and electronic warfare; ammunition and armaments; manned aircraft and avionics; observation and optronics; missiles, rockets, and air defense systems; weapon stations and launchers; teleprocessing and communication systems; drone systems; and UAVs. They claim that global defense projects require systematic management of risks, which limits the disruptions caused by risk and their propagation throughout the systems. Therefore, risk management is one of the most important areas that must be considered when managing defense projects.

According to the current perception of project management as a life-cycle process, project risk management is seen as a comprehensive process, beginning with the definition of the project and encompassing the planning, operative, and control stages, until completion and closure. Risk management is, therefore, an inseparable part of project management.

3.5. Suppliers and Subcontractors

Decisions regarding the selection of suppliers are of vital importance to the activities of every company. Indeed, purchasing has a direct and significant effect on quality, customer satisfaction, profits, and market share. “This conclusion was reinforced since 1993, with the appearance of internet trade and its effect on the increasing customer expectations that led to the competitive environment of today,” [15] in which the margin of error has become razor thin. Therefore, for many companies, assessing suppliers and purchasing processes are critical. Any tiny mistake in this respect can have an adverse effect on the organization’s stability in today’s stormy, competitive environment, which has little tolerance for mistakes [15]. Prior to embarking on internet trade, companies seek to improve their industrial purchases as an essential step for ensuring profits in several main ways; among them being outsourcing to focus on their unique core abilities, as companies increasingly search for suppliers to carry out production tasks and services that the companies themselves previously carried out [44].

Outsourcing has become an important business choice because cooperation with suppliers is likely to offer a competitive advantage. The aim is to supply goods/services in a more effective and efficient way [45]. Many purchaser/supplier relations in the modern day go far beyond the traditional connection, with various levels of communication and cooperation. Closer relations can create more efficient channeling, ensure better quality materials, facilitate the speedy introduction of new technologies, ease entry into new markets, overcome financial constraints, circumvent government limitations, and facilitate rapid learning from leading companies in certain fields [46].

Choosing a suitable supplier for a partnership is perhaps the most important step in creating a successful alliance. Careful filtering of potential partners is a process that requires time and an understanding of the partners’ expectations and goals [47]. To enable effective communication over a long period, it is advisable to collect extensive information regarding the potential partner’s resources, capabilities, and reliability, and in addition to assess its motivations and the quality of its management [47,48,49,50,51]. By contrast, when purchasers and suppliers hurry to enter a business connection without sufficient preparation or understanding of the other’s needs, the relationship often ends in failure. If the process is carried out properly, it is possible to achieve a long-term, high-quality relationship [52]. The decision regarding the type of relations is connected to the company’s specific approach and the strategic importance of cooperation within its activities (core vs. peripheral business). To preserve its competitive edge, a company must protect its core activities. Yet, it must be prepared to enter into purchaser–supplier relations in peripheral activities, which will yield far greater flexibility for organizational learning and enable it to obtain information that is of a less classified level and will be shared with the supplier [17].

Scholars have discussed the most important factors for ensuring success and the criteria for choosing partners. Geringer [53] was one of the first to conduct an extensive methodical study regarding the latter. He found that criteria regarding the partner’s capabilities, such as technological knowledge, financial assets, management experience, and access to markets, as well as the partner’s national culture, experience, size, and structure, are of great importance. Lin and Chen [16], in their comprehensive survey of the literature, identified around 180 possible qualities for assessing supply chain alliances in general industries. These can be divided into eight groups: (1) financial; (2) personnel management; (3) industrial characteristics; (4) acquisition of knowledge/technology and management; (5) marketing; (6) organizational competitiveness; (7) product development, production, and logistical management; and (8) building relations and coordination. More than 50% of the assessment qualities focus on the last two categories [16].

