By Tymon Berger Stanislaw Ashbaugh
In reading the American Recovery and Reinvestment Act back in February it became readily apparent that the Recovery Act’s Buy American provision would not play well with existing buy-domestic laws and rules. For one existing federal contracts only required construction materials to be “substantially” produced from domestic sources whereas the new Recovery Act required “all” iron steel and manufactured goods to be domestically produced. For another the federal buy-domestic provisions that governed state transportation projects had evolved to exclude “manufactured goods” from highway projects; the Recovery Act however seemingly re-inserted the “manufactured goods” requirement into any highway project that was built with stimulus funds. Finally while the Recovery Act demanded that its Buy American provision be applied consistently with international trade agreements trouble reconciling the provision within our own laws seemed a harbinger for the difficulty that would be experienced when attempting to square the provision with existing trade obligations.
To resolve these conflicts the President’s cabinet has promulgated new federal procurement rules issued findings on how transportation contracts comply with the new Buy American proviso and provided states with guidance on how to spend Recovery Act grant money in accord with international trade agreements. These three executive-branch actions are discussed in turn below.
The New FAR Subpart 25.6
Prior to February when it came to buying American federally-funded public construction projects were generally governed by two laws: the Buy American Act of 1933 as amended over the years; and the Buy America requirements derived from the 1982 Surface Transportation Assistance Act. With respect to the amended 1933 Buy American Act that law’s “substantially”-manufactured requirement clashes with the Recovery Act’s stipulation that none of its appropriations can be used on a “public building or public work unless all of the iron steel and manufactured goods used in the project are produced in the United States.”
To understand the extent of this conflict it is important to keep in mind two principles. First the earlier law specifically limits itself to direct contracts with the federal government for example construction contracts with the U.S. Army Corps of Engineers the General Services Administration or the Department of Energy. Compare this limitation with the Recovery Act’s broad application to all projects receiving stimulus funds. Second the 1933 law requires construction materials to be manufactured in the United States using a minimum 51% domestically-produced materials and components. By contrast the Recovery Act requires 100% domestic production of all iron steel and manufactured goods.
Because the new Recovery Act’s buy-domestic provision competes with the existing buy-domestic law funding federal contracts with stimulus money pits the Recovery Act against the amended 1933 Buy American Act. To resolve this conflict the body that promulgates the Federal Acquisition Regulation has introduced FAR Subpart 25.6.
The new Subpart 25.6 specifically applies to construction projects funded by the Recovery Act and imputes the Recovery Act’s more stringent buy-domestic requirements. The subpart uses the term “construction material” to encompass raw materials that are (1) incorporated directly into the construction site; (2) processed into a specific form and shape; or (3) combined with other raw materials to create a material with properties that differ from the individual raw materials. In reflecting the Recovery Act’s Buy American provision the new subpart requires all iron steel and manufactured goods used as construction material to be produced or manufactured in the United States.
Notably when it comes to non-steel items the subpart does not impose the so-called “component test” that the FAR otherwise uses in carrying out the Buy American Act’s buy-domestic requirement; instead under the new Recovery Act subpart the buy-domestic requirement is satisfied so long as the construction material’s components and subcomponents are brought to the United States for manufacturing. For iron and steel however the subpart continues to take a component test approach requiring most iron and steel manufacturing processes to take place here in the United States.
Buying American on Transportation Projects
State transportation projects typically involve some level of federal grant money even though the projects themselves are administered at the state and local level. As such highway and transit construction contracts are not governed by the FAR but the federal government nevertheless retains control over how its grant money is spent. In imposing buy-domestic regulations on transportation projects federal grant money is largely spent in accord with the Buy America statute contained in the Surface Transportation Assistance Act of 1982 and subsequent agency rules promulgated by the Federal Highway Administration and Federal Transit Administration.
In contrast to the comparatively less demanding 51% requirement found in the 1933 Buy American Act the 1982 Buy America statute required all steel cement and manufactured goods to be produced in the United States. Not long after the statute was passed however the Federal Highway Administration issued rules that dropped any requirement for manufactured goods not comprised of steel components; and while the FHWA essentially replaced cement with a domestic requirement on iron by 1995 even iron ore had been permanently waived from the statute’s requirements. Today the FHWA’s Buy America rules effectively only implicate steel—manufactured goods are only implicated when they include steel components in which case the steel must be entirely manufactured in the United States.
By comparison the Federal Transit Administration continues to require 100% domestic production of iron steel and manufactured goods on everything but rolling stock. Mirroring FAR Subpart 25.6 the FTA uses a “substantial transformation test” on manufactured goods i.e. the manufactured goods’ components must only be assembled in the United States. Like FHWA rules and the new FAR subpart however when the manufactured goods include iron or steel components the FTA switches to a component test and requires the iron and steel components to be made here.
In the time since the Recovery Act was enacted the FTA formally announced its conclusion that its current rules already complied with the Recovery Act’s Buy American requirements. This is reasonable in light of the shared language between the FTA’s Buy America rules and the Recovery Act’s Buy American proviso. The FHWA has not formally issued a similar conclusion. Apparently however the FHWA is moving ahead under the presumption that its reasons for removing “manufactured goods” from its buy-domestic rules in 1983 remain just as valid and applicable to the Recovery Act legislation enacted 16 years later.
The Office of Management and Budget’s Guidance Regarding International Trade
In April the President’s Office of Management and Budget provided a final piece of the puzzle by providing guidance on how grant funds interact with international trade agreements. Because the guidance only applies to grant funds such as those used by states in transportation projects FAR Subpart 25.6 remains unaffected by the OMB’s guidance.
According to the OMB in order for a trade agreement to preempt the Recovery Act’s Buy American provision a state or local agency must perform a public project funded by a Recovery Act grant the project must have an estimated value of $7.443 million or more and the state or local agency must be bound by an international trade agreement. If these conditions are met the state or local agency is free to procure iron steel and manufactured goods from its international trade partner as if the agency were buying from a domestic supplier.
As an example Washington’s General Administration is an executive-level state agency that is signatory to a WTO Government Procurement Agreement that includes Japan a renowned steel producer. As such on qualifying projects the GA cannot treat a bid proposing to supply steel from Japan any less favorably than a bid proposing to supply steel from the United States. It is important however to check the terms of Washington’s trade agreements. For instance like NAFTA agreements WTO GPAs do not apply to federally-funded transit and highway projects. Accordingly even though WSDOT is also an executive agency that would theoretically be covered by Washington’s WTO GPA in practically all cases a WSDOT project will continue to require domestic supplies as outlined in the previous section.
Tymon Berger is an attorney with Stanislaw Ashbaugh and a member of the AGC Legal Affairs Committee. He can be reached at 206-386-5900.