Government Contracts Monitor

Recovery Act’s New FAR Clauses Add Complexity to Buy American Compliance for Construction Firms

April 21, 2009

By: Eric Whytsell

On March 31, 2009, the Federal Acquisition Regulation (FAR) Councils unveiled interim “Buy American” regulations and FAR clauses applicable to construction projects funded by the American Recovery and Reinvestment Act of 2009 (ARRA/Recovery Act).

The clauses implement ARRA §1605 – the controversial provision Congress inserted into the Recovery Act to prohibit the use of non-US produced iron, steel, and manufacturing goods in ARRA-funded projects.  While many of ARRA’s domestic-sourcing requirements may appear familiar, the new clauses introduce stricter compliance hurdles for construction firms working with recovery funds.  For more information, see our previous post on this topic and our summary of new recovery rulemaking. 

Applicability

Generally: The new FAR subpart 25.602(a) provides:

None of the funds appropriated or otherwise made available by the Recovery Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work [] unless – (1) the public building or public work is located in the United States; and (2) all of the iron, steel, and other manufactured goods used as construction material in the project are produced or manufactured in the United States.

Yet, unlike the FAR clauses implementing the Buy American Act (BAA), the new FAR 25.601 definition of “domestic construction materials” does not consider the source of the components of manufactured goods (i.e. raw materials or parts used to manufacture such goods).  It instead focuses on whether the “manufacture” of the goods occurs in the United States and permits the use of foreign-sourced components and subcomponents in construction materials so long as all of the manufacture occurs in the United States.  This is less rigorous than the analogous BAA definition of “domestic end product” found at FAR 52.225-1(a) which requires both manufacture in the United States and the use of domestic components worth more than 50% of the value of all components. 

As ARRA §1605 does not specifically address “unmanufactured construction materials”, they remain subject only to established BAA sourcing requirements (including a “component test”) found at  FAR 25.602(b). 

Simplified Acquisition:  The FAR Council also determined that the ARRA’s domestic-sourcing requirements would apply to projects funded by ARRA at or below the simplified acquisition threshold of $100,000.

Exclusions: As under existing law, the new domestic-sourcing requirements may not apply to construction materials produced in certain designated countries depending on the contract value.  Under the Recovery Act, those designated countries include nations that are signatories to the WTO Government Procurement Agreement or a US free trade agreement and “least developed” countries. Interestingly, unlike under the BAA, Congress specifically excluded Caribbean basin countries from “designated countries” for ARRA purposes.  If trade agreements apply to the acquisition (contracts with an estimated value of $7,443,000 or more) then eligible construction materials from a Recovery Act designated country are treated in accordance with FAR 25.4 (Trade Agreements Act) and exempted from the requirements of §1605.

Waiving §1605 Requirements

Exceptions: The ARRA FAR clauses contain three exceptions to the domestic-sourcing requirements that are similar to exceptions found in the FAR clauses applying the BAA.  These exceptions allow a contracting officer to permit a contractor to incorporate foreign construction materials without regard to §1605 or the Buy American Act in three situations: 

1.      Nonavailability: the necessary iron, steel, or manufactured goods are not produced in the United States in sufficient and reasonably available quantity and of a satisfactory quality;

2.      Unreasonable cost: the inclusion of iron, steel, or manufactured goods produced in the United States will increase the overall cost of the contract by more than 25%; or the cost of domestic unmanufactured construction material exceeds the cost of the foreign unmanufactured construction material by more than 6%; or

3.      Public interest: applying the domestic preference would be inconsistent with the public interest.

Waiver Process: A contractor may request a determination of inapplicability of §1605, but must support such a request with descriptions of the construction materials in question, their relevant markets, and an explanation of why foreign construction materials are necessary.  When the Government permits a waiver of the §1605 requirements, the head of the contracting agency must publish a “detailed justification” as to why the restriction is being waived in the Federal Register.  

“Unreasonable Cost” Price Adjustments: In situations where the contracting officer determines to waive §1605 based upon “unreasonable cost” grounds, a premium will be added to a contractor’s price proposal for the purposes of evaluating offers.  In situations where a contractor offers non-US produced iron, steel, or other manufactured goods, the entire contract price will be increased by 25%.  This is a significant departure from the BAA approach, under which the evaluative factor applies only to the cost of the foreign materials.  Additionally, a 6% price adjustment is applied to foreign unmanufactured construction materials (which results in a cumulative 31% price adjustment for these materials if the 25% adjustment also applies).  The government will, therefore, use the following equation to evaluate “unreasonable cost” waiver applications:

Total evaluated price = offered price + (.25 x contractor’s offered price if using non-US iron, steel, or manufactured goods) + (.06 x cost of foreign unmanufactured construction material if using non-US nonmanufactured construction materials)

This new approach significantly impacts the ability of contractors working on ARRA-funded projects to “manage” their evaluated price because any use of non-US materials will result in a 25% price adjustment to the entire offer. 

Penalties for Noncompliance

Under the new FAR 25.607, if a contractor includes foreign construction materials in violation of §1605, the contracting officer may waive the domestic-source requirements (if a cause for waiver exists) or require the contractor to remove the foreign material from the project (if feasible).  However, if the noncompliance is “sufficiently serious” the Government may: (a) terminate the contract for default; (b) report the contractor to an agency suspension and debarment official; or (c) if the misconduct appears to be fraudulent, refer the matter for criminal investigation.  Depending on the facts, a noncompliant contractor may also face False Claims Act liability under a theory of implied certification.

Conclusion

Although the new FAR clauses appear to track the existing requirements of the BAA and the Trade Agreements Act (TAA), the Recovery Act rules introduce new “quirks” that all contractors need to be aware of before pursuing ARRA-funded construction projects.  The new rules borrow from both the BAA and the TAA, so contractors need to carefully consider what compliance measures are necessary for a particular project.

Due to the “urgent and compelling” nature of the ARRA-funding, these rules were published in the Federal Register without public comment.  It remains unclear how this interim regulatory scheme will be employed in actual practice or, in fact, what the final rule will look like.  However, direction may be forthcoming since public comments will be considered before the rule is finished.  Nonetheless, for the time being, the new FAR subpart 25.6 and its corresponding contract clauses are already in effect.