Posted on Sep 22, 2016

Federal Construction Contractors

Many people support the ideal of buying American-made products. That’s reflected in marketing that appeals to our patriotism. In addition, certain laws and regulations govern federal contractors and “Made in the USA” business activity. And during this election year, there’s an emphasis on supporting American businesses.

However, what could be a boon for certain sectors could hinder others. According to some observers, the construction industry is a prime example of an industry that could be hurt.

Federal Restrictions

Buy America features are prominently spotlighted in three areas of federal legislation:

1. Buy American Act. This federal law was passed during the Great Depression and has been modified and updated several times over the years. But its main thrust remains the same — that the U.S. government give preference to U.S.-made products in its purchases.

Currently, the law requires that more than half (at least 51%) of the components of a product be made within the borders of the United States. In addition, the product must be substantially transformed in some way, shape or form by laborers in this country.

Although federal government contractors generally must comply with the Buy American Act, there is an out. Under the Government Procurement Agreement (the GPA), signatory countries of the World Trade Organization, of which the United States is one, can treat products made in other GPA countries as homegrown if they satisfy a minimum value threshold. For instance, a U.S. company can take advantage of that exception if a federal contract is valued at $5 million or more.

There are ways to get waivers but you can’t just say, “It costs too much” (see box below).

2. Buy America Act, which is part of the Surface Transportation Assistance Act, not to be confused with the Buy American Act described above. This legislation is a highway spending bill that includes requirements for federal government contractors to buy in the United States. The provision applies to certain projects financed by the U.S. Department of Transportation, and typically involves purchases of iron and steel, although it may include other manufactured goods.

“Buy America provisions ensure that transportation infrastructure projects are built with American-made products,” explained Secretary of Transportation Anthony Foxx.

The standards in this law are very tough. Notably, made in America generally means that 100% of the components used must be melted, poured, shaped and coated in a U.S. steel mill. Currently, there are fewer than a dozen of these “integrated” steel mills in the country. All of them are in the eastern part of the country and some don’t produce construction materials.

Another difficulty for some contractors is that the law precludes the use of GPA products.

3. Environmental protection regulations. Rules pertaining to the Environmental Protection Agency (EPA) also cast a giant shadow over the construction industry. For instance, the EPA’s American Iron and Steel rule applies to products such as manhole covers. Recipients of assistance from the Clean Water State Revolving Fund and the Drinking Water State Revolving Fund are required to use iron and steel products produced domestically. This applies to the construction, alteration, maintenance, or repair of a public water system or treatment works.

Observers in the industry have complained that while buying domestically-produced materials is a popular message, the broad scope of the governance ignores the reality of today’s global economy.

Impact on Construction

The rules may hurt construction firms in several ways:

As in the case of integrated steel mills, companies may wind up vying to show which one is more patriotic. Moreover, when a construction firm needs steel for a project, it may have to use a mill on the other side of the country. This increases shipping costs and other tangential expenses,

Requiring domestically sourced materials may affect trade relationships with other countries. As an example, even our strongest trading partners, such as the European Union and Canada, might restrict purchases of U.S. products in kind.

Projects may be delayed or even halted. Recently, a high rail system planned between Las Vegas and Los Angeles was scuttled because of plans to use railroad cars made in China. (There are exceptions for certain “rolling stock” items like railroad cars, but they still must be produced 60% in the United States.)
Special attention should be paid to the “red tape” associated with the EPA regulations. First, construction firms must determine which rules apply to them and to what extent. Second, they must adopt procedures to ensure that they meet the requirements and then spend time and money on execution and supervision.

Government contractors may hire outside professional help, including legal counsel. And while this can remove many of the headaches, it adds to costs.

Yet another compliance problem can occur when obtaining manufacturer certifications that the products or materials were actually made in America. In a classic example, the Metropolitan Transportation Authority of New York City had to rip out and replace a fire suppression system that was part of a renovation when it found that some of the components originated in Finland. This happened even though the contractor had certification that it was an American-made system.

Looking to the Future

Barring any significant changes after the presidential election, contractors are likely to have to follow these rules for the foreseeable future. If anything, the buy America theme is picking up more steam and has much political support. So consult with your advisors for help devising was to remain compliant and cope in a cost-efficient manner.

Waivers May Be Obtained

Federal government contractors may be able to obtain a waiver from the requirements of the Buy American Act and the Buy America Act to use domestic material if their application has certain elements including:

1. They’re unreasonably expensive.

2. They aren’t available in sufficient quantity or volume.

3. They aren’t within the public interest.
Requirements may also be waived by the President or a delegated authority, to support reciprocal agreements with other countries in the Trade Agreements Act, the North American Free Trade Agreement and the World Trade Organization.

Here’s a fact sheet about the requirements and available waivers from the U.S. Department of Transportation.

The Federal Trade Commission’s “Made in USA” Policy

The Buy American Act and the Buy America Act should not be confused with the Federal Trade Commission’s (FTC’s) “Made in USA” policy, which applies to all businesses — not just federal government contractors.

The FTC Act gives the commission the power to bring law enforcement actions against false or misleading claims that a product is of U.S. origin. Generally, the FTC requires that a product advertised as “Made in USA” be “all or virtually all” made in the United States. That means the product should contain no (or negligible) foreign content.