On August 23, 2023, the White House’s Office of Management and Budget (“OMB”) issued its notification of final guidance implementing Title IX of the Infrastructure Investment and Jobs Act (“IIJA”) – the Build America, Buy America (“BABA”) Act. The Guidance amends Title 2 of the Code of Federal Regulations, by adding a new Part 184 and a new provision to the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards at 2 C.F.R. Part 200 (the “Uniform Guidance”). The publication provides key clarifications arising from industry input after releasing the Proposed Rule back in February (and discussed previously here). These clarifications proffer what is perhaps the most comprehensive set of guidance of which we are aware in the world of domestic content preferences and country of origin requirements, and borrow significantly from current regimes (e.g., the Buy American Act (“BAA”)). Because we already covered the primary requirements of the OMB’s proposed Guidance, and the Final Rule does not deviate significantly from the original guidance, we focus instead on our top 10 takeaways and lingering questions for compliance.
Overview and Applicability of OMB’s Guidance (A Brief Reminder)
As discussed previously, it is important to remember that the OMB’s publication of its “Final Rule” is not the creation of any regulatory requirements – OMB merely is providing “clear and consistent guidance to Federal agencies about how to apply the domestic content procurement preference” under BABA. In other words, OMB is providing governmentwide baselines for complying with BABA’s mandates that do not supersede or supplant other regulatory requirements. Federal agencies will be left to implement domestic content requirements in line with OMB’s guidance. For some that may require wholesale adoption of the Guidance as regulatory mandate. For others that may require more complicated reconciling of pre-existing domestic content requirements (e.g., the FTA’s Buy America regulations).
It also is important to keep in mind that BABA, and by extension, OMB’s Guidance, applies only to infrastructure projects and infrastructure spending – the requirements do not apply to other forms of federal spending, whether through the procurement process, or through other non-infrastructure grant and assistance opportunities. There are several important caveats to the BABA’s applicability: (1) if no federal funding is being used for infrastructure the preference does not apply; (2) the preference does not apply to any piece of a project that does not relate to infrastructure, even if the project also includes an infrastructure element; (3) the preference applies to an entire project, even if federal and non-federal dollars are mixed; and (4) the preference does not apply to any items that are not permanently incorporated into a project – for example, temporary scaffolding, movable chairs, desks, computers, and all things that might be used in or brought to an infrastructure project but are not permanently affixed to the project, are not covered by the preference.
To the extent your company comes face to face with an infrastructure project, in the United States, that involves federal funding, you may be expected to comply with domestic preference requirements for three categories of products: (1) iron and/or steel products; (2) manufactured products, and (3) construction materials.[1]
Top 10 Takeaways from OMB’s Final Guidance
1. If your Company is a for-profit entity, the BABA requirements may apply to you. OMB originally hinted in its Memorandum M-22-11 that for-profit entities were exempt from the BABA requirements due to their general exclusion from the definition of a “non-Federal entity” under the Uniform Guidance. OMB has seemingly doubled down on this interpretation, noting again that for-profit organizations are not considered “non-Federal entities,” and thus typically are not covered by the Uniform Guidance, or, by extension, the BABA’s Guidance, which adopts the same definition of “Federal financial assistance” and “non-Federal entity.” However, OMB recognizes that Federal agencies have the ability to apply the Uniform Guidance to for-profit companies if they so choose, suggesting it ultimately will be left up to the agencies to decide whether BABA requirements must flow to for-profits in their individual adoptions of BABA regulations, or on a per-program basis.
In our experience, there is an open question as to whether the decision to extend regulations to for-profit entities must be done via some formal action (e.g., adopting regulations or issuing guidance), or whether this decision can be made by mere virtue of including the requirements in your contract. The situation may be made even more complicated where State governments are involved as intermediaries applying their own requirements on top of Federal requirements. To the extent your for-profit company comes across these requirements, it may be worth seeking confirmation that the Federal agency in question actually has determined the BABA requirements apply to you.
2. No standard exemption for Commercially Available, Off-The-Shelf (COTS) items. Government contractors have long benefited from the partial exemption granted to certain COTS items under the BAA – that is, COTS items are excluded from the domestic content requirement for manufactured products, so long as they are manufactured in the United States. The Guidance suggests industry lobbied to have those same exemptions apply to BABA, which would have eliminated the 55% requirement for manufactured products that are COTS items. However, OMB has made clear that there will be no exemptions permitting COTS manufactured products to disregard the 55% domestic cost of component requirement – nor will companies be permitted to dismiss the cost of COTS fasteners in their iron and steel calculations.
