Buy American and Beyond: Domestic Preference Rules for Government Contractors
Holland & Knight Webinar
Holland & Knight hosted a webinar reviewing domestic preference rules in government contracting, including the Buy American Act, Trade Agreements Act, Buy America rules and the Berry Amendment. This webinar highlighted compliance and enforcement issues faced by federal contractors and their counsel, beginning with a high-level overview of each topic and then provided an update of recent and upcoming developments. Our attorneys also discussed new executive orders, case law and statutory/regulatory changes.
- an overview and high-level summaries of domestic preference rules imposed on government contractors as part of the Buy American Act, Trade Agreements Act, Buy America rules and Berry Amendment
- the most common (and expensive) compliance issues encountered by contractors
- recent developments, including recent changes to the rules, expected future changes and the potential impact on contractors
Chris Nagel: Good afternoon, my name is Chris Nagel, I'm with the law firm Holland & Knight, and every month we have a webinar where we address topics of interest for government contractors. My practice focuses on government contractors and federal contractors primarily. I serve as outside general counsel for contractors who don't have their own in-house lawyers and then sort of a government contract counsel for those who do. We try to pick topics each month that are topical and I hear the same questions a lot from clients, so I try to channel those and bring in experts who can help address some of those commonly heard questions. This month the topic is domestic trade preferences, so the Buy American Act, America Trade Agreements Act and all the different structures that we've come to know in this industry. I've got two experts joining me as panelists this month. The first one is Andrew McAllister, who's a partner in our Washington D.C. office and comes from government where he did this work as well and is an expert in the policy and regulatory side of this. Also joining me is Leila George-Wheeler. She's also in our Washington D.C. office and works in Tysons with me sometimes. She focuses on the enforcement side of this and so to the extent you've got government enforcement actions, Leila takes part in defending contractors in those situations. So we thought it'd be helpful to get both sides, and we're going to walk through some of the most commonly heard questions and information that hopefully will be useful to you. Andrew, let me start with you. I feel like I'm hearing more about these policies over the last couple of administrations than we did before. Obviously, these are not new rules and requirements, but it seems to be in the headlines more. Can you walk us through some of the background and where we are now politically in terms of this being more on the front burner?
Andrew McAllister: Thanks, Chris. Certainly, as you said, it's been one of the sort of topic du jour over the past few years. I would say it picked up steam, certainly in the Trump Administration. I guess a couple of reasons for that, one was sort of catering to the Trump Administration's base and in terms of the types of voters that he was aligned with promoting U.S. manufacturing. Some of those Midwest companies type areas. So emphasizing that sort of America first agenda. I would say that also sort of dovetailed to national security and foreign policy in the sense of there are certain strategic industries that we want to make sure that the U.S. is a leader. Whether it's semiconductors, whether it's steel, whether it's other industries, we want to make sure that we protect that U.S. domestic manufacturing base. As you mentioned, the Trump Administration rolled out some policies and after the Trump Administration left office, I think many of us were kind of on the fence and wondering what's going to happen in the Biden Administration. Are we going to retain that status quo or are we going to keep sort of rolling that policy forward? As we saw within the first couple of weeks of the Biden Administration, he issued an Executive Order. It was really geared toward sort of all things made in America. He also created the Made in America Office to sort of centralize some of the policy here, work on various waivers that we'll get to. And so the short answer is the momentum has continued. We've continued from the Trump Administration right into the Biden Administration. We're seeing things both on the presidential level, executive branch, as well as the legislative branch. We'll get to the Infrastructure Act, that was obviously a congressional statement as to domestic preference and then we continue to see regulations roll out.
Chris Nagel: Leila, let me ask you what you are seeing on the enforcement side. Are you seeing a similar uptick or is there sort of a lag between when the policy changes and what you're seeing in terms of enforcement action?
Leila George-Wheeler: Yes, so we are seeing a similar uptick and I actually think that we're going to see more with the continued and even increased emphasis on upping the percentages, for example, in the Buy America Act. Also, just with the focus on domestic manufacturing, there seems to be a push at the U.S. Department of Defense in particular, but other agencies as well, to increase manufacturing and production here in the U.S., especially with everything going on in the world right now with Ukraine. I think there will be more emphasis by enforcement agencies on looking into this Buy America Act compliance and countries of origin compliance generally.
Chris Nagel: Let me take a minute and just say we are tracking the Q&A box on the Zoom platform, so if you've got questions you can ask them there in the Q&A. We'll try to address them as we go in real time as the topics come up. If not, we're hoping to leave a little bit of time at the end to address questions. So feel free to put your questions there as we're going through and I'll try to keep track of those and ask them as we go. Let's move on. Andrew, we're going to go back to you if we could. Can you give us sort of a high level overview of the domestic reference law and then we'll drill further down into the Buy American Act specifically?
