This article is all about Canadian Content Value (CCV) and why it is so important to procurements that fall under the Industrial Regional Benefits (IRB) or Industrial Technological Benefits (ITB) programs. For detailed instructions on how to calculate your Canadian content value using OMX's CCV calculator, click here.
To start, all procurements awarded after 2014 in Canada that fall under the National Security Exemption (NSE) that are over $100m (CDN) will automatically fall under the rules of Industrial Technological Benefits (ITBs). Any programs awarded prior to 2014 will fall under the rules of Industrial Regional Benefits (IRBs). (For procurements under $100m CDN the government has the option to apply IRBs or ITBs.)
What both IRB and ITB procurement's have in common is that the entire value of the contract -100%- needs to be offset by the prime contractor with transactions that add up to 100% Canadian Content Value. It's not merely a 1 to 1 ratio, where $1 spent equals $1 in offset obligations fulfilled. Rather the offset obligations are measured in CCV.
So what exactly is CCV?
CCV is the percentage of the selling price of a product of service that is attributable to Canadian labour and materials. It is always measured in Canadian dollars and all IRB/ ITB transactions are measured in CCV.
This rule means that if a prime contractor undertakes work with a Canadian company valued at $1,000,000 and the Canadian company has a CCV of 60%, then the prime contractor would receive offset credit for $600,000. In this case for each dollar spent, the prime is only receiving sixty cents credit.
There are ways for prime contractors to make up for these 'lost' credits through multipliers and overachievement of CCV in other areas, but as you can see from the above example the higher your CCV, the more attractive your company will be as a potential transaction recipient.
So why does knowing about and understanding CCV matter to your company?
CCV is important to the prime for obvious reasons, they need to find a way when undertaking business activity in Canada to match 100% of the contract they were awarded. However, as they are not privy to your pricing methods and profit margins, the act and responsibility of calculating CCV accurately falls to you, the supplier.
When/if you enter into a transaction with a prime, for the purposes of fulfilling offset obligations, you'll be required to submit your CCV% to the prime. The prime in turn will record this information on a transaction sheet and submit it to Innovation, Science, and Economic Development Canada ISED (formerly Industry Canada)
ISED in turn can audit your company's statement of CCV to ensure that it is accurate when awarding credits to the prime. Thus, it is important for your CCV to be calculated accurately for both the primes' reporting and your benefit as a transaction recipient. After all, a false or misleading CCV percentage will not be great for your business relationship so it is best to understand CCV and how to calculate it rather than making an assumption and getting it wrong!
There are some other key details and benchmarks to note about CCV.
1. The minimum CCV percentage required in order to receive offset credits is 30%. Any transactions below this CCV will not be eligible to receive credit.
2. If the recipient company (the supplier) is an SME (under 250 employees) and the transaction value is $1,000,000 or less and with a CCV of 70% or higher, then ISED will consider the CCV of the company to be 100%. For transactions over $1,000,000, the first $1,000,000 will be rounded up to 100% CCV while the value above that will be calculated using the actual CCV percentage.
Taking the example above with a transaction value of $1,000,000 and 60% CCV - will again, work out to be credits of $600,000. However, in the same case with a CCV of 70%, the credits received will be automatically rounded up to 100% or $1,000,000 for companies with less than 250 employees.
There are two different ways that you can calculate CCV:
1) the Net Selling Price method and 2) the Cost Aggregate method.
- Net Selling Price.
This method requires that a product or service have a substantiated selling price. In this method, you start with your selling price and subtract out all ineligible costs, leaving you with the CCV of your product or service.
- Cost Aggregate.
This method does not require your product or service to have a substantiated selling price. Rather in this method you add up all eligible costs and subtract out any ineligible costs to arrive at your CCV.