This article was originally published in the March 2014 issue of Under Construction, a publication of the American Bar Association's Forum on the Construction Industry.
The Buy America Act (“Buy America”) mandates that, for Federal Transit Authority procurements valued at over $100,000, all “iron, steel, and manufactured products used in the project” be produced in the United States.”1 The intricate FTA regulations, and the FTA’s strict application of those rules, may pose drawbacks for contractors who bid on FTA procurements. The FTA — especially in recent years — applies the plain language of Buy America, leaving little leeway for contractors to obtain waivers or correct certification errors. This article explores Buy America, with a focus on common pitfalls.
The Components and Subcomponents — What Does Buy America Cover?
Buy America covers two categories of materials: 1) steel, iron, and construction materials made primarily of steel or iron that are used in infrastructure projects (e.g., beams, columns, running rail, and contact rail); and 2) manufactured products. Recently, the FTA has required “main elements of the structure,” to be made in the U.S. if they are made primarily of steel or iron.2 For example, the FTA has required the use of domestic elevator guide rails and steel door frames in renovation work on the Chicago subway system. Even small items such as nuts, bolts, and screws that are made of steel or iron may be subject to Buy America if they comprise “the structural elements” of a building.
“Manufactured products” — with the exception of their subcomponents — must be produced in the United States. These products comply with Buy America if (1) all manufacturing processes occurred in the U.S.; and (2) all components are of U.S. origin. A “component” is “any article, material, or supply . . . that is directly incorporated into the end product at the final assembly location.” The FTA requires that 100% of components come from the U.S. — even 85% is insufficient.3 Further, the FTA strictly enforces the manufacturing element — mere assembly in the U.S. does not comply. And, if a product is manufactured in the U.S. and exported for testing, it will remain “domestic” only if it complies with the Customs Service Tariff regulations.
One limited exception to the manufactured products rule is that subcomponents may be of non-U.S. origin. The FTA is adamant, however, that this exception does not apply to steel, iron, and “construction materials made primarily of steel or iron and used in infrastructure projects.” Thus, the FTA rejected an argument that steel and iron beams were “subcomponents” of a construction project and not subject to Buy America. In 2001, a grantee in Puerto Rico claimed that Buy America did not apply to Canadian-made raw steel used in constructing canopies, claiming that the foreign steel was a subcomponent of the alignment (the end product). The FTA reiterated that “[a]lthough subcomponents of manufactured products can be of foreign origin, all steel and iron procured with FTA funds must be produced in the United States.” Although Buy America did not apply to manufactured products not made primarily of steel — for example, a concrete guideway parapet containing steel rebar -- it was “beyond dispute” that steel and iron must be made in the United States.
For non-steel materials in construction projects, there is no bright-line rule regarding what constitutes a “subcomponent” of the project. The FTA regulations define “subcomponent” only in the context of “rolling stock,” which includes transit vehicles such as buses. At least in that context, a subcomponent is, “any article, material, or supply, whether manufactured or unmanufactured, that is one step removed from a component . . . in the manufacturing process and that is incorporated directly into a component.” In FTA-funded construction projects, the FTA sometimes looks at the entire project as the component, and non-steel/iron, non-structural items as subcomponents. For example, in one project, the FTA determined that air conditioner units, irrigation control panels, caulk sealant, escalator fittings, and reduced pressure zone valves (used to prevent backflow and water contamination) were “subcomponents” of the entire project and therefore could be foreign.
For large-scale construction projects, the line between components and subcomponents may be blurry, but non-compliance may cost a bidder the work. To avoid running afoul of Buy America, bidders should never assume that a product is a subcomponent, or not a structural element, just because it is small or does not seem essential to the overall project.
