United States: DOD Tightens Domestic Specialty Metals Requirements

Since the early 1940s, the Berry Amendment has imposed restrictions on the purchase of certain non-U.S. articles, supplies and materials, both to protect U.S. national security interests and to ensure the existence of certain essential domestic industries necessary for the national defense. The domestic source restrictions cover such items as food, clothing, fabrics, and tools. In 1973, Congress extended the Berry Amendment’s coverage to certain designated "specialty metals," such as steel, certain metal alloys, titanium and titanium alloys, and zirconium and zirconium-base alloys. See Sentinel, Spring 2006, for a complete discussion of these specialty metals.

The Department of Defense ("DOD") recently issued guidance implementing revisions to the specialty metal sourcing restriction regulations. Those revisions, included in the FY 2007 National Defense Authorization Act, serve to codify several provisions previously contained in the Defense Federal Acquisition Regulation Supplement ("DFARS"). The basic premise of the specialty metal sourcing restriction regulations is that specialty metals must be melted in either the United States or, if permitted in the contract, in a defined list of "qualifying countries."

The following are the major revisions put into effect by the DOD guidance.

The restrictions on specialty metal sourcing apply to the metal used in both end products and "components," which are defined as parts and assemblies incorporated into end products or other components. The new provisions limit the definition of "components" to parts and assemblies incorporated into: (1) an end product; and (2) a first-tier assembly. In other words, parts and assemblies incorporated below the second tier are not "components," and therefore need not comply with specialty metal sourcing restrictions.

The DOD guidance, however, does provide that where the acquisition is for any one of six types of products, the specialty metal sourcing restrictions must be flowed down to all subcontractors of parts and assemblies, regardless of tier. Those categories of products are:

• aircraft

• missile and space systems

• ships

• tanks and automotive items

• weapon systems

• ammunition

Further, the DOD clarifies that regulated components must be compliant with the regulations, even when the government purchases them separately.

Recognizing that many contractors have inadvertently failed to comply with specialty metal sourcing restrictions, especially with regard to commercial items, the new law provides for a one-time waiver period for items produced, manufactured, or assembled in the United States before Nov. 16, 2006, and accepted by the government after that date. The waiver requires that the contracting officer determine, in writing, that the failure to comply was inadvertent and determine whether any consideration is necessary for past violations. In all, this waiver period provides a window of time for previously non-compliant contractors to take the necessary steps to comply with the restrictions.

The recent provisions also implement a new de minimis exception to sourcing restrictions for electronics components that are commercially available. To qualify for this exception, specialty metals must constitute less than 10 percent of the value of the lowest-level electronics component.

The contractor or subcontractor need not determine the exact percentage value of the specialty metal in the component or end product, but must have a reasonable belief that it is less than 10 percent of the total value.

Finally, the new provisions include revisions to the non-availability exceptions to sourcing limitations. DOD officials may grant a Domestic Non-Availability Determination ("DNAD"), where specialty metal that is compliant is unavailable when needed and in the required form. Under the new law, whether compliant metal is available for a fair and reasonable price, in accordance with Federal Acquisition Regulation 15.402, may also be considered when determining whether a DNAD is appropriate.

These new provisions are effective immediately and should be carefully reviewed by all contractors involved with end products or components that include specialty metals. The current one-time waiver period will provide such contractors with an opportunity to ensure that they are compliant with specialty metal sourcing restrictions in the future.

This article is presented for informational purposes only and is not intended to constitute legal advice.