On March 31, 2009, the Department of Defense, General Services Administration, and National Aeronautics and Space Administration jointly issued interim rules amending the Federal Acquisition Regulation to implement the Buy America provisions of the American Recovery and Reinvestment Act of 2009 (ARRA). The President signed ARRA into law during February as a key part of the economic stimulus package, and § 1605 of ARRA prohibits the use of stimulus funds for public building and work contracts unless all of the iron, steel and manufactured goods utilized are produced in the United States. In response to concerns that Buy America requirements discriminate against foreign suppliers, ARRA requires that these prohibitions may only be applied consistent with U.S. obligations under international agreements. In addition, the domestic sourcing requirements established by § 1605 of ARRA can be waived under the following three circumstances:
- Iron, steel or manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality;
- Inclusion of iron, steel or manufactured goods produced in the United States will increase the cost of the contract by an unreasonable amount, defined as more than 25% of the contract cost; or
- Applying the domestic preference would be inconsistent with the public interest.
The interim rules provide for additional exceptions allowing the incorporation of foreign materials that limit the practical application of ARRA. This legal alert highlights key provisions of the interim regulations.
Application of the ARRA Waiver Provisions
The interim rules provide contracting officers with detailed guidance on when the Buy America restrictions of ARRA may be waived, including the methodology for contracting officers to utilize in evaluating when the exceptions apply. For example, the rules allow contracting officials to determine the “nonavailability” in the United States of particular goods, whether the costs of domestic construction materials are reasonable, and whether applying the Buy America restrictions in a specific case would be inconsistent with the public interest. Determinations to use foreign construction materials require the contracting officer to list the excepted materials under the contract and, in most cases, publish a detailed notice of justification in the Federal Register.
Exception for Foreign Components in Domestic Manufactured Materials
In defining the term “domestic construction material,” the interim rules do not require that the components of domestic manufactured construction material be of U.S. origin. Therefore, contractors receiving stimulus funds may purchase U.S. products that incorporate foreign components.
Exception for Designated Countries
The interim rules also create an exception for “Recovery Act designated countries,” which are defined as countries participating in the World Trade Organization Agreement on Government Procurement, countries that have signed a free trade agreement with the United States, and nations designated as least developed countries. However, certain major countries, including China, do not qualify for this exception. Thus, even though the interim rules were ostensibly drafted to limit the potential for international criticism that ARRA is protectionist, the application of the interim rules still raises potential issues under international trade norms.
Contract Provisions and Penalties for Noncompliance
The interim rules include solicitation provisions and contract clauses that contracting officers must insert in solicitations and contracts calling for the use of ARRA funds. Penalties for noncompliance by a contractor can include removal and replacement of unauthorized foreign construction materials, reduction of the contract price, contract termination, or in extreme cases, suspension or debarment. Noncompliance involving fraud can bring criminal penalties as well. The interim rules are effective immediately and apply to solicitations issued and contracts awarded beginning on March 31, 2009. Written comments on the interim rules are due no later than June 1, 2009.