In his study, Dickson [54] identified and analyzed the criteria that purchasing managers use to assess and select suppliers. He concluded that three factors play a decisive role: the ability to meet quality standards; the ability to provide the goods on time; and achievement history. He also formulated several generalizations regarding the importance of these factors in the process of choosing a supplier. In the case of a complex product/service, presumably more factors will be considered; in such instances, price is likely to be relatively unimportant. By contrast, when purchasing simple products such as nuts and bolts, the price is usually the main factor under consideration. Therefore, he concluded that the nature of the product significantly affects which factors guide supplier selection. As such, he questioned the wisdom of applying one universal system for all kinds of purchasing decisions to the analysis of suppliers.

Over the years, the relative importance attributed to various critical factors for success has changed significantly. Increased competition and the globalization of markets that use internet-based technologies have led to a dramatic shift in the ranking of these factors, and new criteria for the selection of suppliers have also emerged. It seems that the criteria for choosing suppliers will continue to change based on a broadening definition of excellence: traditional aspects of achievements (quality, supply, price, service) will be assessed alongside non-traditional, developing aspects (JIT, communication, improvement of processes, and management of the supply chain) [15].

4. Methodology

4.1. Research Plan

While this study is fundamentally based on quantitative analysis, it applies both quantitative and qualitative tools. To better understand offset processes, as described in previous studies, we conducted an extensive literature review, which highlighted the flaws in previous research and identified lacunae in our knowledge, especially regarding defense projects. Following the lack of factually based data in this field, the study was conducted in two stages.

The first stage was an exploratory study and employed a qualitative approach. We conducted ten semi-structured interviews with leading project managers and senior managers in key roles, as well as academics from relevant fields. All are experts with an academic education and substantial professional experience. Content analysis of the interviews incorporated triangulation that revealed new information and provided insights into the topic under study. Triangulation is a qualitative research strategy for testing validity by confirming the convergence of information from different interviewees. Rather than drawing conclusions from a single interview, data triangulation requires having at least three data sources (three interviews) before presenting a meaningful insight. In the current study, the qualitative data was gathered from experts in three different roles: leading project managers, senior managers in key roles, and academics from relevant fields.

In the second stage, we conducted a quantitative study, collecting data via a specifically designed survey. The questions were composed based on a study of the relevant literature and the information collected in the previous stage, the semi-structured interviews. The survey was divided into three sections. The first included questions about the respondents’ demographic information, workplace, and accumulated professional experience in the field of projects involving offset obligation. The second part of the questionnaire concerned a specific, major project in which the respondents were involved, and the third section asked about the practices implemented by their organizations vis-à-vis projects with offset obligation. Figure 1 presents the research design.

4.2. Validity and Reliability

The questionnaire underwent a process of content validation. Likewise, it was validated by four academics and experts with practical experience who provided substantial and highly valuable feedback, enabling us to adapt and hone its phrasing.

The internal consistency of each variable was supported by an analysis of Cronbach’s alpha of the scale, as presented in

Table 1. The survey questions relating to the three “Iron Triangle” variables.

Measure of Project Success Criterion	Survey Questions	Cronbach’s Alpha
Budget	Perspective 1: With regard to the specific project: To what extent did failure to meet the planned project budget result (solely) from offset obligation? Perspective 2: Respondents’ perception of the practices implemented by their organizations: To what extent does a low/medium/high offset percentage affect the failure to meet the project budget (due to offset obligation)?	0.70
Performance	Perspective 1: With regard to the specific project: To what extent did failure to meet the planned performance result (solely) from offset obligation? Perspective 2: Respondents’ perception of the practices implemented by their organizations: To what extent does a low/medium/high offset percentage affect meeting the project’s performance goals (due to offset obligation)?	0.82
Schedule	Perspective 1: With regard to the specific project: To what extent did failure to meet the planned schedule result (solely) from offset obligation? Perspective 2: Respondents’ perception of the practices implemented by their organizations: To what extent does a low/medium/high offset percentage affect compliance with the project schedule (due to offset obligation)?	0.70

, and the consistency of the entire questionnaire, using the same analysis, was found to be 0.87.

