Theodore P Watson, Esq – Practice Leader
This section is only written to provide information to small businesses and larger federal government contractors regarding common issues and questions raised about the Buy American Act. If you happen to be under investigation or charged with False Claims Act violations due to the Buy American Act violations, contact a BAA construction attorney for immediate help. We represent small businesses, large DOD contractors, manufacturers (local and overseas) and prime and subcontractors doing business with the federal government.
The following are some of the most frequently asked questions regarding the Buy American Act.
What does the Buy American Act (BAA) cover?
The Buy American Act regulates how public procurement agencies purchase “foreign” goods as it relates to public construction projects. In other words, federal government contracting agencies can only purchase “.. unmanufactured articles, materials, and supplies that have been mined or produced in the United States, and only manufactured articles, materials, and supplies that are manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States.
The Buy American Act, under 41 USC 83, applies to the purchase and acquisition of supplies (i.e., domestic end products) and construction materials. There is an overarching preference to buy products made in the United States and also to keep jobs within the US.
What constitutes construction materials under the Buy American Act?
The BAA statute, as a general rule, also requires that every construction contract for any public building or public work include a contract clause that requires the prime contractor (and ultimately their subcontractors and suppliers) to procure or acquire domestic construction materials.
The definition of “construction materials” would normally include any “article, material, or supply brought to the public construction site by a contractor or subcontractor for incorporation into [a] building or work,” including items brought to the site preassembled from articles, materials, or supplies. See also 48 CFR. 25.003 (definition of “construction material”).
Tip: Note that “emergency life safety systems” (e.g., emergency lighting, fire alarms) that are discrete systems that are incorporated into a public building or work and are produced as complete systems, are evaluated as single and discrete construction material regardless of when or how the individual parts or components are delivered to the construction site.
- Materials purchased directly by the government and not through a prime contractor for construction projects are treated as supplies, not construction materials.
Does the Buy American Act Apply to Leasing?
Although the Buy American Act would apply to leasing supplies that are foreign in nature. In the case of Postmaster General, B-156082 (July 20, 1966) it was found that it would not make sense to prohibit the purchase of foreign-made products but allow construction. companies and suppliers to lease the same supplies and products. If in doubt, always ask your contracting officer.
Can you get a waiver of BAA construction requirements?
When federal government procurements are not covered by trade agreements (which by its nature creates a waiver to the Buy American Act requirements), the contracting agency may issue waiver if:
- using U.S. products is impractical or inconsistent with the public interest; or
- the specific product is not mined, produced, or manufactured in the U.S. in sufficient and reasonably available commercial quantities of a satisfactory quality; or
- the using a domestic product would lead to an unreasonable increase of the total cost of the project.
Tip: When selling construction materials to the federal government, it is up to you the contractor to seek a waiver. There are situations where waivers have been issued after contract award. However, do not count on post-ward BAA construction waivers. See more on Buy American Act Exceptions.
How do the terms ‘public building’, ‘public use’, and ‘public work’ apply to the Buy American Act?
Under 41 USC 8301 (1) (“The terms‘ public building’, ‘public use’, and. ‘public work’ mean a public building of, use by, and public work of, the Federal Government, the District of Columbia ( Washington DC), Puerto Rico, American Samoa, and the Virgin Islands.”)
What Does Purchase of Domestic End Products Mean Under the BAA?
Many government contractors find themselves being investigated or criminally indicted because they thought that they were purchasing domestic end products under the BAA. Understand the letter of the law is critical. If the procurement is over the “micro-purchase threshold” to purchase domestic end products depends, in part, upon whether it is unmanufactured or manufactured.
- Unmanufactured end products must be mined or produced in the United States to be in compliance with the BAA.
- Manufactured end products will be considered domestic if they are manufactured in the United States, and either (1) the cost of the components mined, produced, or manufactured in the United States exceeds 55% of the cost of all components or (2) the end product is commercially available off-the-shelf (COTS).
What Does Commercial Off the Shelf (COTS) Mean Under the Buy American Act?
Under 48 CFR 25.003c “COTS items” tend to include supply items (including construction material) that are (1) “ commercial items”; (2) sold in substantial quantities in the commercial market place; and (3) offered to the government without modification. in the same form in which they are sold in the commercial marketplace. Under 48 CFR 2.101. “Commercial items” are items of a type customarily used by the general public or by nongovernmental entities for purposes other than governmental. Purposes that. Have been sold, leased, or licensed to the general public, or offered for sale, lease, or license to the general public.
What does Manufactured Mean Under the Buy American Act?
