One of the most controversial features of the American Recovery and Reinvestment Act ("ARRA" or the "Act") is its "Buy American" provision. There was a strong lobbying effort, which was successful, to impose domestic content requirements for all iron, steel, and "manufactured goods" supplied to ARRA-funded federal, state, and local public buildings and public works projects. Arguing that this might set off a world trade war similar to the infamous Smoot Hawley Tariff Act that contributed to the Great Depression, Senator McCain attempted to excise the Buy American provision from ARRA, but that effort was not successful. The Senate did ameliorate the Buy American provision by adding a requirement that it be implemented consistent with U.S. obligations under international treaties, particularly the World Trade Organization's Government Procurement Agreement, to which the United States is a party. This provision will not have any impact, however, on local public works projects, because cities and counties are not covered by these treaties. Some states, however, have signed onto treaty commitments with respect to state public works projects.
The Act contains three key elements: "public building or public work", "manufactured goods", and "produced in the United States". None of these elements is defined in the Act. This means that to determine the applicable meanings, one must look to the legislative history of the Act, to analogous federal statutes such as the Buy American Act of 1933, and to regulations issued by agencies using ARRA funds to contract for public projects. Don't expect consistency; there will be many uncertainties, until things begin to shake out.
Here are some key points on how the Buy American provision of ARRA works and what the issues are:
- The Buy American provision of ARRA is simple and straight forward. It says: "None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all the iron, steel and manufactured goods used in the project are produced in the United States." That means that if one dollar of ARRA funds goes into a public works project, "all" of the "manufactured goods" used in the project must have been made in the United States.
- "Manufactured goods" is not defined, but it is reasonably clear that the test will be the same "substantial transformation" test employed under the Buy American Act of 1933 that currently covers federal procurements.
- Congress provided for three exceptions where the head of the applicable public agency determines that (1) applying the Buy American provision would be inconsistent with the public interest; (2) iron, steel, and other relevant manufactured goods are not produced in the United States "in sufficient and reasonably available quantities and of a satisfactory quality"; or (3) inclusion of iron, steel, and manufactured goods produced in the United States "will increase the cost of the overall project by more than 25%." Word on the street is that waivers under these three provisions will be hard to come by.
- The agencies charged with implementing the Buy American provision are in the process of adopting their own implementing rules and guidelines. These are not necessarily consistent with each other, meaning that compliance may differ depending on whether stimulus funds come through federal, state, or local channels. Congress could have helped here by mandating a single set of implementing regulations, or a single agency to be in charge, but it didn't. This means that you will have to act as your own guide through the wilderness of conflicting regulations and guidelines, with no central authority to provide answers.
- Compliance likely will be documented through certificates of compliance executed by supplying contractors and subcontractors. Do not sign one of these certificates unless you are very sure that what you are supplying complies with the Act. Penalties for noncompliance can be severe, including removal of offending goods, penalties, debarment, and even criminal sanctions.
- For federal projects and for state projects in states that have agreed to the provisions of the World Trade Organization's Government Procurement Agreement, where the value of the project is $7,443,000 or more, iron, steel, and manufactured goods from member countries (notably Japan, Taiwan, and Republic of South Korea, but not China) may be used. But there are inevitable exceptions, so check carefully.
- While the Act itself does not expressly address small purchases or purchases of commercial products or "over-the-counter" products, purchasing authorities have been slow to adopt exemptions for these purchases. This likely will vary agency by agency.
- According to the Office of Management and Budget ("OMB"), which has issued detailed guidelines on implementation of the Act, "there is no requirement with regard to the origin of components or subcomponents in manufactured goods or products, as long as the manufacture of the goods occurs in the United States."
- The EPA, one of the agencies that has already issued comprehensive guidance on compliance with the Act, including what constitutes "substantial transformation" sufficient to qualify the product as having been manufactured in the United States, has issued two national waivers, one for projects with debt financing in place before the Act was enacted and another for components that equal less than 5% of a project's total cost. These two waivers apply only to eligible water infrastructure projects funded by the Act.
- Amendments to the federal acquisition regulations have been issued to implement the Buy American provisions of ARRA with respect to federal acquisitions. They are found in Federal Acquisition Regulations ("FAR") subpart 25.6. Interestingly, these amendments exempt direct government acquisition of construction material from ARRA requirements by defining them as purchases of supplies. The ARRA Buy American provisions do not apply to supplies. The drafters decided to apply ARRA to federal acquisitions at or below the simplified acquisition threshold of $100,000, which means that the new federal acquisition requirements will apply to construction contracts between $2,001 (the micro-purchase threshold) and the World Trade Organization Government Procurement Agreement threshold of $7,433,000, or other thresholds under comparable free trade agreements. Above the applicable thresholds, products from treaty partner countries are eligible for use in ARRA-funded projects. Demonstrating the complexity of the new requirements, ARRA does not address unmanufactured construction materials (for instance sand), but the drafters of the new federal acquisition regulations decided to use the 1933 Buy American Act to cover such materials, meaning that when used for covered federal projects, they must be mined or produced entirely in the United States.
Want to read more? ARRA can be found here (the Buy American provisions are in Section 1605); OMB's regulations are here; the new federal acquisition regulation provisions are here and the EPA guidance is here or here.