If Buy America applies to a procurement, the recipient of the funds (the “grantee”) — usually a local transit authority — must ensure that all bidders comply with Buy America. To do so, every bidder/offeror must submit either a certificate of compliance or a certificate of non-compliance to the grantee as a condition of responsiveness to the RFP. The FTA does not permit certifications after bids are opened, because, according to FTA policy, this could incentivize a low price bidder to walk away from its bid by not submitting a certification. The FTA also prohibits “do overs.” Thus, a bidder “is bound by its original certification (in the case of a sealed bidding procurement) or its certification submitted with its final offer (in the case of a negotiated procurement) and is not permitted to change its certification after bid opening or submission of a final offer.” Further, once a bidder certifies that it will comply with Buy America, it cannot seek a waiver of those requirements. Thus, to obtain a Buy America waiver, the bidder must submit a certificate of non-compliance at the risk that the FTA will not grant the waiver.
In addition to determining whether a bidder can comply with Buy America, the bidder must be careful to submit complete and correct certificates. The regulations allow a bidder to re-submit a certificate if the error was “inadvertent” or “clerical” by submitting a sworn, written statement, and evidence of intent, to the FTA Chief Counsel and grantee within ten (10) days of bid opening of submission or a final offer. The regulations specify that inadvertent or clerical errors do not include missing signatures, submissions of certificates of both compliance and non-compliance, the failure to submit any certification at all, or “ignorance of the proper application of the Buy America requirements.” The FTA — with little to no exception — applies the plain language of these regulations. Thus, in 2012, the FTA denied a bidder’s request to re-certify or amend its certificate, because the contractor had erroneously submitted both certificates of compliance and non-compliance. In a similar denial in 2010, the FTA explained the need to “protect the integrity of competitive procurements.” In 2003, the FTA denied a request to re-certify where the bidder misunderstood the solicitation and erroneously certified under the manufactured products, and not rolling stock, requirement.
Proper certification requires an understanding of not only the Buy America process, but also the bidder’s overall capacity to comply with Buy America throughout the project. Note that even in design-build projects, the contractor cannot postpone its assessment until after the design phase. The FTA’s policy, which it first expressed in a 2009 guidance letter, is that the procedural requirements of Buy America apply to design-build contracts from the beginning. In the past, a design-build contractor could postpone submitting a certificate, and thereby bypass the Buy America process, until after the design portion was complete. In 2009, a contractor for two design-build projects in Hawaii sought the FTA’s advice on this matter, and the FTA announced this shift in this policy, informing the contractor, “you have cited to an outdated Q&A. . . . Contrary to the Q&A, FTA will not waive its Buy America requirements simply because the project sponsor contemplates using a DB or DBOM contract.”
Buy America Waivers: Not as Simple (or as Permanent) as They Sound
A grantee can seek a waiver from Buy America based on public interest, non-availability, and price-differential. A fourth waiver is available for rolling stock procurements, if the cost of U.S. components is more than 60% of the total cost and final assembly occurs in the U.S. Generally, the bidder does not have standing to seek a waiver, and instead, must seek it through the grantee. Thus, in 2010, the FTA denied a waiver to Volvo Bus Corporation in part because it did not seek the waiver through the FTA grantee.
The FTA will (theoretically) grant a public interest waiver if applying the Act would be inconsistent with the public interest. However, it is virtually impossible to obtain a public interest waiver without demonstrating safety concerns, the introduction of “significant new technology,” or that schedule delays would result in negative impact to the travelling public that outweighs the public benefit of Buy America. In the early 2000s, the FTA rejected a public interest waiver argument based on excessive delay, cost and public welfare in San Juan, Puerto Rico. Even though San Juan had many vehicles or “traveling public,” the FTA found no overriding public interest that justified a waiver. The FTA routinely denies waivers on public interest grounds — in short, if there is not a measurable harm resulting from using U.S. steel, iron, or manufactured products, the grantee will most likely have a losing argument for waiver.
The FTA will grant a non-availability waiver if the subject goods are not produced in “a sufficient and reasonably available amount” or “satisfactory quality” in the U.S. Although the FTA routinely grants non-availability waivers, it performs a meticulous market analysis to determine whether a product is unavailable. For example the FTA denied a non-availability waiver to a grantee for aluminum-steel composite rail when it learned that a U.S. company had begun producing aluminum core third rail — albeit through a different process — which had “substantially the same performance characteristics” as the grantee’s product. In another matter, the FTA determined that a waiver had expired when it discovered two domestic manufacturers of heavy-duty parallelogram lifts.