4.3. The Sample

An online structured survey was sent to individuals employed in a range of relevant positions: project managers, offset managers, operation managers and supply chain personnel, marketing employees, and others involved in projects that entail offset constraints. The n = 58 respondents in the sample are employed by the largest Israeli defense companies, which produce defense systems. Our data analysis is based on their responses.

4.4. “The Iron Triangle”—Budget, Performance, and Schedule

As was discussed above, project success has long been measured by focusing on meeting timetable, budget, and quality constraints—the “Iron Triangle” or the “Golden Triangle” [3,26,55]. Others have suggested [4,5,56,57] additional elements for measuring success [7]. Indeed, overall project success is a much wider concept than the traditional Iron Triangle. As explained in the literature review, embedding project values and delivering these values by involving multiple stakeholders will produce benefits both for specific projects and in the project business generally. However, project managers still favor the traditional criteria when assessing the success of a project [58].

The current study deals with defense projects that are characterized by their complexity and importance in the dynamic environment of the battlefield. In order to assess the success of a defense project, this study used the basic criteria of budget, performance and schedule primarily because the concept of project success in defense industries is very conservative and continues to be based on the Iron Triangle.

Therefore, these basic criteria were used as the variables in this study. They represent direct project elements affected by offset obligation, elements with which project managers must contend throughout the project’s lifecycle.

The study examined each one of the three variables (budget, performance, schedule) from two perspectives. The first relates to a specific project in which the respondents were involved. The second concerns the respondents’ perception of the practices implemented by their organizations. That is, one the three variables (budget, performance, schedule) was the subject of two statements: one relating to the specific project and one relating to respondents’ perceptions of the practices implemented by their organizations.

To measure the internal consistency of the survey, Cronbach’s alpha was calculated between the two statements related to each variable. The results showed that Cronbach’s alpha values are within the acceptable range for reliability.

The Cronbach’s alpha value for budget equaled 0.70; for performance, 0.82; and for schedule, 0.70, as shown in Table 1.

4.5. Realization of the Offset as a Risk

Project risks arise due to a number of factors: the project tasks, uncertainty, complexity, or urgency. Sometimes, additional constraints, such as skill or policy, also affect the risks involved. Managers can contend with these, by identifying risks, and assessing, planning, and preparing an action plan to mitigate them [42].

In the semi-structured interviews conducted with experts during the qualitative stage, interviewees mentioned that the offset obligation, even though it is an external regulatory factor, significantly affects projects. As such, it must be managed in the same way as any other internal risk. Therefore, we decided to examine this variable in our study.

5. Data Analysis

The findings of this study were principally analyzed quantitatively, using IBM SPSS 27. In addition, a qualitative analysis of the semi-structured interviews was conducted. These interviews were recorded and summarized, followed by a content analysis of the interviewees’ responses. This qualitative analysis included a triangulation process to increase the credibility and validity of the findings. Every finding presented was found in the responses of at least three interviewees.

6. Findings

6.1. Findings of the Qualitative Study

As noted, the qualitative study was based on semi-structured interviews conducted with academics, project managers, and senior managers of defense companies. The findings were summarized according to categories outlined in advance, that were found to be fundamental, as well as according to categories discerned within the interviewees’ responses. These categories are presented in

Table 2. The categories discerned within the interviewees’ responses.

Category	Projects Managers	Senior Managers	Academics
Offset impact on budget, performance, and schedule of defense projects
Budget compliance as the criterion most affected by offset obligation
Offset is defined and managed as a risk
Implementation of offset by drawing up a methodical purchasing plan
The vendors must comply with the offset requirement

More specifically, analysis of the interviews yielded the following findings:

• According to the findings, offset obligation is a significant factor for budget, project performance, and schedule. The extent and level of its influence on these three elements differs, depending on the characteristics of a specific project. Sometimes, project managers will prefer a greater effect on one of these criteria in order to avoid a negative impact on another criterion that the project manager prioritizes as more important and/or strategically valuable. Most of the interviewees mentioned budget compliance as the criterion most affected by offset obligation.
• Offset is defined and managed as a risk, as any other project risk. All aspects of this constraint must be analyzed, and a program should be devised including activities to reduce the chances of the risk materializing. Like any other risk, it is dynamic and must be monitored throughout the project life cycle, until it no longer constitutes a risk.
• All interviewees emphasized the need to organize and prepare as early as possible at the price quote stage for the implementation of offset by drawing up a methodical purchasing plan. It is necessary to analyze capacities that can potentially be transferred to vendors to realize the offset, their extent, and their critical importance to the project, as well as the abilities of vendors in the purchasing country and the timing for placing orders.
• The interviewees’ responses indicate that the choice of vendors plays a major role in realizing offset. This obligation sometimes forces the company to search for another vendor who is not a traditional, well-known or “in-house” supplier, for this capacity. It is necessary to invest in the process of locating vendors in the purchasing country in order to comply with the offset requirement, and ensure that these suppliers have the necessary production abilities and the sufficient capacity, and are responsive and open to mutual cooperation.

6.2. Findings of the Quantitative Study

The quantitative research tool employed was a survey concerning how offset percentage affects three criteria for measuring project success: budget, performance, and schedule.

6.3. Descriptive Statistics

The sample included 58 valid questionnaires. Around half the respondents were project managers (47.5%); approximately one quarter were operation and supply chain managers (26%); others were offset managers (13.1%); and the rest are employed in other fields, such as production, marketing and sales, and others (13.4%).

Around one third of the respondents had 20 years or more of cumulative experience working in defense projects (37.78%); a further third had 11–20 years of cumulative experience (31.1%); approximately one quarter had 6–10 years of cumulative experience (24.6%); and the remainder had up to five years of cumulative experience working in defense projects (6.6%). One third of the respondents had been involved in more than five such projects (36.1%); others were involved in 4–5 projects entailing offset obligation (9.8%); an additional third in 2–3 projects (34.4%); and the remainder had been involved in one project entailing offset obligation (19.7%).

6.4. Findings Regarding the Research Questions

This study examined how offset percentage affects defense projects, focusing on three basic aspects of project management: schedule, budget, and performance, using three hypotheses, as follows:

Hypotheses 1 (H1).

Offset percentage will be associated with budget.

Hypotheses 2 (H2).

Offset percentage will be associated with performance.

Hypotheses 3 (H3).

Offset percentage will be associated with schedule.

6.4.1. Examination of H1

To test the first research hypothesis, first a chi-square test of independence was applied to analyze the association between the offset percentage (low offset percentage: <30%; moderate offset percentage: 50–80%; and high offset percentage: >80%) and project budget exception (from 1 = without exception to 5 = exception > 50%). The relationship between these variables was found to be non-significant.

Therefore, because the largest number of observations was in the group with a low offset percentage and the remaining observations were divided equally between the high and moderate groups, we applied a goodness-of-fit test to compare the observed and expected frequencies of levels of project budget exception within each level of offset percentage, as presented in

Table 3. Observed and expected frequencies of project budget exception levels within each level of offset percentage.

Offset Percentage	Project Budget Exception	Observed n	Expected n	Residual
1 = Up to 30% ${\chi }^2\left(4\right)=11.61, p<0.05$	1 = Without exception	15	9.2	5.8
	2 = Exception of 10%	12	9.2	2.8
	3 = Exception of 11–25%	11	9.2	1.8
	4 = Exception of 26–50%	6	9.2	−3.2
	5 = Exception over 50%	2	9.2	−7.2
2 = 50% ${\chi }^2\left(3\right)=9.56, p<0.05$	1 = Without exception	10	4.5	5.5
	2 = Exception of 10%	2	4.5	−2.5
	3 = Exception of 11–25%	2	4.5	−2.5
	4 = Exception of 26–50%	4	4.5	−0.5
3 = 80% or more ${\chi }^2\left(3\right)=0.67, p=ns$	1 = Without exception	6	4.5	1.5
	2 = Exception of 10%	4	4.5	−0.5
	3 = Exception of 11–25%	4	4.5	−0.5
	4 = Exception of 26–50%	4	4.5	−0.5

.

