Comments on the Recovery Act’s Buy American Rules Are Due June 1, 2009

On March 31, 2009, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the “Councils”) issued interim regulations implementing the Buy American restrictions of the American Recovery and Reinvestment Act of 2009 (“Recovery Act”).  These rules form a new section of the Federal Acquisitions Regulations (“FAR”) and add four new contract clauses to be included as appropriate in solicitations involving Recovery Act funds.  Comments on the interim FAR rules will be accepted through June 1, 2009 for consideration in the formulation of final rules.  Final rules will be issued once all comments are reviewed and the Councils finalize any modifications to the interim rules.  It is not certain how long it will be before the final rules are issued.  

Applicability

The FAR interim rules apply to Recovery Act acquisitions only.  They do not apply to Recovery Act grants provided by federal agencies to state and local governments and other entities.  Recovery Act grants are governed by another set of federal regulations issued on April 3, 2009 by the Office of Management and Budget (“OMB”).  The specific agency’s grant regulations apply to Recovery Act grants as well, but only to the extent the agency’s regulations do not conflict with the OMB regulations.  While OMB’s Recovery Act grant regulations are similar to the FAR interim rules governing acquisitions, this notice addresses acquisitions only. 

International Agreements

With the adoption of the interim rules, the FAR now implements the Recovery Act’s Buy American requirement.  The FAR provides that no Recovery Act funds may be used on a project for the construction, alteration, maintenance or repair of a public building or public work unless all of the iron, steel and other manufactured goods used as construction material in the project are produced or manufactured in the United States. The FAR also implements the international agreements exception to the Recovery Act’s Buy American restriction. Two of the new FAR clauses afford national (i.e., non-discriminatory) treatment to products from countries which are signatories to trade agreements with the United States.  This includes signatories to the WTO Government Procurement Agreement (“GPA”), i.e., many European countries, Japan and South Korea among others, and countries with which the United States has entered into a free trade agreement (“FTA”), such as Mexico, Canada, Australia, Morocco, Israel, Singapore, and countries that are a party to the Central American Free Trade Agreement.  Products from certain least developed countries accorded special treatment under the WTO, and mentioned in the Recovery Act’s legislative history, are also provided national treatment under the FAR interim rules.  Products from Caribbean Basin Countries, which are accorded national treatment under the Trade Agreements Act, are not accorded national treatment for Recovery Act projects.  In addition, Brazil, India and China are not parties to any qualifying trade agreement with the United States.  End products from those countries will not be accorded national treatment either.

National treatment will be accorded to products of WTO GPA, FTA and certain least developed countries—i.e. “Recovery Act designated countries”—only if the estimated value of the contract is equal to or exceeds the amount set forth in the applicable trade agreement that triggers the national treatment obligation.  These triggers are based on Special Drawing Rights, which are a form of international currency created by the International Monetary Fund, and are adjusted periodically.  For many agreements, such as the WTO GPA, the threshold amount required to trigger national treatment currently is $7.443 million.  For some of the FTAs, such as NAFTA, the contract currently must be valued at or above $8,817,449 million to be accorded national treatment.  It is important to note, however, that the threshold amount can vary further based on the trade agreement at issue and the particular agency that is awarding the contract.

Public Building or Public Work

The interim FAR provisions clarify a number of issues arising out of the use of broad language in the Recovery Act.  For example, the FAR rules explain that the Buy American restriction applies to a building or work either under the authority of, or with funds of, a Federal agency.  The building or work must serve the general public, and it is of no significance whether the Federal agency will actually hold title in the building or work.  The Recovery Act’s Buy American restriction will not apply to buildings or works outside the United States.

Manufactured Goods

It appears that almost all manufactured items used on Recovery Act projects are subject to the Buy American requirement.  While the term “manufactured goods” is not explicitly defined in either the Recovery Act or the interim FAR rules, the FAR explains that manufactured construction material is either raw material that has been processed into a specific form and shape or combined with other raw material to create an item that has different properties than those of the individual raw materials.  “Construction material” is defined as an article, material or supply brought to the construction site by the contractor or subcontractor for incorporation into the building or work.  This includes items brought to the site preassembled from articles, materials or supplies.  As to qualifying an item as a U.S. item, i.e., the country of origin rule, the FAR simply explains that domestic construction material is either unmanufactured construction material mined or produced in the United States or a construction material manufactured in the United States.  Foreign construction material is any material that is not domestic.