What Are U.S. Domestic Preference Laws?
Andrew McAllister: So this slide is really just designed to provide some background on what these laws are. They've been implemented at different times. Some come from sort of legislative law. Others are changes to regulations, so we've sort of highlighted the most important ones at the bottom. The Buy American Act and Trade Agreements Act — those are kind of tied together in a sense, as we'll talk about later. Once a government procurement hits a certain triggering amount in terms of the value that causes it to move from the Buy American Act to the Trade Agreements Act in general. Those are sort of the broad rules that have applied to government procurement. Then there's a more specialized specific set referred to as Buy America without the "n." We want to make sure to make this as confusing as possible so that people get tripped up everywhere. But those are really specific to the Department of Transportation. So, for instance, the Federal Transit Administration, which is involved in regulating railroads, they have a set of rules about how the tracks are built, how the train cars are built, etc. Also Buy America is expanding in a sense because the new Infrastructure Investment and Jobs Act, which was signed into law at the end of last year, expands a set of fairly restrictive provisions to all so-called infrastructure projects. So we'll provide a little more detail about that later and the Department of Defense areas. We're not really going to spend much time on those, but just to sort of notate them. The Berry Amendment and the Specialty Metals Provision, The Berry Amendment is often about procurements with the Department of Defense, which might be something like military uniforms, so they often involve fibers, fabric and things along those lines. Specialty Metals Provision, as the name sort of indicates, is particular type of metal products that are being provided to the Department of Defense and sort of manufactured within the U.S. requirements. The last sort of point I will mention is you'll sometimes hear the term "Made in America," that sort of a term is really a Federal Trade Commission issue that's mainly about advertising and sort of representing to the consumer. That standard actually is even more stringent than some of the other ones.
Chris Nagel: Great, okay. So we'll focus on the government contract piece and you'll know why we say Buy American with a really hard emphasis on the end versus Buy America. We've got our first question here. Andrew, this is probably for you. Will this affect buying from Canada and then in parentheses, North America? So is there any application of this in Mexico as well in terms of purchasing from Canada or Mexico? Or is it strictly either U.S. or non-U.S.?
Andrew McAllister: Yes, so as we all know, Canada is, of course, a foreign country, despite the fact it's closely aligned with the U.S. I would say things that are about domestic manufacturing are generally either U.S. or non U.S. In that instance, Canada's falling within non U.S. The point that we'll see later is that The Trade Agreements Act, Canada is a qualifying or designated country under the U.S. agreement with Canada. There are certain benefits that Canada receives that maybe China would not for example. The only other piece I would mention, it's a little bit outside of this discussion, but there is something called the National Industrial Base that actually includes a couple of the U.S.' closest allies, one of which is Canada. So there may be certain Department of Defense programs where they're looking at, oh well are the goods made in a country that's part of the National Industrial Base?
Buy American Act
Chris Nagel: Great. Very helpful. Okay, let's move on. We're going to dig a little bit deeper now into the Buy American Act. Andrew, can you talk us through the basics there?
Andrew McAllister: Yes, the Buy American Act again is sort of a general government procurement. There's really two factors that must be met in order to satisfy the standard. It must be manufactured in the U.S.. The term manufactured is not actually defined anywhere in the regulations or the law, but there's production steps occurring. There's some kind of technical experience in and sort of making that end product. Again, if I received four components from overseas, I pulled out the screwdriver in my top drawer and I screwed together those four components that would likely be considered assembly and not manufacturing. It's something beyond assembly. Then the second piece of that test is that the cost of the components from the U.S. must exceed a certain threshold of the cost of all components. Let's say you had 80 percent of your components from the U.S. and 20 percent of your components from Thailand. You would be okay under the Buy American Act because 80 percent, as we'll see, would be beyond that threshold. The other possibility is you have a commercially off the shelf item. So let's say it's a chair like the chair I'm sitting in now. We sell that to everybody. We sell it to the government, we sell to Home Depot, we sell it to Office Depot, right? It's the same product. We haven't done anything unique or special to it in order to make that government sale. So that's another possibility. In a way, you must meet number one and then you must meet either 2(a) or 2(b).
Chris Nagel: Now if I'm a government contractor, Andrew, how do I know if this applies to me or if I need to worry about it?
Andrew McAllister: An important take away is you got to look at your contracts. If you're a prime contractor with the U.S. government, there's going to be a domestic preference clause in that contract if one applies. It's not as if you have to dream it up. It should be in that contractual document, whether it's an RFP or whether it's an actual contract. As the prime contractor, that's where you get it. If you're a subcontractor, the prime contractor is responsible for flowing that clause down to you so that you know the standard under which you need to comply with.
