On March 31, 2009, the Obama administration issued an interim regulation, effective immediately, to implement the statutory “Buy American” restriction for federal buildings and public works funded by the American Recovery and Reinvestment Act of 2009, more commonly known as the stimulus plan. This regulation provides important guidance about the standards for determining the country of origin for steel and other manufactured goods. The regulation is intended to comply with U.S. international obligations entered under the auspices of the World Trade Organization (WTO) and in bilateral free trade agreements (FTAs). Steel and equipment producers in non-trade agreement countries, such as China, India, and Brazil, are the parties most adversely affected by the legislation as implemented.  

Scope  

Covers Federal Contracts for Public Buildings and Public Works, Not Grants to States and Localities  

The interim rule adds a new Subpart 25.6 to the Federal Acquisition Regulation (FAR), and four new clauses for use in covered contracts. It applies to all contracts for the construction of public buildings and public works awarded by federal agencies using stimulus funds. To be considered a public work or public building, the construction must be procured through a federal contract, for a “public” purpose, but the federal government does not necessarily have to retain title to the resulting building or work. The rule further provides that no stimulus funds may be used for a building or public works project unless the project is located in the United States, including U.S. territories. Whereas there are global markets for materials and products, the labor component of a construction project is necessarily local. Therefore, given the general intent to stimulate the U.S. economy, it is not surprising that a limitation to U.S. building sites would be adopted, although there is no such general limitation in the legislation.  

The FAR and the interim rule apply only to federal procurement contracts. They do not apply to stimulus grants made to state and local governments, which will account for a large portion of the stimulus spending. The Office of Management and Budget (OMB) will soon issue separate government-wide guidance for the implementation of grant-funded state and local projects. However, there is only a single Buy American provision in the stimulus plan, applicable both to federal and non-federal (grant-funded) public building and works projects. Therefore, we consider it likely that the rules for grant-funded projects will be very similar to the principles established in the interim rule.  

The rule promulgates two sets of two contract clauses each. The first set applies to construction contracts under $7.443 million in value, which is the threshold above which construction projects are covered by the WTO Agreement on Government Procurement (GPA).1 Other FTAs have similar thresholds. The second pair of contract clauses applies to contracts over the $7.443 million threshold, and incorporates the provisions for identifying and giving equal treatment to products of GPA and other FTA countries.2 Few, if any, federal construction projects will be awarded for less than the monetary threshold, so the remainder of this article assumes the applicability of the GPA and other FTAs.  

As we predicted in an earlier article,3 the interim rule implements the stimulus Buy American provision in a manner largely similar to the Buy America regulations that apply to highway and transit projects funded by federal Department of Transportation grants to states and local agencies.  

Construction Materials  

Eligible Country Sources Include GPA and FTA Signatories and Least Developed Countries

The stimulus plan requires that the Buy American provision be applied consistently with international agreements. Therefore, steel and manufactured goods produced in the GPA member countries (comprising the European Union members, Japan, Korea and nine other developed nations), as well as other FTA countries, will be treated the same as steel and manufactured goods produced in the United States. The rule further provides that listed “least developed” nations are included, despite the fact that they are not members of U.S. free trade agreements and not explicitly protected by the legislative language. The legislative history included a statement that these “Least Developed Countries” should be eligible to participate in stimulus projects, and the rule makers elected to implement that intent. Products from Caribbean Basin Economic Recovery Act (CBERA) countries, which benefit from certain other procurement trade preferences, are not eligible under the interim rule to participate in stimulus plan-funded projects.  

The net result is that construction contractors for stimulus projects at the federal level will be able to choose from a wide variety of country sources, but that some – including China, Brazil, and India – will be excluded unless a waiver is granted in particular instances.  

Iron and Steel  

Standard for Domestic Product is Similar to FTA Buy America Restriction, While Origin of Foreign Product Subject to Substantial Transformation Test

The coverage of U.S. iron and steel products is very similar to that under the Buy America restrictions for highway and transit projects. In order to be considered “produced in the United States,” all manufacturing processes, with the exception of metallurgical processes for steel additives, must be performed in the United States. This would include melting and pouring, as well as rolling, drawing, bending, and shaping. However, unlike the highway and transit rules, steel construction materials of GPA, FTA, and least-developed countries are also permitted. The country of origin of those products is determined by the “substantial transformation” test used under the GPA, the Trade Agreements Act, and for other purposes. Substantial transformation does not require that all productive steps take place in an eligible country. Rather, the article must be sufficiently transformed in that country so as to take on an identity, function, and use that distinguish it from its components imported from other countries. Therefore, for example, a Canadian mill might be able to supply a girder that it made from steel poured in China, whereas a U.S. mill would not.  

The restriction covers steel and iron “used as construction material.” “Construction material” is defined as “an article, material, or supply brought to the construction site by the Contractor . . . for incorporation into the building or work.” Steel construction material would include girders and reinforcing bar, for example. The restriction does not cover steel components that are part of manufactured goods (e.g., a fan blade made of steel). A steel screw or bolt could be covered if delivered in bulk and affixed to a structure at the site, but a screw or bolt incorporated in a preassembled or prefabricated article would not. While a literal reading of the law could have led to the conclusion that the origin of steel in each screw and bolt in manufactured goods must be accounted for, the rule makers evidently concluded that such a result would have been extraordinarily burdensome and would not have conferred much additional benefit on U.S. steel producers. In these respects, the steel coverage is very similar to the pre-existing coverage for transit and highway projects. A key difference, however, is that the transit and highway provisions require U.S. steel, while federal stimulus projects may also use steel construction materials from GPA, FTA, and least-developed countries.  