Further, it is now clear that there is no requirement with regard to the country of origin for components or subcomponents as long as the manufacture occurs in the United States.  Consequently, manufactured construction material can contain foreign components from say, Brazil, China and India, and still qualify as U.S. manufactured construction material as long as it is produced in the United States and otherwise meets the FAR’s definition of domestic construction material.

A different approach to country of origin is used for products from WTO GPA, FTA or least developed countries.  To qualify as construction material originating from one of these countries, the material must be wholly the growth, product or manufacture of that country, or in the case of construction material that consists in whole or in part of materials from another foreign country, has been substantially transformed in the WTO GPA, FTA, or least developed country into a new and different construction material distinct from the materials from which it was transformed.  Thus, for foreign construction material, the substantial transformation test applies.  Foreign construction material can contain components and subcomponents from various other foreign countries, including Brazil, China and India, but the substantial transformation test must be met.

Iron and Steel

Special rules apply to iron and steel used in construction contracts funded with Recovery Act money.  Under the interim FAR rules, steel is an alloy that includes at least 50 percent iron, between .02 and 2 percent carbon, and may include other elements.  Production in the United States of the iron or steel used as construction material requires that all manufacturing processes must take place in the United States, except metallurgical processes involving refinement of steel additives.  This requirement does not apply to steel or iron used as components or subcomponents of other manufactured construction material.

Waivers

The FAR interim rules also set forth procedures for pre-award and post award determinations concerning the inapplicability of the Buy American requirement in regard to a particular construction material.  Generally, requests for such determinations should be submitted in time to allow the agency to make a determination before the deadline for the submission of offers.  Where a request for a waiver is made post award, the selected offeror must explain why it could not have reasonably foreseen the need for such a determination and could not have requested it before contract award.

Grounds for a waiver include a showing that the cost of certain domestic construction material is unreasonable.  Consistent with the Recovery Act, if use of domestic manufactured construction material would increase the overall offered price of the contract by more than 25 percent, the cost of the domestic manufactured construction material is deemed unreasonable. The FAR now provides some insight concerning the information and supporting data that must be included in an offeror’s request for a waiver based on unreasonable cost.  Where an exception based on unreasonable cost is granted, offers including foreign construction material will be evaluated by adding 25 percent to the offered price for comparison with offers with no foreign construction materials.  If two or more offers are equal in price, award will be made to the offeror whose offer does not include foreign construction material.  Offerors are permitted to submit alternate proposals, one containing domestic materials only and the other containing foreign materials.           

The interim FAR rules reflect the other Recovery Act exceptions to the Buy American requirement by simply stating that if a particular construction material is not mined, produced or manufactured in the United States in sufficient and reasonably available commercial quantities of a satisfactory quality, foreign construction materials may be used.  Where the agency determines that application of the Buy American requirement to a particular construction material would be inconsistent with the public interest, it may waive the requirement and foreign materials may be used.  Like the statute, the FAR interim rules provide no guidance on what is needed to show that construction material is unavailable in sufficient quantity and quality or that the use of domestic material is inconsistent with the public interest.

Noncompliance

Unless the agency determines that an exception to the Recovery Act’s Buy American restriction applies, use of foreign construction material constitutes a violation of the Recovery Act.  Under the new FAR provisions, penalties for noncompliance with the Recovery Act’s Buy American requirement include removal and replacement of foreign material, termination for default, reduction in contract price and government-wide debarment or suspension.  If the noncompliance appears to be fraudulent, the matter will be referred to appropriate agency officials for consideration as to whether the Government should pursue a criminal investigation and/or a civil action against the contractor, such as is available under the False Claims Act, which carries severe penalties and fines.

Contact:

C. Jonathan Benner
202.274.2880

Charles A. Hunnicutt
202.274.2957

G. Brent Connor
202.274.2801

Paul J. McGarr
202.274.2977