Chris Nagel: Great, so when my clients are looking through the three or four pages of single spaced supplement provisions, here's one reason that's significant is it may include some of these very important obligations. To drill further down into the definitions and how this stuff applies in the real world, Andrew, maybe you can walk us through this more detailed analysis of the BAA.
Andrew McAllister: So these are just some of the different provisions. I'm not going to go through it in a lot of detail, but the point is, if it's an iron or steel product, it is subject to more stringent standards. So you see that the cost of the foreign iron and steel must constitute less than five percent of the total cost of all the components. Well what is an iron or steel product? It's generally something in which more than 50 percent of the value of that product comes from iron or steel. COTS items doesn't waive the domestic content requirement for iron and steel. Let's say you have two contractors, one who is providing a domestic product, the other who says, I'm unable to provide a domestic product, I can only provide a foreign product. So what those numbers there really mean is when analyzing the offering of the different parties, the domestic product was $100 and the foreign product was $90. If you apply the 20 percent for a large business to that $90, you're all of a sudden going to have a product that is more expensive than the domestic product. So it's really that price preference. It doesn't mean you can never offer a foreign product, it's more so you're going to be penalized for providing that foreign product.
Chris Nagel: Yeah, I think that's a really important point and one that is sometimes not intuitive or applies in two different ways. It can be an evaluation factor in terms of how your price is evaluated when going through the proposal process. And then once you've got a contract with the requirement, then it's sort of a thumbs up or thumbs down rule following. So that's helpful. Andrew, we got a couple more questions here and we will try and get to them quick because we're already falling a little bit behind. Does the qualifying country and product exceptions still apply for purchases from countries such as Australia, Israel, etc.?
Andrew McAllister: The short answer is yes. And so sort of going back to one of the statements we made, let's say you have a $20 million government contract and the nature of that value moves you from the Buy American Act into the Trade Agreements Act. Once you're in that trade agreements act you can utilize all of the qualifying countries. I can't remember all of them, but Australia, Israel and there are a number of other qualifying countries. And so yes, as long as that product, let's say, is an Australian origin product and your standard is the Trade Agreements Act, then you are able to provide that Australian origin product.
Leila George-Wheeler: But not if it's the Buy American Act, right?
Andrew McAllister: Correct. Let's say you had a $50,000 government contract and you said, I got this Australian origin product. The government would say, great, you're in the Buy American Act and so yeah that is an Australian product, not a U.S. product. Therefore, we're going to apply that cost increase to compare the Australian product to the U.S. product.
Chris Nagel: Okay, next question, if the government solicits a COTS item and a U.S. company is awarded the contract, but then designs and builds the product, does it still qualify as a COTS item? I'll take a swing at that as the more traditional government contract lawyer. I think the answer is how you're selling the products more so than how you built the product. I think the question is, are these products available generally at a price that's published or with very minor modifications? I don't think it matters if you manufacture the product in your facility or are buying it and reselling it. Either way, that's going to be a COTS item. If, on the other hand, the government acquires it as a COTS item, but then somehow you change it so fundamentally that you're not now offering that out to the broader public, I think you may have an issue there because the government relies on that representation that it's a COTS product in part for its fair and reasonable price analysis. And so if you're representing the government that it's COTS, but it's really not, then the government doesn't know if you're giving it a fair and reasonable price because this isn't the price you're giving to the general marketplace, which is usually the reason that COTS designation is important. Andrew/Leila, I don't know if you have other thoughts specific to the domestic preference concept, but I think it's going to matter where they're sold as opposed to where they're made.
Andrew McAllister: Yeah, the only thing I would add there, not to belabor it, is there is a specific definition. I don't have the citation at the top of my brain, but there is a definition I want to say in 48 CFR, it sort of walks through what is and is not a COTS item. If there are certain terms of art within the regulations, they may not be defined in the particular regulation you're looking at, but it's probably elsewhere in a more general provision. So I would say you need to make sure you're checking that.
Buy American Act - Recent Changes
Chris Nagel: Yes, great point. 2.101 is where the definition is, and I gave a quick summary, but Andrew's right. Looking at the actual definition, the regulation is the best option. Okay, let's try to get through this part so we can move on. Andrew, any big ticket items from recent changes?
Andrew McAllister: Yeah, the slide speaks for itself. It's continuing that trend of a more stringent standard. You know, going to January 31, 2029, the domestic content. So again, that's the U.S. components must be at least 75 percent of the total components. We're starting to get into a world where we'll see how attainable it is. But yes, these are right. I know there have been some proposed rules out there, but these are final rules and they will take effect and like I said, the rest of the slide I think speaks for itself.