One unavoidable issue for bidders is that a material may become unavailable in the U.S. after the bidder has already certified compliance with Buy America. Up until recently, the FTA has denied waivers in such situations, instead requiring the grantee to modify the contract based on commercial impossibility and re-procure the material. However, the regulations now include post-award non-availability waivers. These waivers are available if a bidder originally certified compliance in good faith and the subject material cannot be procured domestically due to commercial impossibility or impracticability.4 Absent a waiver, a successful bidder who is not complying with Buy America is required to take the necessary steps to achieve compliance, but is not permitted to change its original bid or final offer price. If the bidder does not take these steps, it will either not be awarded the contract (if the grantee has not yet awarded it) or be in breach of an already-existing agreement. The regulations do not elaborate on the penalty for breach of contract, but if the grantee does not terminate the bidder, it will lose funding for the project. Further, if non-compliance on either party’s part is “willful,” the FTA may initiate debarment or suspension proceedings.
A price-differential waiver is warranted if using domestic materials would increase the cost of the grantee’s contract with its supplier by more than 25%. The FTA must find that the amount of the lowest responsive and responsible bid offering the foreign material, multiplied by 1.25, is less than the amount of the lowest responsive and responsible bid offering that material in the U.S. This calculation excludes labor costs in final assembly. When there are multiple items, for example, in a design-build contract, the FTA has a longstanding policy of applying the price differential analysis to each individual item in the contract.
Except in cases of unanticipated, post-award unavailability, contractors should not assume that increased costs and delays will carry the day and make them eligible for Buy America waivers. In many cases, the FTA expects the contractors to make it work as long as there are comparable materials/manufacturing processes in the U.S.
Foreign Projects and Agreements
As difficult as it is to obtain a waiver or achieve Buy America compliance in the U.S., it may be more complicated for contractors overseas. In a foreign country, it is more difficult to obtain United States materials, but there is no guarantee that the FTA would provide a waiver if the necessary materials were readily available in the United States and the cost increase did not satisfy the statute. Further, the FTA is prohibited form enforcing the waiver provisions in foreign projects if (1) the foreign country and United States have an agreement pursuant to which the head of a United States agency has waived Buy America; and (2) the foreign country has violated the agreement by discriminating against products that would otherwise be subject to Buy America and are covered by the agreement.
Regarding U.S. international obligations (e.g., the World Trade Organization Government Procurement Agreement, U.S. Free Trade Agreements, U.S.-EC Exchange of Letters [May 15, 1995], and Canada-U.S. Agreement on Government Procurement), the general rule is that they do not apply to Buy America. For example, in 2010, the FTA stated that while products manufactured in a World Trade Organization (“WTO”) country may be eligible for federal procurements under the Buy American Act5 — which requires domestic materials to be used in U.S. public construction projects — the FTA Buy America regulations would still require that product to be manufactured in the U.S. (or eligible for a waiver) to be eligible for federal funds.6
The Future of Buy America
The FTA shows signs of strengthening its enforcement of Buy America. In 2012, the FTA expressed its steadfast commitment to Buy America, confirming that the Act applies to the entire scope of a project. At that time, a company challenged the FTA’s authority to apply Buy America to utility work that is within the scope and budget of an FTA-funded project. The FTA responded with a vociferous rejection of this challenge, explaining that Buy America has always applied to the entire scope of a project: “FTA makes no apology for vigorously enforcing the Buy America rules” and that “it is simply the fulfillment of the intent of the law to ensure that the use of Federal funds supports the creation of U.S. jobs.” Although the FTA maintains it has always vigorously applied the law, it remains to be seen how the strict application of Buy America language will affect contractors vis-à-vis the recipients of federal funds. In July 2013, the FTA entered an agreement with the U.S. Department of Commerce National Institute of Standards and Technology in which manufacturers and transit agencies can more easily identify domestic products and create a network of manufacturers and suppliers.
In light of the FTA’s stringent enforcement of Buy America, contractors should have a thorough understanding of the relevant regulations and procedures. While the FTA approach may impede even the savviest bidders, a firm understanding of the rules may prevent contractors from losing valuable work.