Goodness-of-fit test findings (based on Table 2) indicate that within low levels of offset percentage, the frequency of low levels of project budget exception is significantly greater than the frequency of high levels of project budget exception. Based on the same rationale, the study applied a goodness-of-fit test to compare the observed and expected frequencies of levels of offset percentage within each level of project budget exception.

Table 4. Observed and expected frequencies of offset percentage levels within each level of project budget exception.

Project Budget Exception	Offset Percentage	Observed n	Expected n	Residual
1 = Without exception ${\chi }^2\left(2\right)=3.96, p=ns$	1 = Up to 30%	15	10.3	4.7
	2 = 50%	10	10.3	−0.3
	3 = 80% or more	6	10.3	−4.3
2 = Exception of 10% ${\chi }^2\left(2\right)=9.33, p<0.01$	1 = Up to 30%	12	6.0	6.0
	2 = 50%	2	6.0	−4.0
	3 = 80% or more	4	6.0	−2.0
3 = Exception of 11–25% ${\chi }^2\left(2\right)=7.88, p<0.05$	1 = Up to 30%	11	5.7	5.3
	2 = 50%	2	5.7	−3.7
	3 = 80% or more	4	5.7	−1.7
4 = Exception of 26–50% ${\chi }^2\left(2\right)=0.57, p=ns$	1 = Up to 30%	6	4.7	1.3
	2 = 50%	4	4.7	−0.7
	3 = 80% or more	4	4.7	−0.7
5 = Exception over 50%	1 = Up to 30%	2 a	2.0	0.0

Note: ^a. This variable is constant. Chi-Square Test cannot be performed.

presents the observed and expected frequencies of offset percentage levels within each level of project budget exception.

Goodness-of-fit test findings (based on Table 3) indicate that within low levels of project budget exception, the frequency of low levels of offset percentage is significantly greater than the frequency of high levels of offset percentage. Figure 2 provides an integrative view of the findings present in Table 1 and Table 2.

According to the first hypothesis and on the basis of the findings of the goodness-of-fit tests (Table 1 and Table 2), it can be concluded that low levels of project budget exception are related to low levels of offset percentage. To validate the above findings, it was decided to recode the offset percentage and project budget exception into two levels each and to re-examine the findings that were discovered. Following this decision, two categories were created for offset percentage: offset up to 30% and offset more than 30%. In addition, two categories were created for project budget exception: exception up to 25% and exception more than 25%. Figure 3 shows the relationship count between recoded offset percentage and recoded project budget exception.

After offset percentage and project budget exception were recoded, and to retest the first hypothesis, a loglinear Poisson regression analysis was performed.

Table 5. Results of loglinear Poisson regression analysis for prediction the natural log of the frequency of interactions between recoded levels of offset percentage and recoded levels of project budget exception.

Parameter	Estimate	SE	Z	95% Confidence Interval
				Lower Bound	Upper Bound
Constant	3.65 ***	0.16	22.65	3.34	3.97
Offset percentage more than 30% × Project budget exception more than 25%	−2.73 ***	0.65	−4.19	−4.01	−1.46
Offset percentage more than 30% × Project budget exception up to 25%	−0.98 **	0.31	−3.17	−1.58	−0.37
Offset percentage up to 30% × Project budget exception more than 25%	−2.15 ***	0.50	−4.31	−3.12	−1.17
Offset percentage up to 30% × Project budget exception up to 25%	0 a,b,c

Note: *** p < 0.001; ** p < 0.01; Reference group: Offset percentage up to 30% × Project budget exception up to 25%; ^a. This parameter is set to zero because it is redundant; ^b. Model: Poisson; ^c. Design: constant + offset percentage × project budget exception.

presents results of loglinear Poisson regression analysis for prediction the natural log of the frequency of interactions between recoded levels of offset percentage and recoded levels of project budget exception.