Chris Nagel: What about services, not hardware products sold to the government buyers? What services delivered over enables the flash support IT infrastructure that is assembled or built on parts and hardware that may or may not be Buy American sourced hardware that is also operated by a U.S. owned, controlled and operated services company. I think telecom services sold to DOD, but may include infrastructure parts provided by foreign suppliers. That's a lot to unpack there, Andrew, but you have some high level guidance on services contracts?
Andrew McAllister: You've got sort of a mix of services and hardware. I guess it sort of depends on how that contract is written. Are we providing them equipment and services, or are we just a services piece? Where the services are conducted I think are not necessarily subject to some of these domestic preference titles.
Leila George-Wheeler: Yeah, my understanding is that straight services contracts where you're not providing products in need as part of the service, that it's applicable, generally.
Chris Nagel: Or maybe that it shouldn't be. Maybe that's an important point as a prime contractor to ask those questions. It may be inappropriately included in a prime contractor and subcontract, I guess, right? OK, let's move on to waivers and exceptions. Andrew, can you walk us through these?
Buy American Act - Waivers and Exceptions
Andrew McAllister: Yeah, so I would say as a sort of initial point, the waivers and exceptions are difficult. It's difficult to meet those standards where there are some guidance as we referenced the Made in America Office that's been recently established. One of its sort of chief roles is to review all waivers to ensure that they're the right thing to do, that they're consistent with U.S. government policy. These waivers are granted in fairly limited circumstances. One that you see more often than the others is non-availability. There's a list that says vanilla bean is not available in the U.S., that one's easy. Then you start to get into things that are more manufactured items. Well, are they truly not available? Is it costly to manufacture them in the U.S.? I would say the other thing is the Made in America office is now publishing what it's doing with certain waivers. There's sort of a running list now on waivers that have been granted, ones that have been denied, etc.
Methods of Enforcement
Chris Nagel: Leila, let's move to you now and talk about some of the specific ways that we see the government enforce these regulations. I know everybody's trying to do the right thing and comply with all the rules, but sometimes there's a risk assessment piece of this and there may be a communication barrier between the compliance folks and the project business folks trying to get things done. So why does this matter? What's the downside? What's the risk if companies are not in compliance?
Leila George-Wheeler: Right, so, Chris, like you said, most companies are trying to comply and doing their best to comply, and sometimes there are breakdowns internally between the supply chain folks and the compliance folks or legal or however it's working out. In those cases you see more enforcement in the administrative area and the False Claims Act area versus other examples, which are actual knowledge, willful intent, actual schemes to purchase foreign goods and sell them here, as Made in America, or is compliant with the TAA, BAA or whichever applicable country of origin requirement applies. The criminal fraud, I think we can all tell what that really is, which is not generally what anyone on this webinar is here for because they're here to learn about compliance and what the law means, right? So in the pre-award context, not complying with the Buy America Act, and this isn't exactly in enforcement, but a way you can lose an opportunity. It used to be that the way it was enforced more often was in the bid protest context where multiple companies are competing for an opportunity and they're in the same industry. One might know something or think they know something about where their products are actually coming from, whereas if there's a Buy American requirement that they don't think they can meet with it and if they lose, you could file a bid protest and they figure it out there. Another, if not more often these days, is in the post-award context where it can either be dealt with as a contract administration issue. You know, that's in particular where the contractor actually proactively discloses it and says, hey, look, we figured out the shoelaces in our boots isn't actually these components and they're not compliant with the applicable rule. These are methods of enforcement, not just applicable to Buy American, but any of the country of origin requirements. Then the contracting officer can say, well, you need to change it or deal with it. Enforcing that rule as a matter of contract administration. It can also result in termination for default or convenience. You know, by the agency. What we're seeing is that basically more often than not, domestic preference rules are being enforced through routine audits and government audits and investigations. Generally that falls into the False Claims Act sphere. Just as a refresher, the False Claims Act basically imposes liability on any person or entity who knowingly presents or causes to be presented a false or fraudulent claim to the government and that includes implied certification. Where you certify that you are compliant with a particular standard and then you actually are not. One area that we're noting that is very common to play out is what's called product substitution. Basically, the contractor promises to deliver products that comply with the applicable requirement, but then instead deliver non-compliant products or partially compliant and other non-compliant products. One other area where administrative action can be taken, which is a bit more drastic than the others is suspension and debarment. Suspension and debarment is discretionary actions to exclude or disqualify contractors from government contracts. This is taken to ensure that the government only does business with responsible contractors. Even if you're determined to be responsible, or contractors are determined to be responsible, they could still have to deal with the suspension and debarment office in showing proactively that they are a responsible contractor when they forego one of these rules.
