Domestic Content in Federal Procurement: Navigating Complex Requirements and Hidden Risks
Federal law imposes numerous requirements on federal agencies to acquire items that are produced or manufactured in the United States. In recent years, those requirements have been extended to infrastructure projects financed in whole or part by federal funds. While the requirements between these statutory schemes are similar, there are differences which create traps for the unwary. This article will explore some of these similarities, differences and traps.
Buy American Act of 1933
This is the earliest statute requiring the purchase of domestic products. It is codified at 41 U.S.C. §§ 8301-8305. The Buy American Act (“BAA”) requires that items – whether manufactured or not – that are purchased for public use be produced domestically. If an item is manufactured, its components must be “substantially” domestic as well. This is so unless their acquisition would be “inconsistent with the public interest or their cost” would be unreasonable. 41 U.S.C. §8302(a)(1).
BAA refers to items purchased by the Government for its own use as “domestic end products.” If the product is not manufactured, it must be mined or produced in the United States. If the product is manufactured, that process must take place in the United States and the cost of the domestic components must be greater than 65% of the total product cost. This percentage requirement will increase to 75% in 2029.
BAA also requires that construction materials used in public buildings or public works be domestic in nature. The analysis for determining whether a construction material is domestic is similar to the analysis regarding domestic end product. If not manufactured it must be mined or produced in the United States. If it is manufactured 65% of the cost of components must be domestic.
Finally, BAA applies to products that are wholly or predominantly iron and steel. The cost of the domestic iron or steel used in these products must be at least 95% of the total cost of all components.
Price Preferences Under BAA
BAA’s domestic content requirement only applies if the cost of the domestic item is reasonable. If a company offers a foreign product at a lower price, the federal agency engages in a “best value” analysis. The agency adds a certain percentage to the low foreign offeror’s price in order to make this determination. The increased foreign price is then compared to the domestic price. If the foreign price is still lower, the agency is free to purchase the foreign item.
If the offeror is a large business, 20% is added to the price of the foreign item. If it is a small business, 30% is added. If the contract is for the Department of Defense, 50% is added to price of the foreign product. If after these additions the foreign product still has a lower cost, the agency can purchase that product.
Trade Agreement Act and BAA
The United States has numerous trade agreements with nations all over the world. In 1979 Congress passed the Trade Agreement Act (“TAA”). 19 U.S.C. §§ 2501-2581. This statute is a huge exception to the BAA. This statute implemented many bilateral and multilateral trade agreements. Section 19 U.S.C. § 2511 permits the President to waive the application of any law, regulation, procedure or practice regarding government procurement for eligible products from certain designated countries. The designated countries include those with which the United States has free trade agreements, least developed countries, Caribbean Basin countries, and World Trade Organization Procurement Agreement countries.
In order for a product to be “TAA compliant” it must be manufactured or substantially transformed in the United States or a TAA designated country. A list of TAA designated countries can be found at 48 CFR § 52.225.5. It is very important for companies selling products from TAA designated countries to follow TAA requirements and customs and border patrol regulations. The penalties for failing to follow these rules can be draconian, ranging from hefty fines to liability under the Federal False Claims Act.
Build America Buy America Act
In 2021 a bipartisan Congress passed the Infrastructure Investment and Jobs Act. (Public Law 117-58) Included within this Act was the Build America Buy America Act (“BABA”). BABA applies to all infrastructure projects that are wholly or partially funded by the Federal Government. Infrastructure is very broadly defined. If a project will serve a public function or will be operated on behalf of the public, it will be deemed to be infrastructure.
BABA and BAA serve different purposes. BABA applies to infrastructure projects that receive federal funding assistance. On the other hand, BAA applies to contracts where the Government buys products for its own use. Thus, these two schemes will never apply to the same procurement.
Similar to BAA, BABA applies to manufactured products, construction materials, and products that are wholly or predominantly iron and steel. But the domestic content percentage requirements are different.
For manufactured products, BABA requires that the cost of the domestic components must be at least 55% of the total cost of the product. BAA, on the other hand, requires 65% domestic content.
BABA provides a definition of construction materials. 2 CFR § 184.6. BAA does not. If the construction material is a manufactured item, BABA requires 100% domestic content, while BAA only requires 65% domestic content.
If a product is classified as an iron or steel product, BABA requires 100% domestic content. All manufacturing processes, from initial melt to application of final coatings, must be performed in the United States. BAA requires that the domestic steel content be 95% of the total amount of steel.
The definition of “manufacturing” is also different in both statutes. In BABA, a manufactured product is defined as an article that has been “combined with other articles, materials or supplies to create a product with different properties other than the original article.” 2 CFR § 184.3. BAA does not define the word “manufacture,” but case law has created several different standards to make this determination. For example, the General Accountability Office (“GAO”) has defined manufacturing as causing “substantial changes in physical character in the United States.” A. Hirsch Inc., B-237466 (February 28, 2990). A year later the GAO stated that the test was whether the product was made suitable for its intended use in the United States. A.D. Machinery Co., B-252546, 547 (May 16, 1911). The test employed by the Federal Circuit Court of Appeals is that a product complies with the manufacturing requirement if its “ingredients were measured, weighed, mixed and compounded in the United States.” Acetris Health v. United States, 949 F.3d 719, 731 (Fed. Cir. 2020). Whether a product will be deemed to have been manufactured is a fact specific test under any of these statutory schemes.
Conclusion
This article only scratches the surface of these issues. If your business is seeking to buy or sell goods to the Federal Government, or if it is participating in a federal infrastructure project, Willcox Savage is ready to help you achieve a successful result.