OMB does suggest that the waiver process could be used to lobby for the exclusion of COTS items under a particular program – albeit suggesting that COTS waivers generally have not been successful in the past. The exclusion of a COTS waiver is not unsurprising in the world of Federal grants where such assistance programs are not subject to the same commercial preferences as the world of government procurement – but the exclusion will nonetheless come as a blow to those companies working further down the supply chain that historically have relied on this waiver for its government contracts customers.
3. BABA requirements will not be waived in favor of Trade Agreements Act (TAA) compliant products (usually). Another common question raised focused on whether, like the BAA, the BABA requirements would be overcome by international trade obligations. In government contracting, if a contract value exceeds a certain dollar threshold and an international trade agreement governing procurement is applicable, the BAA domestic preferences will be waived in favor of permitting acquisition of TAA-compliant products. The same process will not apply to BABA. Referencing the Fact Sheet published by the Made in America Office in 2022, the Guidance explains that “Federal financial assistance awards are generally not subject to international trade agreements because these international obligations only apply to direct federal procurement activities…” In other words, most agreements covered by the TAA will not apply to an infrastructure project because it is not a procurement activity.
OMB does recognize that certain States may have signed Government Procurement Agreements or other trade agreements that could be applicable to a particular infrastructure project. In these cases, it will be up to the individual States to seek public interest waivers for the BABA requirements.
4. The Guidance identifies four (potentially five) categories for items incorporated into infrastructure projects. The Guidance again clarifies that each item incorporated into an infrastructure project must be classified into a single category in order to make an effective BABA analysis. However, OMB also has made clear that not every item permanently affixed to an infrastructure project will need to meet one of BABA’s domestic preference requirements. That is, OMB has recognized the existence of four, potentially five, separate groups in which to categorize items: (1) items made predominantly of iron or steel or a combination of both; (2) manufactured products; (3) construction materials; (4) Section 70917(c) materials; and (5) none of the above.
Section 70917(c) materials are those “aggregates” identified in the IIJA as expressly excluded from applicability of the BABA requirements for construction materials – such as cement, stone, sand, or gravel. According to the OMB, these materials likewise do not constitute manufactured products when used on their own, or even when combined at the worksite, and thus qualify for their own unique category of products.
To the extent you can categorize an item as either a Section 70917(c) material or “none of the above,” that item will not be covered by the BABA’s domestic preference requirements, even if permanently affixed to an infrastructure project.
5. The Guidance (generally) adopts the BAA’s definition of items made predominantly of iron or steel or a combination of both. Sticking with its plan to utilize pre-existing domestic preference regulations in forming its Guidance, OMB likewise is applying a 50% cost threshold to determine whether a product is made “predominantly” of iron or steel – that is, if the cost of the iron and steel exceeds 50% of the total cost of all components, the product falls under this category and must meet a 100% produced in the United States standard. However, unlike the BAA, the OMB has refused to adopt the exemption for certain COTS fasteners in making this calculation, and also has clarified that “labor costs” are excluded from any cost calculations.
6. OMB provides an affirmative definition for Manufactured Products, but industry still is lacking a definition of what it means to “manufacture.” OMB has proffered a new, affirmative definition for “manufactured products,” noting that they are the articles, materials, or supplies that have been: (i) processed into a specific form and shape; or (ii) combined with other articles, materials, or supplies to create a product with different properties than the individual articles, materials, or supplies. Raw materials, Section 70917(c) aggregates, construction materials, iron, and steel, in addition to manufactured components, all may qualify as the component parts that make up a manufactured product. However, the definition is intended to clarify that not all “combination of materials produces a manufactured product” – the key is whether the processes create a product with entirely different properties from its component parts.
OMB joins a long list of Federal agencies and regulatory bodies declining to adopt guidance for what it means to “manufacture” products in the United States. In the absence of clear guidelines, companies will again be faced with a very fact-specific analysis that attempts to draw the fine line between “mere assembly” and manufacturing. What’s interesting here, though, is industry may be able to use this definition of “manufactured product” to at least shed some light on the manufacturing processes expected to be involved – to constitute manufacturing, there must be some level of combination or processing of different articles and materials that creates a product with “different properties” than its individual pieces. It may not be a lot on which to rely, but at least it’s a start.
7. “Kits” are to be treated as one Manufactured Product. Kits have been an interesting concept long considered in government contracting under the BAA – when procuring a kit, is the end product the kit itself, or do the individual parts that make up each kit need to go through separate BAA analysis? The Federal government has never adopted formal guidance on the treatment of “kits” under the BAA, but OMB has shed some light on the issue under BABA. According to the OMB, “[a] kit may be treated and evaluated as a single and distinct manufactured product regardless of when or how its individual components are brought to the work site.” In such event, the items making up the kit will be treated as components for purposes of the cost of component test,[2] and the entity that manufactured the elements of the kit will be considered the manufacturer – not the entity that acquires and assembles the kit. In other words, the kit itself will need to be (1) 100% manufactured in the United States (i.e., the manufacturing processes before the kit is acquired or delivered to the site), and (2) 55% of the cost of the component parts that make up the kit will need to be of domestic origin.