Chris Nagel: That's really helpful. A couple of things you said really stuck out to me. One was this idea of implied certification. When you get into why compliance and government contracting matters, I think this is one of the best points that people don't think about as much. this is the case as you know Leila, that was resolved at the U.S. Supreme Court level just a few years ago. This question of when you submit an invoice to the government, are you somehow certifying that you're in compliance with all the contract terms? And that instinctively is lawyers doing contract work. Typically, the answer is no. It's a contract administration function, right? The government has all sorts of remedies within the contract. If you breach the contract, that's what it is and you use the remedies available to you within the contract. Unfortunately, for those of us who defend government contractors, the Supreme Court said no. When you submit an invoice to the government, you are impliedly certifying that you're in compliance with material terms of the contract. So what are material terms of the contract? Of course, that's what's getting litigated now in federal district courts across the country. But the point is why does all this compliance stuff matter? Well, because every time you submit an invoice to the government, you may be certifying that you're in compliance with each one of these terms. I think some of these domestic preference provisions probably will be considered material.
Leila George-Wheeler: I was just going to say it's right there on the slide, but you can be subject to extraordinary damages under the False Claims Act. Up to triple damages, which is extraordinary.
Chris Nagel: We've got a question here and I think it's a good one. What happens if you unknowingly install material and later found out that it failed the Buy American provision? Can we go ahead and fix it or are there potential penalties? I don't think there's going to be a good legal answer to that one. It's kind of the typical lawyer answer, it's really a case-by-case sort of thing. Hearing from both of you, is there sort of principles you would apply to that situation or kind of general high-level guidance you might issue?
Leila George-Wheeler: So I agree with you Chris, it is a case-by-case basis. What you're going to want to do is when you find out, right, and this is why it's important to build in compliance measures with these types of country domestic preference rules because you want a procedure for when it's determined that this one component doesn't match, what do we do? Well, you want to be able to elevate it. You want to elevate it to your compliance folks or your executive team, whatever you have to assess whether a mandatory disclosure needs to be made because government contractors are subject to the mandatory disclosure rule and that rule includes violations of the False Claims Act are included, as you know, requiring a mandatory disclosure. Frankly, more often than not, if you voluntarily or you know mandatorily, depending on the situation, tell the contracting officer, hey you want to do this, of course, in conjunction with your compliance or legal team or outside counsel, but disclose proactively, then you know, I think it's more likely that there will be a contract administration handle. This is a contract administration matter as opposed to an actual law enforcement agency investigation, which is less costly in the long run. So that's what I would say.
Andrew McAllister: So just an anecdote from a fairly recent matter, so I think all the things Leila said are correct, which is the more you can point to compliance, the more you can point to, hey, we had some kind of procedure. Yeah, we made an error here or somebody made a judgment call and I guess the government disagrees with our judgment call. Here's why we arrived at the conclusion. We had a client recently working on a government building. Turns out part of their responsibility was providing urinal sinks and things along those lines for the bathrooms of the building. I think the position that was being taken, which is legitimate, is we were providing some kind of component for a larger system for a housing price. Therefore, you need to assess our urinal, our sink as a component of some larger system. And so ultimately, the government was doing their inspection, doing their audit. They were looking around at the urinals and sinks and huh? It says made in China, that's interesting. Last time we checked, China's not BAA, not TAA, etc. So again, what ended up happening was not some kind of civil enforcement action or anything along those lines. It was handled at the contract level. But of course, what happened? Well, the client had to rip out all the urinals, rip out all the sinks. Then what did they have to do? Well they had to actually buy compliant products from a competitor. So not a very good result either from a business perspective. I think again the more you can build in that compliance, then yeah it was really disruptive to have those things ripped out and have to buy them from our friendly competitor down the road but it was better than some of the things that are on the screen right now.
Chris Nagel: I think the point you guys are raising is critically important, which is, first and foremost, we want to stop compliance breaches and not have issues in the first place. But those compliance programs come in handy when the government starts knocking on the door. You can say, this is what we did to try to comply. You know, we're good corporate citizens and those things, seems to drive enforcement actions quite a bit. There's somebody asking about services where they don't sell products, but they're looking to outsource back-office functions overseas to India. I think, Andrew, what you said basically is that contract by contract, but as a very high-level rule, likely that would be a contract. It would not incorporate these requirements. Any other thoughts on that?
Andrew McAllister: I don't think so, it sort of depends on the circumstances and what the contract is. Are they creating, let's say, some kind of software that can be used for this government contract, commercial contract, etc. So it's a little hard to give absolutes there.
Chris Nagel: Is there a document that needs to be shown in an RFQ documenting that you meet the BAA? I think this question is about, if there is some sort of certification. I'm not aware of anything like that, although you could see an agency adding that to do a solicitation, potentially. Andrew or Leila, have you seen anything contractor required to certify their compliance?