Manufactured Goods  

No Restriction on Origin of Components or Subcomponents  

The rule of origin for manufactured goods relates only to the place of creation of the end product, i.e., each item in the form in which it is delivered to the work site. No country is excluded as a source of components or subcomponents of such products, nor are such products required to contain any minimum level of domestic component content.  

In focusing solely on the end item, this origin standard is similar to the most widely applicable origin requirement in U.S. procurement law – the Trade Agreements Act (TAA). It contrasts with other standards that have domestic component content requirements, such as the Buy American Act of 1933 and the Buy America Act requirements for trains, buses, and manufactured goods in federally funded state and local transit projects.  

An item “manufactured in the U.S.” qualifies as domestic. “Manufactured” is not defined but, in the absence of any more particularized definition, an article substantially transformed in the U.S. would almost certainly qualify. As to products of a GPA, FTA, or least developed country, the substantial transformation test applies explicitly.4 The net effect is that manufactured goods purchased by general contractors for these projects will be treated the same as if the federal agency had purchased them directly in a TAA-covered procurement.  

For most manufactured goods, the “substantial transformation” test will be applied to the end product in the form that it is brought to the construction site. However, the rule includes a carve-out for emergency life safety systems (such as emergency lighting, fire alarms, or audio evacuation systems). Each such system will be evaluated as a single discrete manufactured good regardless of how or when the components are delivered to the construction site. Assuming the system is assembled and integrated at the U.S. construction site, it appears that any emergency system would comply regardless of the origin of the system’s components.  

Unmanufactured Goods  

No Change in Coverage from Buy American Act of 1933  

Unmanufactured construction material (e.g., sand and gravel) is not covered by the legislation, but the FAR rule makers decided to include a provision covering it in the rule because unmanufactured construction material is already covered by the Buy American Act of 1933.5 Bids based on use of unmanufactured construction material from other than the preferred countries are subject to a 6 percent price evaluation penalty. When the awarding agency evaluates the prices of competing bids, an amount equal to 6 percent of the cost of the disfavored material is added to the evaluated bid price. If the actual cost of such material is more than 6 percent less than material from preferred sources, the contractor might find it advantageous to propose it despite the price evaluation penalty.  

Requests for Exceptions  

It May be Difficult for Contractors to Secure Exceptions

The regulation includes procedures by which bidders may request waivers of the Buy America restriction on any of the three authorized grounds: unavailability, unreasonable cost, and public interest. It seems unlikely that any of these exceptions will be widely used or have much impact.  

Unavailability is unlikely to apply often, since there are more than 50 eligible country sources, including almost all of the major industrial nations. Cost is deemed unreasonable only if the exclusion of a source increases the cost of the entire project, not just the item in question, by at least 25 percent. This will rarely, if ever, be the case. And if a product meets the criteria of “availability” from authorized sources at a “reasonable cost,” it is unlikely that an agency head would find a sufficiently compelling “public interest” to support a waiver. While the waiver provisions are similar to those for the Buy American Act of 1933, the stimulus plan and the regulations require that an agency granting a waiver for a stimulus project publish a detailed written justification in the Federal Register.  

If possible, waiver requests must be made at or before bid submission. Post-bid requests must explain why a pre-bid request was not feasible. If a post-award request is granted, the contracting officer must negotiate consideration for it. If the waiver was on the basis of cost, the consideration must at least equal the “unreasonable cost” standard (25 percent of project cost, or, in the case of unmanufactured construction material, 6 percent of its cost).6  

Uncertainties Remain Regarding Sanctions for Noncompliance  

If noncompliant materials are used in a project, the agency may require that they be removed and replaced.7 However, the interim rule recognizes that it may be prohibitively expensive or impossible to remove a component after a building project is completed. If the violation is “sufficiently serious,” other potential consequences of noncompliance are termination of the contract for default and suspension and debarment of the contractor from government contracting for a period of time (typically three years). While the regulations make no mention of the False Claims Act (FCA)8 as a potential sanction, a false certification of origin to the federal agency would provide a basis for a civil FCA claim. The civil FCA provides for damages up to three times the damage suffered by the government, plus penalties. It is unclear how a court would quantify the damage suffered by the government, if any, by the unauthorized origin of technically compliant products.  

The interim rule also notes that other, unspecified contractual remedies may apply, but the regulation itself does not create such remedies and it is not clear what monetary remedy could apply under a typical government contract. There is no provision for liquidated damages for use of non-eligible construction materials. An equitable adjustment for the supply of nonconforming goods is theoretically possible, but it may be difficult to establish the difference in value to the agency of a girder made in the U.S. and an identical girder made in Brazil, for example. The difficulty arises from the fact that the policy is designed to benefit the private economy, not the government as purchaser.  

Overall Impact  

Makers of Steel and Manufactured Product in Non-GPA/FTA Countries Will Be Adversely Affected  

The interim rule complies with the statute while limiting the administrative burden of compliance for contractors and agencies, notably by focusing solely on materials as delivered to the work site, and not requiring any analysis of origin or cost of components incorporated in manufactured goods (other than U.S. iron and steel products) before delivery. Given the large number of eligible country sources, pricing for construction materials generally should be reasonably competitive. The main impact will be to exclude steel construction materials and other manufactured goods (but not components thereof) from ineligible countries such as China, Brazil, and India. Although the rule took effect March 31, comments and proposed changes may be submitted until June 1, 2009.