This article discusses compliance "Buy America" provisions in federal procurement laws and how the Federal Acquisition Regulations (FAR) implement some of those commitments in government contracts. It also outlines the application of the Trade Agreements Act to many large solicitations and how that can impact compliance of goods, services and construction. The FAR, found under 48 C.F.R. Part 25, also provides a brief analysis of the fundamental changes and clarifications to the Buy America requirements for federally-funded infrastructure projects that are currently proposed by the Office of Management and Budget (OMB).
Buy American – The Federal Acquisition Regulations
The Buy American Act (BAA) was enacted during the Depression in 1933 to encourage the federal government to buy from American companies. The BAA requires the federal government to purchase, with certain exceptions, only "domestic end products" from U.S. companies. The BAA rules require that the U.S. government must have a domestic preference when procuring products. Therefore, the genesis of determining the government's purchasing restrictions in a given contract is contingent on the definition of a "manufactured product." To qualify as a "domestic end product," the manufactured product must meet two requirements (or prongs); first, the end product must be "manufactured" in the United States, and second, the end product must be made of "substantially all" U.S.-sourced components. The first requirement to meet the domestic preference under BAA is that the manufactured end product must be manufactured in the United States. In addition to being manufactured in the United States, the "end product" must also be made of "substantially all" U.S.-sourced components, which means the cost of the components mined, produced, or manufactured in the United States exceeds 60% of the cost of all components. This percentage threshold will increase to 65% at the beginning of the calendar year of 2024, and again to 75% at the beginning of the calendar year of 2029. There are exemptions if the product is commercially available off-the-shelf. Based on decisions of the Comptroller General, the term "manufacture" means the completion of an article in the form required for use by the government. Manufacturing may include a mechanical operation performed on a foreign product or assembly of separate items, whereby the identity and character of the end item is established and fixed as to its current and future use. The key in determining whether a process constitutes manufacturing for BAA purposes is not necessarily whether a foreign product has been significantly altered, but whether the item being purchased by the government is made suitable for its intended use. Manufacturing specifically does not include sterilization, inspection, packaging, or testing or evaluation operations.
Build America, Buy America – The Office of Management and Budget Regulations
The OMB is proposing to revise its Guidance for Grants and Agreements, limited in scope to support implementation of the BABA. These revisions include a new part 184 in 2 CFR chapter I and revisions to 2 CFR 200.322, which will contain new regulations addressing the Buy America Preference for all awards with infrastructure expenditures and provides definitions for the purposes of 2 CFR part 184. The OMB noted that it aims to provide "consistent and clear market requirements" for industry players for determining the cost of components of manufactured products. The OMB's Proposed Rule adopts the BABA's definition of "Infrastructure" when referring to federal-funded projects that are subject to the Buy America requirements, which a threshold question as to whether the BABA applies to a given government project. The term infrastructure includes: ".... public infrastructure projects which includes at a minimum, the structures, facilities, and equipment for, in the United States, roads, highways, and bridges; public transportation; dams, ports, harbors, and other maritime facilities; intercity passenger and freight railroads; freight and intermodal facilities; airports; water systems, including drinking water and wastewater systems; electrical transmission facilities and systems; utilities; broadband infrastructure; and buildings and real property; and structures, facilities, and equipment that generate, transport, and distribute energy including electric vehicle (EV) charging." If the BABA applies to the government project that you are supplying, then the products that you supply must be "produced in the United States." In the Proposed Rule, "produced in the United States" means the following, depending on the type of product. Construction materials are integral to infrastructure projects. Construction materials are defined by the OMB Proposed Rules as articles, materials, or supplies incorporated into an infrastructure project that consist of only one or more materials that are listed under the regulations, with the corresponding manufacturing requirements to meet the "produced in the United States" standard. For example, for plastic and polymer-based products all manufacturing processes, from initial combination of constituent, plastic or polymer-based inputs until the item is in a form in which it is delivered to the work site and incorporated into the project, must occur in the United States.