Andrew McAllister: In the RFQ stage, by submitting the RFQ in response, you're probably certifying that you're going to follow the thirty-seven different government contract provisions. There are some specific certifications that you see in the regulations depending on the regulatory sites. I would say you are certifying sort of at each step. It depends on how that RFP or RFQ is worded, or are you just, here's my widget. Here's how much it's going to cost and maybe you're not making any representation. My guess is you likely are making some kind of rule.
Trade Agreement Act
Chris Nagel: I think that also comes back to the implied certification point that Leila brought up about invoices. We're talking about an RFQ, it's a different situation, but once there is a contract, then I think it's even more significant. We got a couple more questions that I think will apply to some of the future slides. Let's move on, and then I'll ask this question when we get to them. Andrew, can you give us a quick synopsis of the Trade Agreements Act?
Andrew McAllister: Yes, so this is important. Again, it's general government procurement once it hits a monetary threshold that gets around $180,000. Once it goes above that threshold, the Buy American Act is quote waived and then you are under the Trade Agreements Act. That gives you a lot of flexibility because as I mentioned if you have a product that was made in France, Belgium, Chile, Canada, that's all going to be a qualifying country. It recognizes that the U.S. has trade agreements with those particular countries. I guess the last point I would raise is you might tell yourself, well is my product a Chinese product or French product? I'm taking Chinese inputs and manufacturing it in France. I think it's a French product, but somebody might disagree. You can get a ruling from U.S. Customs and Border Protection to confirm the analysis there.
Chris Nagel: Very helpful. We've got a TAA question here before we move on. Have you seen TAA added into the header of USMCA certificate of origin templates? Two customers pressing that if one is eligible for one it's always eligible for the other. Do you see overlap between those two things, Andrew?
Andrew McAllister: I'm not sure I'm familiar with the specific statement. I would say that the certificate of origin is if your product is eligible for duty preference. So that's about a customs issue, right? Well ordinarily it's a five percent duty, but if it's from a USMCA country, it's a zero percent duty of that certificate of origin. The Trade Agreements Act is more self-certifying. I would say certainly the fact that somebody is certifying that it's a Mexican country of origin should provide that same sort of value or back up for a U.S. government procurement. However, I'm not familiar with that particular statement of people adding that to a certificate of origin.
Chris Nagel: You see a lot of contracts that are well over a $180,000 that have a basic BAA clause and not the TAA version of the clause. Does that indicate that it's the wrong clause in the contract? That strikes me as maybe, you know, there's a lot of time that the contract clauses are incorporated into the contract and you know, it may include the threshold in the provision itself. So it may be that you have to kind of look through the contract clauses to see which one applies and which one doesn't. Although, I suspect it's probably not entirely uncommon for the wrong clause to be incorporated. Andrew or Leila, have you seen that in your practice?
Andrew McAllister: Yes, so I would say we've certainly seen wrong clauses in contracts, that's not an uncommon thing. There are some exceptions where if it's something like a national security contract, there may be instances where it's a high value contract that is still governed by the Buy American Act. So there are some exceptions, or the contract may be governed by something completely different, some other domestic preference standard. You have to think strategically. Sometimes having the wrong clause in the contract is to our benefit. The wrong clauses in there, well, that's what they told us to certify to. In other instances, it's like, no we don't like that clause and it's the wrong clause so we need to figure out a way to get the correct clause in there.
Leila George-Wheeler: I was just going to say the same thing. It could either be sometimes contract agency folks will go through and click as many as they can just to make sure that they aren't missing something, right? The government is all about avoiding risk. So maybe they include a clause that they don't need to, but they're just doing it because they don't want to miss something. Maybe they don't know the difference. So that's an option, you know, it could be that it's included erroneously. Like Andrew said, there are some exceptions for national security type contracts that also sole source and a small business that decides as well. So it could be falling under one of those as well.
Buy America vs. Buy American
Chris Nagel: We got just a few minutes here to try to get through a fair amount of content. Andrew, real high level, can you talk to us about Buy America versus Buy American Act?
Andrew McAllister: So the existing Buy America again, it's about Department of Transportation projects for the time being, which I would say the two big agencies are the Federal Transit Administration and the other one is the Federal Highway Administration. The other issue is we have three buckets the goods fall into sort of the iron and steel rolling stock. There's a specific specialized set of rules on that. Then the third bucket is really anything that doesn't fit in the first two buckets. The Buy American Department of Transportation, it's all about U.S., so it's either made in the U.S., produced in the U.S., meets the standard, or it's not. A French origin good with the Department of Transportation's Buy American standard, in essence does you no good.
Infrastructure Investment and Jobs Act
Chris Nagel: Let's talk about the Infrastructure Act now. I think this is sort of applying the Buy America standard in a broader context. Can you talk to us about how that's changed with the new law?