Loglinear Poisson regression analysis shows that the likelihood of frequency of interactions between the offset percentage up to 30% and the project budget exception up to 25% is significantly greater than: the likelihood of frequent interactions between offset percentage more than 30% and project budget exception more than 25% (estimate = −2.73, p < 0.001); the likelihood of frequent interactions between offset percentage more than 30% and project budget exception up to 25% (estimate = −0.98, p < 0.01); and the likelihood of frequent interactions between offset percentage up to 30% and project budget exception more than 25% (estimate = −2.15, p < 0.001).

Next, the study applied a chi-square test of independence to analyze the association between the offset percentage and perception of project budget exception (from 1 = to a very small extent to 5 = to a very large extent). The relationship between these variables was found to be non-significant. Figure 4 shows the relationship counts between the above variables.

As seen in Figure 4, considerable frequencies of moderate and low levels of perception of project budget exception are concentrated within the lowest level of offset percentage.

To demonstrate that these findings are not random, a loglinear Poisson regression analysis was conducted. To strengthen the interpretation of this analysis, the perception of project budget exception variable was split into two levels: one level below the median (inclusive), and a second level, above the median. The former, “Low perception of project budget exception”, included levels: “1 = to a very small extent” (1.7% of all cases), “2 = to a small extent” (32.8% of all cases), and “3 = to a moderate extent” (37.9% of all cases), a total of 72.4% of the cases. The latter, “High perception of project budget exception” included levels: “4 = to a large extent” (22.4% of all cases) and “5 = to a very large extent” (5.2% of all cases), a total of 27.6% of the cases.

The “Offset percentage” variable was also split into two levels: “Low offset percentage” included “1 = up to 30%” (72.4% of all cases), while “High offset percentage” included “2 = 50%” (13.8% of all cases) and “3 = 80% or more “(13.8% of all cases), for a total of 27.6% of all cases.

Figure 5 shows the relationship count between offset percentage and perception of project budget exception after recoding these variables to two levels each.

Table 6. Results of loglinear Poisson regression analysis for prediction the natural log of the frequency of interactions between recoded levels of offset percentage and recoded levels of perception of project budget exception.

Parameter	Estimate	SE	Z	95% Confidence Interval
				Lower Bound	Upper Bound
Constant	3.45 ***	0.18	19.36	3.10	3.80
High offset percentage × High perception of project budget exception	−1.75 ***	0.46	−3.78	−2.65	−0.84
High offset percentage × Low perception of project budget exception	−1.10 **	0.36	−3.08	−1.80	−0.40
Low offset percentage × High perception of project budget exception	−1.01 **	0.34	−2.93	−1.68	−0.32
Low offset percentage × Low perception of project budget exception	0 a,b,c

Note: *** p < 0.001; ** p < 0.01; Reference group: Low offset percentage × Low perception of project budget exception; ^a. This parameter is set to zero because it is redundant; ^b. model: Poisson; ^c. Design: constant + offset percentage × perception of project budget exception.

presents results of loglinear Poisson regression analysis for prediction the natural log of the frequency of interactions between recoded levels of offset percentage and recoded levels of perception of project budget exception.

Table 5 shows that likelihood of frequency of interactions between low offset percentage and low perception of project budget exception (reference group) are significantly greater than likelihood of frequency of interactions between high offset percentage and high perception of project budget exception (estimate = −1.75, p < 0.001), than the likelihood of frequency of interactions between high offset percentage and low perception of project budget exception (estimate = −1.10, p < 0.01), and then the likelihood of frequency of interactions between low offset percentage and high perception of project budget exception (estimate = −1.01, p < 0.01). These findings confirm the first hypothesis.

6.4.2. Examination of H2 and H3

No associations were found between offset percentage and performance, and between offset percentage and schedule.

7. Discussions

Various scholarly articles discuss topics such as project success and the criteria for its assessment; risk management; and the choice of suppliers, both in general and in defense projects in particular. However, the literature does not examine how offset, a regulatory factor that influences all of these matters, affects defense project management. Seeking to fill this lacuna, the present study offers a preliminary exploration of this topic.

