Whether through the vaccine mandate, minimum wage increase, emissions disclosure rules, or now with Buy America (BA) rules, the Biden administration has long used the government contracting community to advance its domestic policies.
Aimed at fostering a strong American manufacturing base and creating jobs, domestic-preference policies, unlike those previously mentioned, typically engender broad, bipartisan support leading to tightening existing rules, new rules increasing the domestic content requirement, and heightened scrutiny over BAA waivers. A flurry of new domestic-preference updates brings greater clarity to the requirements and imparts important lessons that government contractors should know when bidding for and performing on federal financial assistance programs. We explore three new updates below.
OMB Guidance
On August 14, the White House’s Office of Management and Budget (OMB) issued final guidance that will serve as an aid for the heads of federal agencies to implement domestic preference requirements as required by the Build America Buy America Act (BABA). The BABA was incorporated in the Infrastructure Investment and Jobs Act (IIJA) and expands BA requirements, applying the requirements to all federal financial assistance programs for infrastructure.
It is important to note that Buy American Act (BAA) requirements, BA requirements and BABA requirements are not the same. BAA requirements apply to direct federal procurement—goods bought by the U.S. government for its own use. The BAA “is the primary law addressing domestic content preferences in Federal procurement.” On the other hand, ”BA requirements” is a “phrase used to describe domestic preferences generally applied to awards made with Federal financial assistance.” There is no primary “Buy America” statute. Instead, certain federal agencies have applied domestic preferences to their awards of financial assistance in accordance with the controlling statutes. BABA requirements extend “Buy America” requirements, applying them to all federal financial assistance awards obligated on or after May 14, 2022. The IIJA “expanded Buy America requirements government-wide to Federal financial assistance programs for infrastructure.” More specifically, the BABA requires contractors to use American-made iron, steel, manufactured products and construction materials when building infrastructure funded by the federal government.
Updated Definitions
Thankfully, the guidance defines important terms to “provide a common system for Federal agencies to distinguish between the product categories established under the statutory text in BABA.” Separate categories for iron or steel products, manufactured products, and construction materials are required in the BABA’s plain text, and separate “domestic content procurement preferences” should apply for each. For instance:
- “Iron or steel products” means “articles, materials, or supplies that consist wholly or predominantly of iron or steel or a combination of both.” In addition, “all manufacturing processes, from the initial melting stage through the application of coatings,” must have occurred in the United States.
- “Manufactured products” means “[a]rticles, materials, or supplies that have been [p]rocessed into a specific form and shape; or [c]ombined with other articles, materials, or supplies to create a product with different properties than the individual articles, materials, or supplies.” The IIJA also requires all “manufactured products” to have been (1) . . . manufactured in the United States; and (2) the cost of the components of the manufactured product that are mined, produced, or manufactured in the United States is greater than 55 percent of the total cost of all components of the manufactured product.”
- “Construction materials” means articles, materials, or supplies that consist of only one of the following items: non-ferrous metals; plastic and polymer-based products (including polyvinylchloride, composite building materials, and polymers used in fiber optic cables); glass (including optic glass); fiber optic cable (including drop cable); optical fiber; lumber; engineered wood; and drywall. Similarly to the other definitions, the IIJA requires that “all manufacturing processes for the construction material occurred in the United States.” In addition, “[m]inor additions of articles, materials, supplies, or binding agents to a construction material do not change the characterization of the construction material.”
Section 70917(c) of the BABA also explicitly excludes materials like “cement and cementitious materials; aggregates such as stone, sand or gravel; or aggregate binding agents or additives.”
55% “Cost of Components” Test for Manufactured Products
Under BABA, for manufactured products to be considered “produced in the United States,” the final product must be manufactured in the United States and more than “55 percent of the total cost of all components” must be of U.S.-origin.
When calculating the total cost of all “components,” interpreted to mean “an article, material, or supply, whether manufactured or unmanufactured, incorporated directly into: (i) a manufactured product; or, where applicable, (ii) an iron or steel product,” the equation will change depending on whether the components were purchased or manufactured by the manufacturer. For those components purchased by the manufacturer, “the acquisition cost, including transportation costs to the place of incorporation into the manufactured product (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)” is incorporated. “For components manufactured by the manufacturer, all costs associated with the manufacture of the component, including transportation costs . . . plus allocable overhead costs, but excluding profit” are incorporated. It is important to note the test does not incorporate costs related to the manufacture of the product.
These rules are inapplicable to items removed from the work site at the end of a project, like tools and equipment.
Buy America Preference Waiver
The process to waive BABA requirements was not substantially changed by the final guidance from what was provided in the proposed guidance. The guidance provides that a waiver is justified anytime a federal awarding agency “finds that: (1) [a]pplying the Buy America Preference would be inconsistent with the public interest (a ‘public interest waiver’); (2) [t]ypes of iron, steel, manufactured products, or construction materials are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality (a ‘nonavailability waiver’); or [t]he inclusion of iron, steel, manufactured products, or construction materials produced in the United States will increase the cost of the overall infrastructure project by more than 25 percent (an ‘unreasonable cost waiver’).”
The guidance also lays out the process for requesting a waiver. The recipient must provide the federal awarding agency with a request, in writing, in accordance with the agency-provided submission instructions. The federal agency will then develop a publicly available “detailed written explanation for the proposed determination”—allowing 15 calendar days of public comment. The waiver determination must then be submitted to the OMB’s Made in America office for final approval unless the OMB Director provides otherwise.