Andrew McAllister: I would say it's a work in progress. It was signed into law in November of 2021. There's a number of sort of progress steps along the path to implementation. The key takeaway is it applies to any infrastructure project. That could be an infrastructure project where you're getting funding under the IIJA. It could even be an infrastructure project that's outside of the IIJA. It has expanded things considerably. You see sort of those 11 groupings and I would say that different agencies are in the process of implementing those rules. One of the sort of intermediate steps that's occurred is the agencies that come back and sort of said, hey, we didn't have any domestic preference in our law. Let's say, just to use an example, Department of the Interior, we're funding some IIJA projects, we don't have anything about domestic preference, so we're going to have to adopt the standard you've laid out in this law. Another agency like the Federal Transit Administration comes back and says, well hey, we already have a set of rules. They're not quite the same as your rendition of the rules, but we have rules. In some instances, those existing rules may still carry on, while in other instances the agency had no domestic preference laws and has to adopt sort of this Buy America standard in the IIJA.
Chris Nagel: As I remember, our last month's webinar was about the IIJA and as I remember, a lot of those funds are going to be sent by state and local governments. Is it fair to say, Andrew, I guess there will be some different application of the rules based on the actual state local entity that's spending the money.
Andrew McAllister: One interesting thing is sort of in the state and local level, sometimes there's sort of a carve out again for those sort of existing Department of Transportation grants where it's like, well you know, those have to be Buy America. They have to be manufactured in America. In terms of the Trade Agreements Act's applicability, still sort of working through how that's going to sort of take shape at the state level. So there is sort of a list of certain state agencies that recognize the Trade Agreements Act. Depending on which state agency receives the funding, etc., that's going to help determine what precisely the standard is. I would say it's a work in progress.
Chris Nagel: This may be helpful for folks who want to go back and get more in the weeds on IIJA, but we only have about six minutes here.
Berry Amendment & Specialty Metals Provision
Chris Nagel: We've got a question on the Berry Amendment, if you manufacture fibers in the U.S. and have them sent out of the country to have it woven and then the fabric is returned to the U.S. and used to make a product, does the product qualify for the Berry Amendment? Does the weaving that was done out of country impact compliance? Andrew, I'm anxious to get your take, I can tell you for some screwy reason, I actually had something very similar to this, like five years ago. I remember when we analyzed it, the fact that a lot of the work was done, the weaving work was done overseas seems like it really impacted the compliance to the point that my instinct is without looking at it and kind of reaching back in the annals of my brain, I think we decided at that point that it probably was not in compliance with Berry because of the weaving work of the fabric that was done overseas. Andrew, you have any initial thoughts? I know this is a pretty fact specific analysis.
Andrew McAllister: It is a pretty specific question, certainly would want to take the time to sort of work through the specific facts, work through the rest of the regulations. However, the standard is, I would say, pretty encapsulating in terms of wanting the work, wanting the raw materials to be from the U.S. and produced in the U.S., so I think it may present a problem, not an absolute answer. However, I think it may present a problem. You will sometimes see in certain procurements, it's often more a raw material thing where they may recognize that certain raw materials are difficult to obtain in the U.S. The sort of weaving thing I would say in some ways, that's the very thing that the U.S. government wants done in the U.S. to protect U.S. manufacturing. So there's sort of a policy reason that overlays the legal reasons.
Incorporate Domestic Preference into Ethics & Compliance Program
Chris Nagel: Leila, between this slide and tips and best practices, maybe you can give us just a couple of minutes of some high level thoughts in terms of how we can apply this and kind of the most important ways that you see companies dodging landmines and kind of smartly using resources given that everybody's got limited resources. Where do they focus when it comes to compliance?
Leila George-Wheeler: We already talked about how there's a requirement for an ethics compliance program. I would just note that includes training. Training is where I think you all might want to think about who should be trained on in the areas of knowing about the rules and understanding them and making sure that when you're in this area and you have contracts that fall under domestic preference requirements, you want those people to know and you want the people on the ground, not just the contracts team, but the supply chain, etc. to be aware of those and what it means and have kind of, you know, practices in place. On the next slide, we talk about those that will help make sure you don't run afoul of these rules. I just also wanted to note that where certification is required, TAA or BAA is required. You want to make sure that you are maintaining that documentation or whatever it is when you're doing your assessment of whether your products are compliant, you want to maintain that documentation and maybe incorporate maintaining that documentation into your overall document, information governance or document retention policies. Andrew mentioned at the beginning, always flow down the BAA domestic end product requirements to subcontractors and suppliers. If you are a subcontractor supplier and if it's not in your sub contract, and it should be, you know, try to get clarity. It should always be in your contract. You can just go through these slides and just look through these are pretty self-explanatory, but the one thing I wanted to mention, for one of the questions where it was asking, hey, we're above the TAA threshold, but the BAA provision is still in there. Why is that? It never hurts to push back or to ask questions. Should this be here? In fact, just this week, we're working with a client who was asked to sign a contract that had the BAA provision in it. It was a strict services contract, and we recommended that they go back and ask the contracting officer, do they really need it in there? You can always ask the question and maybe they'll remove it and then you don't have to worry about it if you don't think it applies. So government folks, they use old forms, sometimes it's not the most updated clause. I think it's important to pay attention to that and to ask questions where you think there are issues. I went through that pretty quickly. I didn't hit on all of them, but you know, there are some other tips and best practices here listed.