Contrary to popular belief, the term “manufacture” is not openly defined under the Buy American Act. Neither the FAR or executive orders that implement the statute also does not define the term “manufacture”. If you are under investigation by the DOJ or IG for noncompliance of the Buy American Act you will more than likely see the agency making its own determinations of whether something is manufactured or not in the United States. The reality is that courts openly state that whether an item is manufactured in the US is factual in nature. Each case must stand on its own merits and facts. See list of BAA qualifying countries.
Tip: Your company’s day to say activity has to be looked at uniquely to decide whether your company’s process actually amount to constitute manufacturing in the United States.
As a general rule, after your item has been manufactured or in its final form, activities such as packaging and testing do not constitute manufacturing under the BAA.
- There can be room to argue that pre-manufacture testing before the end product is finished under a unique set of facts could arguably be manufacturing.
How is the cost of components determined under the Buy American Act?
This is a highly debated issue when if you or your company is under investigation or facing criminal liability for false claims stemming from Buy American statute violations. As stated before, each case is fact-specific and one must carefully look at your day-to-day. Activities and company processes to make an educated conclusion.
48 CFR 25.003 lays the groundwork for the definition of “cost of components”. Specifically, the regulations state that the cost of components, in turn, is generally determined based on certain costs incurred by the contractor in purchasing or manufacturing the components. Specifically,
- for components purchased by the contractor, the cost of components includes the acquisition costs (including transportation costs to the place of incorporation into the end product), and any applicable duty (regardless of whether a duty-free certificate of entry is issued); and
- for components manufactured by the contractor, the cost of components includes all costs associated with the manufacture of the component (including transportation costs), and allocable overhead costs, but excludes profits and any costs associated with the manufacture of the end product. See also Marbex, Inc., B-225799 (May 4, 1987).
If you are a subcontractor, prime contractor or supplier / manufacturer of products on a federal construction project, then make sure you hire a BAA construction lawyer that understands the federal contracting process.
What do allocable costs to a government contract mean under the BAA?
This is another area of the BAA compliance analysis in which federal law enforcement agencies tend to unilaterally decide the end result. Construction contractors and their BAA construction attorneys must remember that each case is driven by facts. There are very few cases that automatically mirror your particular case. Courts have repeatedly stated that compliance with the Buy American Act is decided on a case-by-case basis.
Allocable costs to a federal government contract are allowed if they
- are incurred specifically for the contract;
- benefit both the contract and other work, and can be distributed to each in reasonable proportion to the benefits; or
- are necessary to the overall operation of the business, even if a direct relationship to any particular cost objective cannot be shown. See 48 CFR 31.201-4.
What is an end product under the Buy American Act?
This is probably one of the most difficult issues to assess when defending against Buy American and False Claims Act criminal or civil allegations.
The critical point is to look at the end-result the procuring agency is looking to acquire or accomplish. For example, there is a stark difference between buying horsehair that may have a different fermenting process (but the underlying form of the product does not change) compared to buying a total cleaning system that has several individual components that must ultimately be put together to then compete the entire system to be sold to the agency.
Tip: The general rule is that anything that is not itself bought by the procuring agency as an end product (such as a knife, headset or some other individual piece of equipment) is seen as a component, even if the agency could theoretically have purchased it as an end product.
Always look to see if the agency is procuring a system versus a single product that can operate on its own or serve its own purpose. These are all very complex areas that having a Buy American Act compliance attorney could help. For more on end product definition, see the case of Data Transformation Corp., GSBCA 89082 P,87.3B.C.A. ¶20,017(July15,1987).
What can happen to you or your business if you do not comply with the Buy American Statute?
If you are a government contractor, prime contractor or subcontractor selling construction materials to the federal government you are generally required to certify that you are complying with the Buy American Act. If the government has reason to believe that you are not complying with the BAA, then you can be subject to a government investigation, criminal and civil indictments – jail time, hefty fines and treble damages, suspension and debarment from government contracts.
Putting it mildly, if you do not have a waiver, and you are caught violating the Buy American Statute, your company and its officers can be subject to serious criminal and civil penalties. See also 15 USC 1536.
What must you do initially when notified that you are under investigation for failure to comply with Buy American Act requirements?
The first thing to do is to seek legal counsel from a government contractor defense attorney that understands the procurement process and can immediately look at the facts of your case and form a strong team for your defense. In addition, be mindful not to speak to investigators without your attorney.
Looking at your internal controls and policies may also call for a swift internal investigation. As lawyers, we would want to know every single detail about your process when selling products to the government. Missing one minor detail can fatally change the outcome of Buy American Act litigation and or compliance.
Contact a BAA Compliance Attorney for Immediate Help
If you are facing a federal investigation, or subject to criminal and civil liability, call our BAA construction lawyers at 1.866.601.5518 for immediate help.