President Trump continues to push forward with his “Buy American, Hire American” initiative with the issuance of his third Executive Order No. 13881 (the “Order”) on July 15, 2019, entitled “Maximizing Use of American-Made Goods, Products, and Materials.” This Order attempts to strengthen the standards that federal agencies must follow under the Buy American Act (“BAA”) by raising the threshold for domestic purchasing requirements.
Specifically, this Order proposes rule changes that would require iron and steel end products used in federal procurements to contain 95% U.S. materials. This is significantly above the current 50% threshold. The Order further proposes a rule requiring non-iron and steel end products used in federal procurements to contain 55% U.S. materials, up from the current 50% threshold.
This recent Order comes on the heels of two prior Executive Orders issued over the last two years.
Executive Order No. 13788, signed on April 28, 2017, required federal agencies to “scrupulously monitor, enforce, and comply with Buy American laws, to the extent they apply, and minimize the use of waivers, consistent with applicable law.” Executive Order 13788 also mandated federal agency action on Buy American laws at specified dates, as well as subsequent reporting on implementation of Buy American laws. In short, agencies were instructed to follow the law and report back.
Executive Order No. 13858 signed on January 31, 2019, instructed all agencies to maximize the use of iron and aluminum, as well as steel, cement, and other manufactured products produced in the United States in contracts, sub-contracts, purchase orders, or sub-awards. While Executive Order 13788 targeted recipients of “federal grants”, Executive Order 13858 amended that language to include those receiving “Federal financial assistance”, as defined in 2 C.F.R. § 200.40—federal assistance received by private entities in the form of grants, cooperative agreements, direct appropriations, loans, etc. Thus, private entities receiving public funds will be “encouraged” to use domestic sources when procuring goods or services.
Congress passed the BAA during the Great Depression to foster American industry by protecting it from foreign competition for federal procurement contracts. The BAA affords generous pricing preferences to offerors who certify their compliance with the domestic purchasing requirements stated in the act. Specifically, the BAA requires public agencies to procure articles, materials, and supplies that were mined, produced, or manufactured in the United States, except under five exempt circumstances. See 41 U.S.C. § 8302(a).
The BAA is one of several federal statutes implementing domestic purchasing requirements, including the “Buy America Act” and related regulations applicable to certain federal infrastructure and federal stimulus projects. See 49 U.S.C. § 5323(j) (mass transit grants); 23 U.S.C. § 313 (federally-funded highway grants); 49 U.S.C. § 24305(f) (federal grants to Amtrak); 49 U.S.C. § 50101 (grants to the Federal Aviation Administration); 48 C.F.R. § 25.600, et seq. (projects using funds appropriated by the American Reinvestment and Recovery Act).
The key to understanding the BAA is determining whether the solicited goods or “end products” are domestic, i.e. were mined, produced, or substantially manufactured in the United States. The FAR defines an “end product” as “those articles, materials, and supplies to be acquired for public use.” See 48 C.F.R. § 25.003. The analysis of whether an end-product qualifies as domestic is done using a two-part test. See 48 C.F.R. § 25.101. First, the end-product must be manufactured in the United States; second, more than 50% of all component parts (determined by cost of the components) must also be manufactured in the United States. If a product meets this two-part test, then it can be considered a “domestic end product” under the BAA. End products that do not qualify as domestic under this test are treated as foreign.
The most recent Order proposes a new standard for iron and steel end products to qualify as domestic end products, by requiring that iron and steel end products contain 95% U.S. material. In addition, the new Order proposed to amend the Federal Acquisition Regulation (“FAR”) to increase the percentage of required U.S. material for all non-iron and steel products to 55%. The Order also directs the FAR Council to consider whether this threshold should be gradually increased over time to require that an end product contain a minimum 75% U.S. components in order to qualify as domestic. While the Order does not address the existing FAR requirement that the end product also be “manufactured” in the United States, it is assumed that this would remain a threshold requirement for constituting a “domestic end product.” See 48 C.F.R. § 25.101
The Order also directs the FAR Council to consider increasing the price evaluation preference that domestic end products enjoy under the BAA. The FAR currently provides that when a domestic offer is not the lowest offer, the Contracting Officer must assert an evaluation penalty against the price of any contractor’s proposal. See 48 C.F.R. § 25.105. Generally speaking, the applicable penalties for foreign offers are: 6% where the lowest domestic offer is from a large business; 12% when the lowest domestic offer is from a small business; and 50% for any Department of Defense procurements. See 48 C.F.R. § 25.105(b)(1) and (2). The recent Order asks the FAR Council to consider amending these penalties from 6% to 20% for large businesses and from 12% to 30% for small businesses.
Under the Order, the Secretary of Commerce and the Director of the Office of Management and Budget, in consultation with others, including the FAR Council, are required to submit a report to the President on any other changes to the FAR that “the FAR Council should consider in order to better enforce the Buy American Act.”
The practical impact of this Order, as well as prior Executive Orders, remains to be seen. If implemented, domestic industries supplying domestic end products are certain to benefit in the form of a competitive advantage. However, this home field advantage could likely come at a cost to the American taxpayers, as the pool of qualified suppliers would be reduced, resulting in lesser competition. With decreased competition comes a possible increase in prices that the Government will pay to procure these products. Whatever the outcome, Buy American will continue to grab headlines as part of the President’s agenda moving forward.