The Buy American Act: New focus on government contract compliance

On April 18, 2017, President Trump issued an Executive Order1 requiring that every government agency “…scrupulously monitor, enforce, and comply with Buy American Laws… and minimize the use of waivers, consistent with applicable law.”

Government agency surveillance of contractor Buy American Act compliance in recent years appears to have been inconsistent2.  Allegations of Buy American Act violations over the last several years appear to be more frequently the result of competitive bid protests of awardee compliance or qui tam (i.e., whistle blower) allegations of non-compliance than agency or prime contractor compliance surveillance activities3.

However, that could change with the President’s Executive Order and increased contracting agency focus on Buy American Act compliance.  This leaves contractors vulnerable if they do not have effective compliance programs in place to ensure their articles, materials, and supplies comply with their contractual obligations.  Findings of non-compliance could lead to a number of compensatory and punitive penalties.

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Background

The Buy American Act4 was enacted in 1933 and required that the articles, materials, and supplies acquired for public use or used in the construction, alteration, or repair of any public building or public work be mined, produced, or manufactured in the United States.  The provisions of the Act and its subsequent revisions are embodied within Federal Acquisition Regulation5 (FAR) for US Government contracts.

FAR Subpart 25.1, Buy American – Supplies, and Subpart 25.2, Buy American – Construction Materials, describe the policies and procedures for implementing the Buy American Act requirements within government contracts.  Those FAR provisions also include many important definitions and exceptions.  FAR Subpart 25.11, Solicitation Provisions and Contact Clauses, further directs the incorporation of specific contractual clauses and implementation requirements into solicitations and contracts.  Based upon the nature of the acquisition and applicable statutory requirements, one or more contract clauses found in FAR Section 52.225 related to sources of supply, trade acts and prohibited sources may be specified.

Buy American Act compliance

Achieving compliance with the Buy American Act regulations can be complex.  Understanding and properly applying the requirements, specified procedures, exceptions, impacts of foreign trade agreements, and numerous judicial interpretations can require specialized knowledge.  For example, applicable foreign trade agreements may be multilateral or country specific.  Determinations regarding whether articles, materials or supplies qualify as being mined, produced, or manufactured for the purposes of the Buy American Act generally require fact-based, circumstance-specific analyses of sources as well as any conversion processes (e.g., manufacturing, modifications) that take place in the development of end products.

Sanctions for violations can be severe, including disqualification of non-compliant proposals, replacement of non-compliant goods, contract termination, debarment from government contracting, financial penalties and reputational harm among others.  In some cases, allegations of Civil False Claims Act violations and/or fraud have resulted when certified invoices were issued for goods that were alleged or determined to be non-compliant.

Key considerations

As described previously, compliance should be evaluated on a fact-based, circumstance-specific basis beginning with the evaluation of the numerous exceptions to the requirements.  For example, FAR Paragraph 25.104(a), Nonavailable articles, provides a rather extensive and varied list of articles and materials that are exempt from the regulation.  Examples include specified forms of industrial diamonds, platinum, rubber, and silk.  Additionally, the Defense Federal Acquisition Regulation Supplement6 (DFARS) Subpart 225.1, Buy American – Supplies, identifies specific “public interest” exceptions for Department of Defense contracts.

A frequent consideration in a compliance evaluation is what constitutes an end product versus a component of an end product.  For example, while an end product that is assembled from all foreign sourced parts may present a qualification problem, an end product that incorporates a component that is assembled from all foreign sourced parts but domestically manufactured (e.g., assembled) may not7.  A second frequent consideration is what constitutes manufacturing and whether foreign sourced parts or materials are sufficiently converted or changed to be recognized and domestically manufactured.  A third frequent consideration includes the cost of the components used in manufacturing.  Subject to certain exceptions, the costs of domestic components must exceed 50 percent of the total cost of all components.

To summarize, there are numerous considerations that must be made to evaluate if articles, materials, or supplies qualify under the Buy American Act regulations.  Knowledge of those regulations is essential in making accurate and defendable compliance determinations.

Compliance risk management

High-level steps to consider in evaluating Buy American Act compliance and managing compliance risk include:

  • identify covered contracts and the specific articles, materials, and supplies that need to qualify;
  • evaluate sources of supply;
  • evaluate eligibility for exemption(s), including impacts of foreign trade agreements;
  • evaluate manufacturing or construction processes; and
  • determine and document if the articles, materials, and supplies proposed or provided qualify as having been mined, produced, or manufactured in the United States.

The entity should also have in place adequately documented procedures for evaluating compliance during the proposal planning and development process as well as during contract performance.

A compliance assessment may uncover non-compliant conditions that require remedial actions and possibly mandatory self-disclosures to the government.  It may be advisable to coordinate any assessments with the entity’s legal counsel to ensure proper handling.

Authors:

Gary McDonald
Specialist Leader
Deloitte Risk and Financial Advisory, Government Contracts
Deloitte & Touche LLP
+1 571 766 7702

Mark Burroughs
Managing Director
Deloitte Risk and Financial Advisory
Deloitte & Touche LLP
+1 571 766 7062
Mobile: + 1 571 239 5081

1 Executive Order 13788, Buy American and Hire American, April 18, 2017, 82 Fed. Reg. 18837
2 Department of Defense Inspector General, Report No. DODIG-2016-051, Air Force Personnel Can Improve Compliance With the Berry Amendment and the Buy American Act, February 24, 2016
3 Examples: Textron, Inc., Bel Helicopter Textron Division, Plaintiff, v. Honorable Brock Adams, Secretary of Transportation, Admiral John B. Hayes, Commandant of the Coast Guard and Aerospatiale Helicopter Corporation, Defendants. Civ. A. No. 79 1749. United States District Court, District of Columbia. May 30, 1980; United States ex rel. Oren Lambert, et al. v. Elliott Contracting, Inc., et al., 59 CCF ¶80,591. U.S. District Court, S.D. West Virginia, No. 1:13-1106, March 11, 2015; United States, ex. rel. Louis Scutellaro v. Capitol Supply, Inc., 61 CCF ¶81,104. U.S. District Court, D. District of Columbia, No. 10-1094 (BAH), April 19, 2017; and U.S. v. Rule Industries, Inc., 878 F.2d 535 (1st Cir. 1989)
4 41 U.S.C. Chapter 83 – Buy American
5 48 U.S.C. Chapter 1 – Federal Acquisition Regulation
6 48 CFR Chapter 2, Defense Acquisition Regulation System, Department of Defense
7 Hamilton Watch Co., Inc., B-179939, June 6, 1974, 74-1 CPD ¶306

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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