Calculating Cost of Components
The calculation of the cost of components is the same process for Buy American or Buy America compliance. For components purchased by the contractor, the acquisition cost, including transportation costs to the place of incorporation into the end product or construction material (whether or not such costs are paid to a domestic firm), and any applicable duty (whether or not a duty-free entry certificate is issued). However, for components manufactured by the contractor, all costs associated with the manufacture of the component, including transportation costs as described in item 1., plus allocable overhead costs, but excluding profit. The cost of components does not include any costs associated with the manufacture of the end product. In order to calculate the cost of components for a give product line, the bills of material must be analyzed that show the cost and origin of each component and subassembly of an end product, as well as the totality of the manufacturing processes necessary to produce that end product for public sale.
Trade Agreements Act and Free Trade Agreements
The Trade Agreements Act of 1979, codified at 19 U.S.C. §§ 2501-2581, is an Act of Congress that governs trade agreements negotiated between the U.S. and other countries. The TAA essentially provides that the Government may acquire only "U.S.-made or designated country end products." A list of designated countries can be found under FAR 25.003 Notably absent from this list are China, India, Malaysia, Thailand, and Taiwan. The Act requires contractors to certify that each end product meets the applicable requirements. "End products" are defined as "those articles, materials and supplies to be acquired for public use." FAR 25.003. The Federal Acquisition Regulations (FAR) Subpart 25.4 includes further guidance for TAA compliance. The TAA rules of origin used to determine whether something is an end product of a certain country differs from the rules under the BAA. The TAA rule of origin says the end product must be "wholly the growth, product or manufacture" of the U.S. or of a designated country, or "substantially transformed [in the U.S. or a designated country] . . . into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed." See 19 U.S.C. 2518(4)(B)(ii) and FAR 25.003. The main difference here between the TAA and the BAA is that the TAA does not have the 60 percent domestic content component cost requirement. The TAA only requires that a product was "substantially transformed," which is a very subjective determination based on case-by-case facts. Customs has the authority to make country of origin determinations for TAA purposes. See 19 CFR 177.21 et al. A contractor or supplier has a choice to seek either an "advisory ruling" or a "final determination" from Customs as to either a class of products or a specific product, relatively. A "final determination" gives the highest degree of assurance regarding TAA status because it is binding, judicially reviewable, and applies to a specific set of facts. In many ways, the TAA supersedes the Buy American Act, because if the end product you sell is TAA compliant, then the BAA rule does not apply. See 19 U.S.C. 2511(a), which provides for Presidential authority to waive discriminatory purchasing requirements. The BAA is waived (superseded) by the TAA when the value of the procurement is above the general threshold of $182,000.00. The restrictions in the Buy American statute do not apply to acquisitions covered by the Trade Agreements Act. 48 C.F.R. 25.001(b). The dollar value of the acquisition determines whether the TAA applies, with some exceptions. 48 C.F.R. 25.001(b). Pursuant to 48 C.F.R. 25.402(b), federal supply contracts equal to or exceeding $182,000.00 are covered by the WTO GPA. Acquisitions covered by the WTO GPA are subject to the TAA and not subject to the Buy American requirements. 48 C.F.R. 25.400(a)(1). Therefore, in general, if the value of an acquisition is $182,000.00 or greater, the BAA is waived, and the TAA applies. The following acquisitions are not covered by, and are therefore exempt from the TAA:
- Acquisitions set aside for small businesses
- Acquisitions for arms, ammunition, or war materials, or purchases indispensable for national security or national defense purposes
- Acquisitions of end products for resale
- Acquisitions from Federal Prison Industries, Inc.
