The American Recovery and Reinvestment Act of 2009 (the Recovery Act) has caused a lot of consternation and hand-wringing by American companies and our trading partners because of its Buy American provisions, but is that concern warranted? Probably not, due to recent interpretations about how to apply these provisions. But let’s start at the beginning -- the actual language of the law itself which applies these revised rules to circumstances which are not inconsistent with the public interest; involve iron, steel and relevant manufactured goods; and are to be applied consistent with international obligations. Section 1605 of the Act states:
Use Of American Iron, Steel and Manufactured Goods. (a) None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.
(b) Subsection (a) shall not apply in any case or category of cases in which the head of the Federal department or agency involved finds that –
(1) applying subsection (2) would be inconsistent with the public interest;
(2) iron, steel and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or
(3) inclusion of iron, steel and manufactured goods produced in the United States will increase the cost of the overall project by more than 25 percent.
(c) If the head of a Federal department or agency determines that it is necessary to waive the application of subsection (a) based on a finding under subsection (b), the head of the department or agency shall publish in the Federal Register a detailed written justification as to why the provision is being waived.
(d) This section shall be applied in a manner consistent with United States obligations under international agreements."
What does all of this really mean? Clearly stimulus money will trigger funding for projects of a public-works nature that will require iron and steel. "Manufactured goods" could easily mean the equipment used to build those projects. There is nothing in the proposed regulations to give us a definition or provide any guidance. However, on April 3, 2009, the Office of Management and Budget published the Interim Final Guidance for Federal Financial Assistance (OMB Memo), which defines a manufactured good for purposes of an award as "a good brought to the construction site for incorporation into the building or work that has been – (1) Processed into a specific form and shape; or (2) Combined with other raw material to create a material that has different properties than the properties of the individual raw materials." See §§ 176.140 and 176.160.
Again, while the definition of public work or public building is not in the Recovery Act or regulations, the OMB Memo provides the missing definition. A public work or building "means a public building or, and a public work of, a government entity [with types of entities listed]."
In the current environment of worldwide sourcing, what changes should American companies expect? How will this Buy American requirement change the playing field when it comes to sourcing from our trading partners? There were a series of notices published in the Federal Register on March 31 which clarified a good number of the points which the law itself did not address. Even so, some unease remains, primarily because much of the federal money will go to shovel-ready projects in the states where the rules may be different. It is important to keep in mind the distinction between the Buy American provisions which govern federal procurement (the Federal Acquisitions Regulations or FAR, and the DFARS which govern Department of Defense contracts) and the Buy America provisions which are separate and govern federal money spent by the states and local governments. These Buy America provisions have not yet been changed by the states/localities, so some areas of contradiction remain and are only highlighted in this abbreviated alert.
First enacted during the height of the Depression in 1933, the Buy American provisions are found at 41 U.S.C. §§ 10(a)-(d) and apply to projects within the U.S. only. The regulations interpreting the Act, which can be found at 48 CFR Part 25. § 25.101, establish a two-step qualification process. The good must be manufactured in the U.S. and also consist of U.S. content which must exceed 50% of the cost of all components. The Recovery Act’s Buy American provision changes this definition. It ignores the cost of the components and looks only at the overall cost of the finished good. However, the Buy America provisions (those at the state/local level) have not been similarly updated.
The Recovery Act regulations go on to provide exceptions in cases for public interest, non availability, unreasonable cost, commissary resale and commercial information technology.
There is special consideration given in the Buy American Act to Canadian products, as well as those from Caribbean Basin countries (Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize, British Virgin Islands, Costa Rica, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Netherlands Antilles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, or Trinidad and Tobago). In addition, designated (beneficiary) countries include Free Trade Agreement countries (Australia, Bahrain, Canada, Chile, Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, Morocco, Nicaragua, or Singapore); least developed countries (Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Cape Verde, Central African Republic, Chad, Comoros, Democratic Republic of Congo, Djibouti, East Timor, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Laos, Lesotho, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique, Nepal, Niger, Rwanda, Samoa, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Tanzania, Togo, Tuvalu, Uganda, Vanuatu, Yemen, or Zambia); and finally, World Trade Organization Government Procurement Agreement signatory countries (Aruba, Austria, Belgium, Bulgaria, Canada, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea (Republic of), Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, or United Kingdom), all of whose products are treated equally with American made goods provided certain requirements are met.
Acquisition is defined to include lease, rental, or lease-purchase contracts (including lease-to-ownership, or lease-with-option-to-purchase), and in these cases, the standard substantial transformation test applies, i.e., were the third-country-sourced raw materials or components substantially transformed in the foreign country from which the final good is being sourced into a product with a new name, character or use? If so, the finished good qualifies as a product of the sourcing country, and then the trigger amounts listed above determine whether Buy American does or does not apply. For contracts below the trigger amounts, the existing Buy American provisions continue to apply. However, whereas in most instances there is a small contract exemption, typically under $100,000, the Recovery Act provisions apply to all contracts regardless of dollar size. Further adding to the confusion, there is a new term of art in the Recovery Act, unmanufactured construction material. It remains subject to the Buy American Act.
