Almost a year to the day after the Build America Buy America Act (BABA) became law, the federal Office of Management and Budget (OMB) has published its “Final Guidance for Grants and Agreements” intended to implement BABA’s domestic content preference requirements (88 FR 57750, Aug. 23, 2023).
BABA and Prior OMB Guidance
BABA was enacted last August as part of the Infrastructure Investment and Jobs Act (IIJA) (see sections 7091-70927, Pub. L. 117-58, 135 Stat 429). It imposes Buy America preferences for domestic iron and steel, manufactured products and construction materials used in federally funded infrastructure projects. BABA also required the Office of Management and Budget (OMB) to issue guidance to assist the heads of Federal agencies in applying those new domestic content preferences.
On Feb. 9, 2023, OMB published proposed guidance (discussed in a previous blog post) and solicited public comments on BABA implementation. This final guidance is the culmination of those efforts. It builds on, and in some cases revises, the prior non-binding guidance to bring clarity and consistency to federal agencies’ application of the BABA domestic content preferences. The final guidance also follows OMB’s “Initial Implementation Guidance on Application of Buy America Preference in Federal Financial Assistance Programs for Infrastructure” memorandum (Memorandum M-22-11) to provide initial advice to agencies on the BABA preference as well as the process for waiver applications and the conditions for issuance of waivers.
Background
President Joe Biden signed the IIJA (and, with it, BABA) into law in November 2021. BABA establishes the “BABA preference,” a domestic content procurement preference for federal financial assistance obligated for infrastructure projects. The BABA preference applies to three categories of products and materials for infrastructure projects:
- Iron or steel products
- Manufactured products
- Construction materials
Different, but related, standards apply to each of the categories, as discussed below.
In addition to issuing guidance on BABA implementation, OMB may amend the Federal Acquisition Regulations (FAR) to instruct federal agencies on terms and conditions of Federal awards to implement the Buy America preference. The final guidance amends 2 CFR, Subtitle A, Chapter I by adding a new part 184 and amending subpart 200.322 to clarify existing provisions within part 200. The purpose of these amendments is to improve consistency in the implementation of BABA requirements across the federal government.
What the Final Guidance is Not
The new part 184 in 2 CFR is not “intended as comprehensive guidance on all topics related to the implementation of BABA.” Federal agencies will face unique situations in the context of their individual federal financial assistance programs and may issue their own guidance to stakeholders in connection with their unique infrastructure projects. Moreover, BABA implementation is an iterative process, meaning that further revisions and guidance are likely.
OMB makes clear that the final guidance does not replace Memorandum M-22-11. An updated memorandum will be issued to replace Memorandum M-22-11 to remove any direct conflicts with the final guidance and to be certain the memorandum is consistent with BABA and the final guidance.
Lastly, OMB explains that the provisions set forth in part 184 are “guidance and not regulation,” and publication of the final guidance in the CFR does not change its nature – notwithstanding the “Action: Final Rule” label in the Federal Register notice.
Final Guidance Overview
The final guidance provides definitions for key terms, including (among others) “construction materials” and “manufactured products,” and provides standards for defining “manufacturing process”; clarifies the test that agencies should use to determine the cost of components of manufactured products; describes when the BABA applies to products or materials incorporated into an infrastructure project; and confirms the process for requesting and obtaining waivers of BABA requirements.
Covered Products or Materials
BABA preferences apply to three separate categories of products and materials:
- Iron or steel Products are articles, materials, or supplies that consist wholly or predominantly of iron or steel or a combination of both. There is no definition of “predominantly,” but OMB’s guidance is intentionally consistent with the FAR for direct federal procurement – specifically, a 50% threshold. By incorporating definitions from the FAR, OMB aims for consistency and predictability between federal procurement and federal financial assistance. Notably, however, the final guidance does not incorporate FAR-specific waivers or exemptions, such as language related to COTS fasteners. OMB also notes that when determining whether a product meets the applicable threshold, labor costs are not included.