- Acquisition from Nonprofit Agencies Employing People Who Are Blind or Severely Disabled
- Acquisitions not using full and open competition (subpart 6.2 or 6.3) when the limitation of competition would preclude the use of procedures (under the TAA)
- Sole source of the acquisition(s) is justified via subpart 13.501(a)
Under the TAA, countries that have entered into trade agreements as defined in the Act and enumerated in the FAR, that do not discriminate against American-made products (a list of which are maintained by the U.S. Trade Representative), are allowed to compete for U.S. government procurements on non-discriminatory terms in purchases above a dollar threshold, currently $182,000 for goods and services and $7,032,000 for construction contracts. These thresholds are increased periodically for inflation. The TAA defines "a product of a country" as: "An article is a product of a country or instrumentality only if (i) it is wholly the growth, product, or manufacture of that country or instrumentality, or (ii) in the case of an article which consists in whole or in part of materials from another country or instrumentality, it has been substantially transformed into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was so transformed." 19 U.S.C. § 2518(4)(B). For example, a product that is substantially transformed in the United Kingdom, a country that has a non-discriminatory agreement with the U.S, will qualify as a domestic product of the United States for federal procurement purposes. The application of the TAA varies based on country-of-origin and substantial transformation, as well as the policies of the procuring agency. If a contract solicitation includes the TAA clauses for the procurement, then it becomes easier to meet the domestic content percentages because all of the content from the designated trade partner counts toward the domestic content percentage as though it was manufactured in the United States. This can ease the qualification of suppliers for many types of goods and services as well as assist suppliers for large construction contracts funded by the government. Note that the application of TAA by states varies by entities and the rules may vary slightly as applied to state procurements.
Waivers
Under Part I, Section 70914 of the BABA, "the head of each Federal agency shall ensure that none of the funds made available for a Federal financial assistance program for infrastructure, including each deficient program, may be obligated for a project unless all of the ... manufactured products, ... used in the project are produced in the United States." Waiver Criteria: The heads of agencies may "waive the application of that preference in any case in which the head of the Federal agency finds that ... applying the domestic content procurement preference would be inconsistent with the public interest; ... manufactured products (including cables) ... are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality; or ... the inclusion of ... manufactured products produced in the United States will increase the cost of the overall project by more than 25 percent." Public Justification for Waiver: Prior to issuing waivers, an Agency head must "make publicly available in an easily accessible location on a website designated by the Office of Management and Budget and on the website of the Federal agency a detailed written explanation for the proposed determination to issue the waiver; and provide a period of not less than 15 days for public comment on the proposed waiver." Such waiver justifications could impact projects to avoid U.S. made cable products. Prior Domestic Content Requirements Not Impacted: Under Section 70917 of the BABA, existing domestic content requirements that apply to manufactured products are not affected by this legislation. The Made in America Office is supposed to assist with processing waivers for agencies. There have been limited requests for waivers of Buy America provisions and few, if any, wholesale requests for waivers for infrastructure projects due to either limited U.S. production capacity or substantially higher prices for U.S. goods
Conclusion
Some companies are following the new Buy America preferences, while others may need to make significant adjustments to their supply chain and domestic manufacturing processes to meet the stringent "produced in the United States" requirements. If there is uncertainty about whether the Buy America requirements apply or one has difficulty in navigating the regulations, seeking advice from outside counsel with expertise in the Federal Acquisition Regulations (FAR) or Buy America requirements is crucial. If the TAA applies, it is still wise to check to ensure compliance with all necessary import requirements. Private companies supplying products to the government must be aware of the domestic preference rules and guidelines outlined in the FAR and Build America, Buy America Act. Although some exceptions exist, complying with the domestic content preferences requires a thorough review of an end product's materials, components, and manufacturing processes in comparison to the regulations. Companies dealing with complex products involving foreign materials should seek the assistance of experienced outside counsel familiar with the FAR and Buy America requirements.
Check out our new Digital Magazine Get the inside scoop on the Braumiller Law Group & Braumiller Consulting Group "peeps." Expertise in International Trade Compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
