Expect reporting/audit: misses can trigger remedies and reputational damage in-market. Responsibility for AIC compliance must rest with senior executives with regular reporting to the Board.
Major defence and sustainment procurements can deliver significant value to prime contractors and also impact and drive strategy for key subcontractors through flow-down requirements and opportunities. In all markets, government customers commonly expect broader economic and industrial benefits for the purchasing country, beyond delivery of the contracted capability.
In Australia, this is addressed through the Australian Industry Capability Program, and unlike in some other countries, the detailed Plan must form part of the tender response. This means early engagement with Australian industry, an in-depth analysis of capabilities and the potential for future partnerships, intellectual property licensing and import replacement.
The AIC Program is viewed by Government as the most important initiative for developing Australia’s defence industrial base and will directly feed into assessments of what constitutes overall value for money in any particular procurement. The Program aims to:
AIC Plans are sought for all Defence procurements where either:
Lower value procurements (between $4m and $20m) can require a less onerous AIC Schedule where the contractor is required to “use reasonable endeavours” to deliver them. This aligns with the expected use of established supply chains
AIC requirements are embedded in the ASDEFCON template Conditions of Contract for:
AIC can also be included as an optional requirement under Complex Materiel (Vol 1) (lower technical risk procurements with limited or no design and development).
The AIC requirements are detailed in multiple parts of the tender documents and should be addressed as a specialised workstream as well as part of the legal, risk and compliance activities.
AIC performance monitoring involves detailed reporting and audit requirements to demonstrate compliance. This is a focus area after the Australian National Audit Office published in May 2025 a critical report Maximising Australian Industry Participation through Defence Contracting.
Failure to meet AIC obligations can trigger contractual remedies and create reputational risk—particularly for foreign primes seeking follow-on work or a long-term presence in the Australian defence market.
For foreign primes, AIC is usually considered as comparable to (but not the same as) the “offsets” arrangements used in many other defence procurements, where a government purchaser requires agreed industrial and economic benefits for the local economy.
It is most similar to direct offsets (e.g., local manufacturing, technology transfer, local sustainment/repair/maintenance, and use of domestic subcontractors); and can be differentiated from indirect offsets (e.g., investment in adjacent industries, funding for R&D or universities, and export support for local industry).
Offsets are typically documented either in the primary contract or in a separate agreement (often a side deed). They can take a range of contractual forms and often include a required contractual percentage, the awarding of “credits” as a discharge mechanism and financial penalties for non-compliance – none of which is applicable under the Australian model.
Under ASDEFCON, AIC should be treated as a core contract workstream, not a bid “nice to have”. The relevant template (Strategic Materiel, Complex Materiel Vol 2 or Vol 1) drives how prescriptive the obligations are and how they will be measured. For primes, the practical focus is on early planning (credible Australian partners, sourcing and strategic vision), a well-considered and documented AIC Plan and also IP Plan, strong governance during delivery, and disciplined reporting to avoid both contractual remedies and reputational harm.
This article was written by Mark MacLennan, Defence Industry Lead and Malcolm Taylor, Consultant (non-legal)