In addition, the guidance allows waivers of general applicability but requires the federal agency to provide at least 30 days for public comment. We address one agency’s waiver of general applicability below.
Waiver of Buy America Requirements for De Minimis Costs and Small Grants
On August 16, the Department of Transportation (DOT) issued guidance on a limited waiver of general applicability related to BABA requirements for de minimis costs and small grants. The waiver, narrower than what the DOT proposed last November, “will allow DOT and its assistance recipients to focus their domestic sourcing efforts on products that provide the greatest manufacturing opportunities for American workers and firms and reduce delays in the delivery of important transportation infrastructure projects.”
DOT announced it will waive “BABA’s domestic preferences for iron and steel, manufactured products, and construction materials used in projects funded under DOT-administered financial assistance programs for iron, steel, manufactured products, and construction materials under a single financial assistance award for which: [t]he total value of the non-compliant products is no more than the lesser of $1,000,000 or 5% of total applicable costs for the project.” The waiver will also apply when “[t]he total amount of Federal financial assistance applied to the project, through awards or subawards, is below $500,000.”
In the face of strong opposition from some powerful lobbying groups like the United Steelworkers Union, DOT maintained fairly robust thresholds in line with the proposed waiver. However, the agency did narrow some aspects from what the November waiver proposed, including clarifying that the waiver’s scope applies to “the total amount of Federal financial assistance provided for a project, not just the total amount of a single award” and the waiver will not apply where “the non-domestically produced miscellaneous minor components comprise no more than 5 percent of the total material cost of an otherwise domestically produced iron or steel product.”
The Unico Mechanical Corp. Decision Signals Increasing Scrutiny of BAA Waivers
For a variety of reasons, many contractors rely on waivers of BAA requirements to do business with the government. Recently, due to a bipartisan push to support domestic industry, there has been an increase in scrutiny over BAA waivers. On August 1, exemplifying this theme, the Government Accountability Office (GAO) denied the issuance of a waiver as it failed to include a reasonable market survey supporting the requestor’s claim that the domestic products were unreasonably costly.
Unico Mechanical Corporation, a small business located in California, protested the award to a rival contractor, McMillen, arguing that the agency improperly granted McMillan a BAA waiver. The contract at issue was for the replacement of two butterfly valves and control systems in the powerhouse of the Cougar Dam, a 519-foot hydroelectric dam in Oregon.
The RFP for the work included FAR 52.225-9 and 52.225-10—two clauses implementing the BAA. FAR 52.225-9 requires contractors to use only domestic construction materials unless the agency explicitly exempts the materials pursuant to strict criteria. One such condition is that a domestic alternative cannot be acquired, or the domestic alternative is unreasonably costly. Importantly, “the cost of a particular domestic construction material subject to the requirements of the Buy American statute is unreasonable when the cost of such material exceeds the cost of foreign material by more than 20 percent.” The contractor can also request a waiver if the material is not explicitly exempted; however, that waiver must be submitted in conjunction with supporting documentation, including a “reasonable survey of the market.”
McMillen’s bid submission used foreign butterfly valves and requested a waiver, which was denied. However, the agency awarded the contract to McMillen anyway, placing the foreign butterfly valves on the list of exempted materials, effectively waiving the BAA requirements. Unico quickly protested the award. In turn, the agency agreed to take corrective action when it reevaluated McMillen’s survey.
Again, the agency found that only one domestic firm could produce BAA-compliant valves and after comparing the prices, the price disparity was unreasonable in accordance with the Federal Acquisition Regulation. Unico was excluded from the evaluation as the agency found the company not to be a domestic supplier because it lacked the necessary component pricing to make an informed decision.
The GAO agreed with Unico, finding the waiver was improperly granted. First, GAO said McMillen did not adequately explain the basis for its change in opinion that the valves could be domestically produced. Second, GAO found the agency’s position that Unico did not provide enough information from which the agency could assess capabilities as Unico was never required to provide this information and the agency never asked for it, and, most importantly, the GAO stressed that it was McMillen’s responsibility to submit an adequate survey as the requestor of the BAA waiver. The GAO decision provides a roadmap for contractors requesting waivers, emphasizing the need for a substantiated market survey.
Going Forward
A flurry of changing requirements and similarly sounding acronyms (BAA, TAA, “Buy America,” and BABA) will make compliance challenging for affected government contractors. However, noncompliance with domestic-preference requirements can result in severe penalties.
For example, in May, Suhaib Allababidi was sentenced to four years in federal prison after claiming certain electronics provided to the government were manufactured in the United States when they were really produced by Chinese companies in China and filed false export information. Similarly, in June, OMNI Business Solutions agreed to settle alleged violations of the Trade Agreements Act (TAA) and the False Claims Act after the Department of Justice alleged the company misrepresented the country of origin and offered them for sale as TAA compliant. In some cases, companies may need to carefully review supply chains to ensure their goods are compliant with domestic preference rules.
Contractors must be careful to comply with the applicable rules, whether it is the BBAA, the TAA, an agency’s “Buy America” requirements, or the new guidance implementing the BABA. The rules can be complicated and their application can be confusing. In addition, while OMB released “final” guidance on the BABA implementation, OMB noted there will be future revisions and interpretations. Future changes may require updates to a contractor’s supply chain or procurement preferences, making constant awareness of regulatory updates just part of doing business with the federal government.
