As anticipated, the Trump Administration has continued to build on its emphasis for domestic preference requirements on projects that are subject to the Buy American Act – both for projects that are directly funded by the federal government, or pursuant to the Administration’s January 31, 2019 Executive Order, “Strengthening Buy American Preferences for Infrastructure Projects,” potentially also to projects that are indirectly funded by the government. The Administration’s latest efforts in this area have come in the form of a July 15, 2019 Executive Order, “Maximizing Use of American-Made, Goods, Products, and Materials.” While this most recent Executive Order on this subject contains a number of proposed changes, which will need to be implemented through regulations, it proposes two changes that may have significant ramifications for the construction industry. This alert summarizes the key considerations for construction contractors.
First, in order for steel and iron manufactured products to be considered domestic end products, the Executive Order proposes to increase domestic content from 51% to 95% for such a product to qualify. The Executive Order is unclear as to whether the proposed change would apply to domestic construction materials, but should it, the change could have a material impact on supply chain and other business issues for construction contractors involved in civilian agency construction projects. However, if the product in question meets the definition of a commercially available off the shelf (“COTS”) item, the Executive Order will not affect those products as COTS item are exempted by the Federal Acquisition Regulation (“FAR”) from domestic content requirements.
Second, the Executive Order proposes to increase the price penalty levied against foreign end products from 6% to 20% in unrestricted procurements and from 12% to 30% in small business competitions. The price penalty is used by civilian agencies to determine whether sourcing a domestic end product would pose an “unreasonable cost” as compared to a foreign end product. If the price of a domestic end product is higher than its foreign end product counterpart, the agency can implement an exception to the Buy American Act’s general mandate that domestic materials shall be used unless their cost is determined to be unreasonable. For example, if a domestic end product costs $10,000, but a foreign end product costs $9,000, a civilian agency in connection with an unrestricted competition would currently apply a 6% price penalty to the foreign end product for evaluation purposes to arrive at an evaluated price of $9,540. As the evaluated price of the foreign end product, even as penalized, would still be less than the price for a domestic end product, the agency could seek an exception to the statute under the unreasonable cost exception. However, under the changes proposed by the Executive Order, the application of a 20% price penalty would result in an evaluated price of the foreign end product of $10,800, which would be higher than the $10,000 price for the domestic end product, thus changing the foregoing calculus by now demonstrating that the domestic end product no longer poses an unreasonable cost. Accordingly, should the proposed penalty percentage increases go through, the changes are expected to erode civilian agencies’ ability to use the unreasonable cost exception to the Buy American Act – a change that could also impact supply chain, pricing and other strategic or even tactical decisions by contractors. The Executive Order‘s proposed increases on price penalties, however, do not affect DoD procurements because DoD already implements a much higher 50% price penalty.
As noted, the Executive Order only proposes changes, and it will be up to the FAR Council to determine what and how to implement any of these proposals. The FAR Council has up to 180 days to consider these issues, so we will be watching for activity on that front for further and more concrete developments on this important area.