A recent Foley Legal News Alert (February 2009) discussed the significant implications of the sweeping “Buy American” provision in the American Recovery and Reinvestment Act (ARRA). This update discusses subsequent actions by the Obama administration instructing how the ARRA Buy American provision is to be implemented at the federal, state, and local levels. Fortunately, in several key respects, the Obama administration made salutary decisions to apply the Buy American provision in a restrained manner, thereby reducing its protectionist impact and associated compliance burdens. This may not be the last word, however, as efforts are already underway in Congress to force the Obama administration to enhance the domestic content requirement of the ARRA Buy American provision. Additionally, as agencies are taking different implementation approaches, these may result in a patchwork of Buy American regulations across the federal government.
First, on March 31, 2009, an interim rule amending the Federal Acquisition Regulation (FAR) was issued by the Civilian Agency and Defense Acquisition Councils (FAR Councils) imposing the ARRA’s Buy American provision on federal procurement contracts funded with ARRA appropriations. Second, on April 3, 2009, the Office of Management and Budget (OMB) issued guidance to federal agencies as to how the Buy American provision is to be applied to ARRA grant funds. Third, the Federal Transit Administration and Federal Highway Administration (FTA/FHA) have determined to apply the ARRA Buy American provision by simply imposing their existing Buy American regulations to ARRA grants. The U.S. Environmental Protection Agency (EPA) has issued a nationwide waiver of the ARRA Buy American requirement for state revolving fund projects for which debt was incurred between October 1, 2008 and February 17, 2009.
ARRA Procurement Contract Regulation
The ARRA Buy American requirement applies to iron, steel, and manufactured goods acquired by contractors for use in ARRA-funded public buildings and public works, essentially as construction material. Because both the ARRA’s Buy American provision and aspects of the 1933 Buy American Act could simultaneously apply to a procurement, the FAR Council resolved this confusion by promulgating a unique FAR provision specifically tailored for ARRA projects, to be published as FAR Subpart 25.6 and associated clauses. (Notably, the amendment exempts direct government acquisition of construction material from the ARRA Buy American requirement by defining direct government purchases as “supplies,” not construction material, and the ARRA Buy American provision does not apply to supplies.) This regulation applies only to federal procurement contracts, not stimulus grants to states and localities.
As to contract dollar amount, the FAR Council determined to apply Subpart 25.6 to ARRA construction projects at or below the simplified acquisition threshold of $100,000, which means that Subpart 25.6 applies to all ARRA construction projects above the $2,000 micro-purchase threshold. Thanks to the ARRA language that the Buy American provision is to be applied “consistent with” international obligations of the United States, under Subpart 25.6 ARRA construction projects above the $7.433 million threshold of the World Trade Organization Agreement on Government Procurement (GPA) and those of the various Free Trade Agreements (FTA) (except Caribbean Basin countries) enjoy the benefit of those agreements so that GPA and FTA country construction materials will be treated as United States domestic material under FAR Subpart 25.4, and the rules of those agreements such as the “substantial transformation” country of origin test will apply. Thus, in the main, the requirement to use domestic construction material exclusively will apply only to ARRA construction contracts between $2,001 and the GPA threshold of $7.433 million or comparable FTA threshold (covered projects). Above those thresholds, products from GPA and FTA countries are eligible for use in ARRA-funded contracts.
Iron and Steel
As to iron and steel procured by federal contractors for use as construction material in covered projects, Subpart 25.6 requires, consistent with the ARRA, that all manufacturing processes take place in the United States except metallurgical processes related to refining steel additives. This would include melting, pouring, rolling and the like. Subpart 25.6 makes clear, however, that this does not apply to iron and steel used as components or subcomponents of other manufactured construction materials, which markedly limits the impact of the 100-percent domestic iron and steel manufacturing requirement to iron and steel brought to the construction site in those forms, such as rebar and girders.
The ARRA does not address unmanufactured construction material (i.e., sand) used in covered projects, but the FAR Council determined to use the 1933 Buy American Act to cover these goods, which are defined as raw materials that are neither processed nor combined with another raw material. Unmanufactured construction materials used in covered projects must be mined or produced entirely in the United States.
As to manufactured construction material used in covered projects, this is defined as all construction material that is not unmanufactured construction material. This effectively means that all construction materials will be deemed “manufactured” when the result of processing into a specific form and shape or combining of raw material into a property different from the individual raw materials.
Manufacturing in United States Not Defined
Subpart 25.6 curiously avoids defining precisely what is required for manufactured construction material to be considered “produced” or “manufactured” in the United States. But given Subpart 25.6’s definition of “manufacturing,” by implication construction material will be considered “produced/manufactured” in the United States when it results from processing into a specific form and shape or combining of raw material into a property different from the individual raw materials, and that processing/combining occurs in the United States. This would appear to be a low threshold definition for establishing domestic manufacturing status. “Substantial transformation” would likely meet this standard, and for projects above the GPA threshold, the “substantial transformation” test is specifically employed.