The findings of the two parts of the study, both qualitative and quantitative, produced several significant results and insights:

• This study examined the three criteria for project success known as the “Iron Triangle”—budget, performance, and schedule. In the qualitative part of the study, the interviewees indicated that offset affects the extent to which a project meets these criteria to different degrees. Indeed, the extent to which offset influences each one of them differs from project to project and is dependent on the project’s individual characteristics. At the same time, the majority of interviewees indicated that offset has the greatest influence on failure to meet the project budget. This may be because schedule obligations are concluded in writing in advance and, similarly, performance goals are stipulated at the outset of the project’s life cycle. Failure to meet one of these two criteria usually results in a fine, damages the company’s image, and reduces the chances of winning future projects (defense projects vis-à-vis governments). In addition, any delay in the project schedule results in increased costs; consequently, the project manager tries to prevent delays as much as possible. To avoid failing to meet the criteria of schedule and performance, project managers sometimes prefer to deviate from the planned budget yet ensure they meet the stipulated schedule and provide the required performance. In the quantitative part of the study, we found that the low offset percentage levels were significantly associated with the low levels of project budget exception and perception of project budget exception. Conversely, no association was found between offset percentage and schedule, and between offset percentage and performance.
• As mentioned in the methodology, the Iron Triangle, also referred to as the “Triple Constraint,” has been and is still an indisputably central aspect of project management. Despite a significant body of research asserting that the Iron Triangle does not tell the whole story when measuring project success, these criteria still occupy a preeminent place in our understanding of whether a project has been delivered as planned. Based on our findings, we concluded that project managers have a good understanding of the Iron Triangle concept, especially for defense projects. This assumption was supported by PMBOK GUIDE [9] and Government Accountability Office (GAO) [24].
• In an attempt to ensure that these projects indeed meet the stipulated goals, from the very outset, project managers make significant efforts to this end, including preparation of a work plan; monitoring and quality assessment; preparation of a risk management plan; preparation of back up plans, etc. Despite these efforts, however, projects often exceed the budget slightly. Likewise in a few cases, which project managers greatly endeavor to avoid, these activities are insufficient, and for extreme, sometimes unexpected reasons, the project concludes with a large exception from the budget.
• An additional aspect evident in most of the interviews conducted in the qualitative part concerned offset as a project risk. According to the interviewees, it is extremely important to consider offset as a risk from the very outset of the project life cycle, to analyze the significance of this risk, and to define activities that can reduce it. This finding supports the argument that the risk management process includes several advanced stages of analysis and thinking [59]. Moreover, it is necessary to monitor the development of this risk throughout the project life cycle and correspondingly update/change activities to reduce the risk, as defined by the Project Management Institute in the Project Management Body of Knowledge [9].
• It is possible to minimize risk factors via early planning and the allocation of the necessary resources for this purpose [43]. Considering the offset constraint, in addition to the existing project constraints, it is necessary to take an additional series of actions. Early organization is a vital condition for successfully meeting this obligation as well as all the other project requirements. As early as the price quote stage, project managers must analyze this constraint, developing an organized plan that includes analysis of the project’s purchasing capacity and the company’s central and “peripheral” activities. In accordance with the results of these analyses, they should examine the potential capacities that can be transferred to subcontractors in order to meet the Offset Obligation. This supports the findings presented by Todeva and Knoke [17], who note that entering supplier–purchaser relations and the decision regarding the character of these relations are connected to the company’s stance vis-à-vis cooperation and the company activities, consequently requiring an examination of the company’s core vs. peripheral activities.
• In most cases, meeting offset obligation necessitates locating new subcontractors. The process of searching, locating, and developing a new subcontractor in the client country is of great importance and has ramifications for meeting the goals of schedule, budget, quality, and project achievements. Therefore, it is necessary to invest in the process of choosing suppliers who meet defined criteria. This finding supports the conclusions of Cheraghi et al. [15], according to which, decisions regarding suppliers are of critical importance to every company’s activity, and they directly and significantly influence a series of elements, among them quality, customer satisfaction, profitability, and others.