Chris Nagel: I think the subcontractor point's the really important one, and it brings in my mind a phrase you used a few minutes ago, which was if you either present or cause to present a false claim, and in this case, it can be an invoice. That's where subcontractors can get wrapped up as well. I think burying your head in the sand and saying, we didn't know that we had the requirement. There may be even more nuance in terms of is it included in your subcontract or not. Because once the False Claims Act litigation process gets rolling, some of those questions become less obvious. I've worked as a subcontractor who's got stuck litigating for several years on the False Claims Act because the whistleblower brought a compliance issue and the subcontractor got wrapped up along with the prime contractor. I think that's a great point. Oh, Andrew, do you have something else?
Andrew McAllister: Yeah, as the last questions are sort of funneling in, just two points. One that was sort of alluded to is we actually had a client recently where they came to us and said, we've got to comply with X clause. We said, okay great. Well we started looking at the clause and I don't think they comply. But let's get the language of the contract. We really need that language in the contract. It turns out the contract was a couple of years old and it had a 2017 version of the certificate and we actually could comply with the 2017 version of the certificate, just not the present-day certifications. So that's one point. The other point is you're certifying to the government that certain end products, certain current construction materials are compliant. Well, in some instances you as the subcontractor are providing a component and so you're not really certifying to the end product, you're telling the prime contractor, hey here's my component. Here's what went into making my component, but I'm not certifying to an end product. I think sometimes understanding those different nuances of where you sit in the supply chain can be helpful.
Chris Nagel: Okay, we're at the top of the hour, so we're going to stop with our comments, but for folks who want to stick on for a couple more minutes, I just I think we have two more questions. I'll read those real quickly in case they're helpful for those who want to stay on for another minute or two. The first question is, is software considered an end product? Any different result is provided as a software services subscription under a software as a service delivery model.
Andrew McAllister: In terms of software, there are certain exceptions, there is sort of the IT exemption. If you look at the regulations, this would be the Buy American Act. There is sort of an IT exception that allows you to sort of get out of complying with the Buy American Act. I would say yes, software is a product. If you're providing software and that's the only thing you're providing to the government, then that would be the end product. There may be instances where you're delivering, let's say, some kind of autonomous vehicle that happens to have software embedded in it, right? That software may or may not be sort of the end product being provided to the government. So I suggest both on Buy America, at least on the Federal Transit Administration there's something called the microprocessor exemption. It doesn't quite describe it perfectly, but it includes software. And then under the Buy American Act, there's sort of an IT exemption that's in the regulations.
Chris Nagel: Last question, the procurement above the BAA limit and TAA applies but some of the deliverables/subassemblies are not from TAA countries due to non-availability. How difficult is it to get a waiver for those non-TAA items if identified in the proposal?
Andrew McAllister: I go back to what's the end product that you're delivering to the government? You know, it's a subassembly. Well, is that an individual end product or is that a component in a way? Each end needs to be compliant. Again, I could have all Chinese components, but let's say all those Chinese components get sent to France, where somebody spends two weeks, you know, putting them through some complicated production process. There's electrical engineering, there's X, Y and Z. You know, it's a very sophisticated technical process. There's a possibility that even with those Chinese components, my product is not Chinese, it's a French product. So I think it's sort of going to depend on again what is the end product? The end product needs to be compliant. The end product needs to have the appropriate country of origin France, Germany what have you. In terms of getting a waiver, waivers are difficult. Chances are, particularly if you're under a Trade Agreements Act standard, you're going to say, I need to have this product made in Malaysia. I think Malaysia's not a Trade Agreements Act country. Well, the government's going to first look and say, well there's 35 other countries you can source it from. What's the problem with those other 35 countries? So my point is you're going to have a lot of challenges in trying to get a waiver but if you've got some unique product or a unique case for why it's not available in those other countries, then you might have an argument.
Chris Nagel: Well, it's been a huge help, guys, I appreciate you both joining as panelists. For those attendees that are still on, we appreciate you sticking with us and we've got our contact information at the beginning of the slide presentation. We'll send out these slides and the recording, and I hope you'll touch base with us if you have any follow up or questions.