No Component/Subcomponent Requirement
Even more important, Subpart 25.6 specifically provides that there is no component or subcomponent origin requirement for domestic “manufacturing” status. This is in sharp contrast to the 1933 Buy American Act, which imposes the 51-percent domestic component requirement for end products to qualify for domestic status, and the 100-percent domestic component requirement of the 1964 Buy America law applicable to FTA/FHA grants. Thus, for purposes of the ARRA, construction material will acquire domestic origin status when manufactured in the United States without regard to the origin of its components, thereby alleviating the need to establish country-of-origin below the prime contractor level. With this, the Obama administration addressed perhaps industry’s greatest fear about ARRA compliance, and concomitantly expedites the rollout of ARRA projects.
Exceptions Available, but Challenging to Secure
Subpart 25.6 takes a literalist position that the ARRA’s requirement that “all” iron, steel, and manufactured construction material used shall be made in the United States to mean just that — all. Consequently, an offeror’s use of any foreign construction material in an ARRA project requires a formal pre-award exception. The existing exception list of non-available goods in FAR 25.104(a) is adopted, and other goods can be deemed non-available under the FAR 25.103(b) (1). The “unreasonable cost” exception can be employed only if the use of domestic construction material results in an increase in the cost of the entire project by more than 25 percent. If this waiver is granted, foreign construction materials may be used, but offers using foreign goods will be subject to a fixed 25-percent price add-on for evaluation purposes, and again, unlike the 1933 Buy American Act, this will apply to the total offer price, not just the foreign material. Post-award waivers are provided for, but the government can demand consideration for the post-award waiver, and the indicated consideration amount is the 25 percent of the total project offered price used for the unreasonable cost exception — a very serious penalty indeed for non-compliance.
Certifications Uncertain; Sanctions for Violations Likely
Subpart 25.6 requires ARRA contractors to disclose the quantity and cost of foreign and domestic construction material in their proposal. Subpart 25.6 does not impose a certification requirement, but it remains to be seen whether one will be imposed considering that current Buy American Act contract disclosures are required to be certified. The regulation does list a host of potential sanctions for violations, ranging from removal and replacement to default termination to suspension and debarment.
OMB Guidance for Agency Grants
OMB’s guidance for ARRA grants to states and localities, which will be the major portion of stimulus funds, will be codified at 2 C.F.R. Part 176 and generally follows the same approach as FAR Subpart 25.6. Part 176 will be implemented by federal agencies imposing Part 176 grant terms or conditions on ARRA grant recipients.
International Agreements by States and Localities Can Be Honored
Perhaps the most significant point in Part 176 is that the ARRA Buy American requirement will not apply to iron, steel, and manufactured goods from a “Party to an international agreement” such as countries that are signatories of the GPA and the FTAs, provided the ARRA grant recipient (states and localities) also is required under an international agreement to treat such party’s goods and services the same as domestic goods and services. This effectively permits ARRA grant recipients to abide by their obligations under their international agreements. This is important because the GPA generally exempts federal grants from GPA coverage, making it an open question whether the United States will apply GPA exemptions to grants on a case-by-case basis. (FTA/FHA grants are specifically exempt from GPA coverage under all circumstances.) Moreover, the ARRA created some doubt that the “international obligations of the United States” exception extended to the international obligations of the individual states and localities. Commendably, OMB has clarified this confusing situation and avoided having ARRA grant recipients being caught between conflicting ARRA grant conditions and their international obligations. This provision may be the subject of litigation, however, as it is unclear whether the ARRA actually authorizes OMB to extend this exception beyond the United States government itself. Assuming it applies, it keeps much of the state and local government procurement market open for GPA and FTA countries, while closing the market for goods from ineligible countries such as Brazil, China and India.
Initial Agency Actions
FTA/FHA determined, prior to issuance of the OMB grant guidance, that they would apply existing Buy American regulations to ARRA grants. While designed to expedite getting ARRA grants funds to states and localities, this position will now have to be squared with the OMB guidance. For example, the FTA/FHA approach treats many infrastructure projects themselves as the “manufactured good” for Buy America law purposes, and imposes a 100-percent domestic component requirement, essentially at the construction material level. By contrast, the OMB guidance considers construction material to be the relevant “manufactured good” and imposes no domestic component requirement. The outcome could be the same under both tests, but the conflict needs to be resolved so grant recipients have a clear understanding of their ARRA compliance requirements.
The EPA has taken a different approach, using the “public interest” exception to issue a nationwide waiver of the ARRA Buy American requirement for state revolving fund projects for which debt was incurred between October 1, 2008 and February 17, 2009. This smart approach will permit the flow of ARRA funds to state and local clean water and wastewater revolving fund projects that are “shovel-ready,” or nearly so, while the agency gets in place the regulatory regime for later projects. Hopefully more agencies will follow the EPA’s lead so that stimulus funds can be deployed now, when most needed, rather than await publication and implementation of Buy American regulations.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:
David T. Ralston, Jr.
Partner, General Commercial Litigation — Government Contracts
Jeffrey R. Blease
Chair, Construction Practice
San Diego, California