Under the Recovery Act, the money must be spent on projects within the U.S. and all of the iron, steel and other manufactured goods must be U.S.-produced or -manufactured. The regulations go on to define production in the U.S. to exclude metallurgical process involving refinement of steel additives. The Recovery Act also redefines unreasonable cost. § 25.105 contains the standard Buy American formula, which provides a mechanism for a domestic offer to be considered, even if it is not the low offer, provided the contracting officer adds 6% if the lowest domestic offer is from a large business concern, or 12% if it is from a small business concern (subject to other additions based on agency regulation or small business set-asides). Under the Recovery Act, the evaluation factor is 25% of the total offer, plus 6% if the offer is based on an exception for unreasonable cost requested by the offeror. Further, if two offers are equal, the Recovery Act regulations mandate preference be given to the offer which excludes foreign construction material excepted at the request of the offeror. Again, none of these provisions have been updated by the states/locals for their procurement purposes.
We have addressed here in summary the changes which apply to the federal procurement process. It is important to keep in mind separate regulations (called DFARS) apply to procurement by the Department of Defense. It is equally important to recall that such major trading partners as China, India and Brazil are not signatories to the WTO Government Procurement Agreement, and therefore do not benefit from the trigger amounts and related exceptions mentioned above.
In considering whether to bid on a project and invoke the Recovery Act provisions, it is also important to keep in mind that each agency is writing its own interpretation and each must be carefully reviewed as the Contracting Officer has the final say in most cases. Further, while the manner in which the Administration rolled out the Recovery Act provisions has lessened the likelihood of a trade war with any of our allies, each agency has the right to interpret the requirements differently and we are already seeing that happen. The Federal Transit Administration and the Federal Highway Administration announced they would apply existing Buy American regulations to Recovery Act grants, but did so prior to the OMB Memo being issued. Some reconciliation will be needed in light of the more restrained approach of OMB, and that process has begun with updated notices on both websites. The Environmental Protection Agency took a different view. Relying on the public-interest exception, EPA issued a nationwide waiver of the Buy American requirement for state revolving fund projects where the debt was incurred between October 1, 2008, and February 17, 2009. This interpretation allowed funds to flow while regulations were put in place for later projects, and for those later projects, EPA has recently posted an April 15, 2009, policy memo on its website which focuses primarily on the waiver process.
At the same time, the Steelworkers Union has begun an interesting political campaign. Its members have submitted a Buy American resolution to a large number of political entities, such as city councils, and been successful in having over 4,000 of them adopt the resolution.
The manner in which the Obama Administration chose to interpret the Recovery Act’s Buy American provisions may well make things go far more smoothly than originally feared. For example, government acquisition of construction materials is considered supplies, not construction material, so Buy American does not apply. As previously noted, the Buy American provisions are applied consistent with international obligations, again lowering the likelihood of spats with our trading partners. As such, only if the size of the contract is less than the WTO GPA floor of $7.433 million (or comparable FTA provisions as mentioned above) does the Buy American requirement apply. At the same time, iron or steel used as components or subcomponents of other manufactured construction materials are not subject to Buy American requirements, thereby further lowering the likelihood of trade disputes. Similarly, "manufactured in the U.S." is also not defined, which would seem to allow the substantial transformation test to apply as well to foreign components used to make a finished good in the U.S., which is covered by the Recovery Act. This is in sharp contrast to the 50%+ cost standard requirement noted above and the over 90% requirement for Made in USA as administered by the Federal Trade Commission.
The OMB memo sought to head off problems regarding Buy American regulations by holding that the international obligations exception extends to states and localities. As the language of the Recovery Act is silent on this point, litigation may follow, but in any case, kudos to the Obama Administration for finding a way to walk the fine line between seeking ways to enhance economic recovery while also honoring our long-standing international obligations. Whether companies in China, India or Brazil will agree remains to be seen, but then they chose their fate by not adopting the WTO GPA.
The Buy American provisions generally, and especially under the Recovery Act, are highly complex and often confusing. The Recovery Act adds spending limits, labor certification, and extensive recordkeeping and reporting requirements. Everyone wants stimulus money, but if you decide to go after those funds, we hope you will do so with your eyes wide open, by having first consulted with experts, so you know exactly what you are getting into.
In the event federal procurement is sourced from one of these countries or groups of countries, and the contract in question is over-the-cost threshold, the foreign goods are treated on par with American goods. However, the Recovery Act specifically excludes Caribbean Basin countries from its benefits. The current WTO GPA and FTA thresholds differ by country or trading block, and distinguish between supply contracts, service contracts and construction contracts. The norm for WTO GPA and general Free Trade Agreement contracts is $7,443,000 for construction contracts and $194,000 for the other two. When it comes to specific free-trade agreements, the floor amounts for supply contracts range from $50,000 to $194,000; with service contracts, the amount is either $67,826 or $194,000; and, finally, with construction contracts the amount is either $7,443.000 or $8,817.449. There are differences between how various FTAs are treated so check the reguations before proceeding.