8. Construction Materials are re-classified to remove combination materials. In what is perhaps the biggest deviation from the Proposed Rule, OMB is reverting to a definition of “construction materials” that applies to “only one” of the listed materials in its definition. That is, items that consist of two or more listed construction materials (e.g., lumber and plate glass) including items that combine a listed material with “non-minor additions of other non-listed items,” will be classified as “manufactured products,” and subject to the lesser 55% content standard. The one caveat here is if a combination product is specifically included in the definition of a construction material – such as engineered wood – this product will qualify as a construction material, not a manufactured product.
9. OMB expanded the scope of Construction Materials to include Engineered Wood and Fiber Optic Cables, leaving the door open for additional covered categories. The Guidance now identifies engineered wood as a separate construction material from “lumber.” Additionally, despite the Proposed Rule including Optical Fiber as a construction material, the Guidance now also identifies Fiber Optic Cable, which includes drop cable, as a standalone construction material. According to OMB, these categories were natural progressions from the types included in the IIJA and were included to provide clarification and guidance to industry on how these materials should be treated.
Conversely, the Guidance also clarifies that certain additional materials, like paintings, coatings, bricks, and geotextiles are not “construction materials,” because they did not “constitute a clear logical extension of the items” already listed. Accordingly, “paintings, coatings, and brick incorporated into an infrastructure project will generally continue to be classified as manufactured products.”
OMB also strongly hinted at its intent to “consider adding new items to its list of construction materials” in future revisions to Part 184. Companies utilizing construction materials in their infrastructure projects would be wise to watch for future revisions to Part 184, as any new materials added to this list will be subject to the heightened standard applicable to construction materials under BABA.
10. The Guidance provides (some) clarifications on the impact “minor additions” have on an item’s classification. A topic of contention among commentors was the request for a de minimis standard for additions to construction materials that do not change an item’s classification. According to OMB, “minor additions of articles, materials, supplies, or binding agents to a construction material do not change the categorization of the construction material” into a manufactured product. Unfortunately for industry, OMB provides little in what it means for additions to be “minor additions” – in fact, OMB emphatically states its refusal to define the term or provide a specific percentage or amount corresponding to that term. Rather, OMB is leaving this question to the discretion of Federal agencies responsible for running infrastructure projects, a decision that almost certainly will lead to conflicting interpretations across agencies, and perhaps even across projects run by the same agency.
Concluding Thoughts
The Guidance is without a doubt comprehensive – distilling over 2,000 comments received from industry – but there remain many open questions relating to BABA compliance that OMB ultimately has determined to leave up to the individual Federal agencies to resolve. Though we understand this approach in light of the Guidance being, well, just guidance, we expect that in practice this will likely result in conflicting requirements across Federal agencies – and opens the door for even more conflicting interpretations by State recipients. This process likely will be made even more complicated by OMB’s plans to continue issuing iterative guidance relating to BABA, both through updates to OMB Memorandum M-22-11 and the new Part 184.
The Guidance will become effective October 22, 2023, though do keep in mind that the Guidance has no regulatory effect until adopted as regulation by individual Federal agencies. Companies should be reminded that specific rules, regulations, and guidance issued by the Federal agencies with whom you are contracting should govern over the OMB’s stated guidance. Having said that, many Companies already have come face-to-face with BABA requirements in their projects, and the OMB Guidance certainly provides an interesting basepoint for interpreting your obligations. Companies involved in infrastructure would be wise to give this Guidance a thorough read – including the explanatory notes leading up to the Guidance itself – and to take stock of your current supply chains. Suppliers that oftentimes receive requests for country of origin certifications may too want to review the Guidance and understand with what they can, and cannot, certify compliance. And, as always, when faced with conflicting guidance, seek written clarification immediately.
FOOTNOTES
[1] As a reminder, iron and steel products and construction materials must be 100% produced in the United States, and manufactured products must be: (1) manufactured in the United States, and (2) 55% of the cost of all components must be U.S.-origin.
[2] For components purchased/acquired by the company, cost of components includes: the acquisition cost, including transportation costs to the place of incorporation into the manufactured product, and any applicable duty. For components manufactured by the company, cost of components includes: all costs associated with the manufacture of the component, including transportation costs, plus overhead (but excluding profit). In either event, the costs of actually manufacturing the end product are excluded.