December 09, 2019

Government Construction Contracts in the Era of Buying American

David Y. Yang

While domestic preferences in federal procurements are not new, their increased emphasis is.  During his campaign, then-candidate Donald Trump promised not only to keep but bring manufacturing jobs back to the United States, especially those in steel.  Since then, President Trump has promoted this agenda by issuing, to date, three Executive Orders meant to strengthen domestic preferences through the Buy America and Buy American Acts, including greater emphasis on enforcement.  This article addresses the potential impacts of these Executive Orders on domestic preference considerations in government contracting, including the most recent July 15, 2019, Executive Order, which may have a substantial impact on manufactured construction materials and the compliance risks that contractors should consider when bidding on government construction contracts.

The Buy America Act and the Buy American Act

The Buy America Act is the colloquial term for a collection of domestic content restrictions regarding funding provided by the U.S. Department of Transportation to state and local governments (usually through grants) by prohibiting the federal government from obligating funds “unless steel, iron and manufactured products used in such project[s] are produced in the United States.”  Unless an exception (which are limited) applies, steel and iron products may only be used on a job where “all manufacturing processes, including application of a coating, for these materials . . . occur[s] in the United States.”  

On the other hand, the Buy American Act generally requires contractors performing federal contracts to use “only manufactured articles, materials, and supplies that have been manufactured in the United States, substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States.”  The phrase “substantially all” requires contractors to use “domestic end products,” which for manufactured products means that their “cost of components mined, produced, or manufactured in the United States exceeds 50 percent of total costs.”  

Alternatively, if the manufactured end product is a commercially available off-the-shelf (“COTS”) item under Federal Acquisition Regulation (“FAR”) 2.101, it too will be a domestic end product so long as it was made in the United States.  An “end product” broadly includes all “articles, materials, and supplies to be acquired for public use.”  The definition thus also appears to include “construction materials,” as the term broadly includes any “article, material or supply brought to the construction site.”  Accordingly, for a manufactured end product to be considered a domestic construction material, at least 50% of its total cost must be attributable to a U.S. source or the construction material must be a COTS item made in the United States.  These are critical considerations for construction contractors because FAR 52.225-9, Buy American – Construction Materials, a required clause in all federal construction contracts under $6,932,000, requires contractors to use “only domestic construction material in performing [the] contract.”  

The Executive Orders and Their Impact

To bolster U.S. manufacturing, the Administration has now issued three Executive Orders.  On April 18, 2017, the President issued an Executive Order entitled “Buy American Hire American,” which applies to both the Buy America and Buy American Acts, and requires the Commerce Department and the U.S. Trade Representative to “assess the impacts of all United States free trade agreements and the World Trade Organization Agreement on Government Procurement on the operation of Buy American Laws.”  With regard to steel and iron, this Order reaffirms that for products to be considered “produced in the United States,” all manufacturing processes must be performed in the United States.

Following this mandate, on January 31, 2019, the President issued a second Executive Order entitled “Strengthening Buy American Preferences for Infrastructure Projects,” which expands on the April 18, 2017, Order.  This second Executive Order instructs federal agencies, within 90 days, to develop plans and rules to encourage contractors to adhere to domestic preference requirements for iron and aluminum as well as steel, cement, and other manufactured products, which include “items and construction materials composed in whole or in part of non-ferrous metals such as aluminum; plastics and polymer-based products such as polyvinyl chloride pipe; aggregates such as concrete; glass, including optical fiber; and lumber” to the maximum extent practicable in all projects that receive indirect federal government assistance by way of loans, loan guarantees, or grants and other cooperative agreements.  The Order may have significant implications for contractors because, whereas the Buy American Act has traditionally only applied to procurements issued by the federal government, this Order signals that the Buy American Act may apply to any project that receives federal assistance even if it was not solicited by the federal government.  As a result, contractors may start seeing an increase in domestic preference requirements in state and local construction contracts funded in whole or in part with federal funds, thus introducing the compliance risks historically only associated with federal projects.

Finally, on July 15, 2019, the Administration issued a third Executive Order entitled “Maximizing Use of American-Made, Goods, Products, and Materials,” in its most recent effort to bolster domestic preference requirements, by warning industry that the “Administration shall enforce the Buy American Act to the greatest extent permitted by law,” and recommending two key changes for the FAR Council to consider, within 180 days, whether the changes should be implemented through rulemaking.

First, in order for steel and iron-manufactured products to be considered domestic construction material, and hence domestic end products, the Executive Order proposes to increase the domestic content requirement from 51% to 95% for such products to qualify.  Should this be implemented through rulemaking, it could substantially reduce or even eliminate foreign content from supply chains for non-COTS steel or iron-manufactured products, thus requiring contractors to more carefully screen, review, and exercise greater diligence over suppliers as well as more carefully consider pricing and/or availability considerations.

Second, the Executive Order proposes to increase the price penalty levied against foreign end products from 6% to 20% in unrestricted procurements and from 12% to 30% in small business competitions.  The price penalty is often used by civilian agencies to exempt a procurement from the Buy American Act because domestic end products are not required if their costs would be unreasonably high compared to a foreign counterpart.  For example, if a domestic end product costs $10,000, but a foreign end product costs $9,000, a civilian agency in an unrestricted competition would currently apply a 6% price penalty to the foreign end product for evaluation purposes to arrive at an evaluated price of $9,540.  As the evaluated price of the foreign end product, even as penalized, would still be less than that for a domestic end product, the agency could seek an exception to the statute under its unreasonable cost exception.  Under the Executive Order’s proposal, however, the application of a 20% price penalty would result in an evaluated price of the foreign end product of $10,800, which would be higher than the $10,000 price for the domestic end product and, thus, the domestic end product would no longer pose an unreasonable cost.  Accordingly, should the proposed penalty increases go through, they are expected to substantially constrain civilian agencies’ ability to exercise the unreasonable cost exception to the Buy American Act – a change that could further impact supply chain, pricing, and other project and business decisions for contractors. 

Takeaways for Down the Road

While the Executive Orders signal greater enforcement by the Administration on Buy America and Buy American Act requirements, any actual implementation will need the FAR Council and/or federal agencies to issue rules and guidance to effectuate any changes.  Nevertheless, the Executive Orders may seriously impact both contractors who traditionally have dealt with the Buy America and Buy American Acts and also those who have not.  To the extent state and local procurements become more involved and additional restrictions are placed on domestic content, contractors will need to exercise greater supply-chain scrutiny when bidding and performing contracts subject to domestic construction material and other end-product requirements to ensure that certifications that they and/or their suppliers provide are accurate and complete.  Notably, an incorrect certification or contract violation can raise significant business and legal risks ranging from contract pricing, administration, and compliance to exposure under the False Claims Act.  Given these issues, it is important that contractors evaluate the impact and nuances that the Executive Orders may have on their projects, as well as their options to manage such risks.

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David Y. Yang

Oles Morrison Rinker & Baker LLP, Seattle, WA