8. Conclusions and Recommendations

This study explored and analyzed how a regulatory factor largely overlooked by “traditional” studies of project management affects defense project management in projects involving offset obligation. The findings indicate that further research should focus on several management challenges on the path to successfully attaining the goals of a defense project with offset commitments: meeting the project budget; managing the offset as a project risk; early organized planning vis-à-vis purchasing to meet the project goals; and choosing subcontractors to realize the offset.

8.1. Main Themes

• Early preparations concerning offset obligation, from the price quote stage, can significantly reduce the level of risk. Such preparations should begin by analyzing the project’s purchasing capacity. Then, the core capacities of the company should be defined including those that it is impossible or undesirable to transfer to a subcontractor for production, assessing the capacities that do not yield additional value to the company and can potentially be produced by subcontractors in the customer country. Likewise, it is important to define which technologies can be transferred for production by subcontractors in client countries. Thinking “outside the box” and transferring capacities that were previously produced by a “home” supplier in a traditional manner to new subcontractors will help meet the offset obligation.
• It is important to continuously search for and locate potential subcontractors in the client country. Developing a supplier is a long process that requires a precise examination of the subcontractor from many perspectives. Among these are technological capabilities, achievements, service consciousness, responsiveness, production capacities, ability to meet schedules, financial backing, the added value offered by the provider, and more. However, at the same time, it is necessary to examine and preserve the company’s accumulating knowledge and core business, ensuring that these do not trickle out.
• Transferring production capacities to a new supplier can cause delays and result in failure to meet the project schedule, on the one hand, and the desired achievements and quality on the other. To avoid this, and to ensure the smooth and speedy integration of a supplier into the supply chain, it is desirable to take a number of steps to support the supplier: training in various aspects of quality and work processes; establishing the production line; remote or on-site guidance; engineering support and guidance; improvement of production files and transfer of the full production file; transferring capacities from home to external production. The literature presents many examples of applying mathematical models to solve optimization problems in the supply chain [60,61]. Developing a realistic mathematical model for offset obligation might be an excellent opportunity to ensure a smooth path in the supply chain, starting from raw materials and concluding with delivering the project to the customers.
• The appointment of a designated offset manager can help the company improve its understanding of the regulations and laws in the customer country (which products and technologies are recognized as falling into the category of offset, for example). It is desirable for the offset manager to have the ability to activate purchasing, production, and engineering bodies in the organization, thus enabling him to outline and build an optimal purchasing program that integrates suitable offset suppliers to meet the needs of the project and the demands of the offset. In addition, it is crucial to offer support and guidance while transferring production from the company to a subcontractor in the client country or from a “traditional” supplier to an additional offset supplier.
• The professionalism of the offset manager will prevent or at least reduce the risk of failure to meet the project’s offset obligation. In addition to planning and building a purchasing program that takes into consideration the offset constraint at an early stage of the project, creative and “clever” solutions will help to realize the offset obligation quickly and at minimal cost. Likewise, the offset manager should be aware of the offset-related specific added value offered by capacities produced in the client country.

8.2. Study Limitations and Recommendations for Future Research

This study focused on leading defense companies in Israel. Based on its findings, future studies should analyze how offset affects large projects with a sale value of more than 80 million dollars. We recommend that future studies increase the number of participants and widen the geographical area, worldwide, to include more defense companies that face offset constraints. There indeed is previous literature that recommends replacing the Iron Triangle with project value, and therefore we further recommend expanding the current study and examining the offset effect on project value and stakeholder satisfaction. Following the survey presented in the current study, it might be fruitful to compare participants’ responses, according to the position the respondents hold. Another recommendation for future research relates to the statistical analyses. To improve and expand the statistical power of analyses in this field, we recommend combining different types of classification such as TwoStep cluster analysis, k-means cluster analysis, hierarchical cluster analysis, silhouette statistics for cluster analysis, Naïve Bayes, decision-tree analysis, discriminant analysis, and nearest neighbor analysis.