- Construction materials are articles, materials, or supplies that consist of only one of the following: (i) non-ferrous metals; (ii) plastic and polymer-based products (including polyvinylchloride, composite building materials, and polymers used in fiber optic cables); (iii) glass (including optic glass); (iv) fiber-optic cable (including drop cable); (v) optical fiber; (vi) lumber; (vii) engineered wood; and (viii) drywall. OMB’s clarification that construction materials are only one of the materials in the preceding list is an addition to its previous guidance. Importantly, minor additions of articles, materials, supplies or binding agents to a construction material do not change the categorization of the construction material. OMB’s list of construction materials adds three items to the list in the BABA text, namely, fiber-optic cable, optical fiber, and engineered wood, which OMB considers “logical extensions” of Congress’ list.
- Manufactured products are expanded in the final guidance to provide an affirmative definition. Previously, manufactured products were defined as anything that was not iron or steel products nor construction materials. Under the final guidance, manufactured products are “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.” If an item is classified as an iron or steel product, a construction material, or a section 70917(c) material (see below) then it is not a manufactured product. However, the inclusion of components that are iron or steel products, construction material, or section 70917(c) materials does not preclude classification as a manufactured product.
Certain materials were expressly excluded from the scope of “construction materials” under Section 70917(c) of BABA. These “section 70917(c) materials” include “cement, cementitious materials; aggregates such as stone, sand, gravel; or aggregate bind agents or additive.”
OMB emphasized in the final guidance that only one category will apply to one item to preclude classification in more than one category or bucket. The distinction between product categories is critical to understanding which domestic content standards apply.
Cost of Components of Manufactured Products
Under BABA, a manufactured product must be (i) manufactured in the United States; and (ii) the cost of the U.S.-origin components of the manufactured product must be greater than 55% of the total cost of all components. The final guidance explains how agencies should determine if this threshold is met.
Products are classified as a “manufactured product” based on their status when brought to a worksite. This presumes the “manufacturing process” occurred before arriving at the worksite. The components of manufactured products fall into one of two groups: components purchased by the manufacturer and components manufactured by the manufacturer. For components purchased by the manufacturer, the cost of a component is the acquisition cost, including transportation costs to the place of incorporation into the manufactured product and any applicable duty. For components manufactured by the manufacturer, the cost of components is all costs associated with the manufacturing of the component, including transportation costs plus allocable overhead costs but excluding profit. OMB specifically excludes from the costs of components any labor costs associated with the manufacturing of the manufactured product (i.e., the end product), which is consistent with the FAR.
Like the definition of iron or steel products, OMB has tried to align “manufactured product” and “cost of components” with the FAR definitions to promote “uniformity and predictability” for both federal procurement contracts and federal financial assistance under Part 184.
Buy America Waivers
The final guidance includes a formal waiver process a federal agency must follow when a recipient requests a waiver. Regarding who may request a waiver, the final guidance replaces “non-federal entity” with “recipient,” which is defined under OMB’s general administrative regulations as the entity that directly receives the federal financial assistance. The definition expressly excludes subrecipients, limiting the entities that may apply to an agency for a waiver.
In response to comments about obligations of the U.S. under international trade agreements, OMB acknowledges that BABA must be implemented consistent with those obligations but notes that they apply principally to direct federal procurement, not federal financial assistance. OMB also acknowledges that several states agreed to abide by the procurement obligations under certain international trade agreements (e.g., the World Trade Organization Agreement on Government Procurement) and may therefore have a basis on which to apply for a waiver of the BABA preference. The final guidance recognizes that public interest waivers are an appropriate mechanism to allow federal financial assistance recipients to meet obligations under international agreements.
Ultimately, OMB’s final guidance remains consistent with the proposed guidance on waiver categories and provides for waivers for public interest, nonavailability or unreasonable cost.
Our Observations
The final guidelines include several changes in response to comments submitted to OMB after the proposed guidelines were published in February 2023. While it is impossible to please all of the commenters all of the time, many of these changes are helpful.
Providing an affirmative definition of “manufactured products” should create more certainty for stakeholders, as will the closer alignment of definitions in part 184 with the FAR for direct federal procurement. The guidance for determining the cost of components is more problematic, however, and may raise as many questions as it resolves as agencies, recipients, and subrecipients sort out what will and will not qualify as produced in the United States. Examples of cost of component calculations would have been helpful.
Companies and recipients likely will continue to struggle with the waiver application process, as well as how to ensure compliance by their subcontractors and suppliers. We anticipate an increase in bid protests and litigation before the dust settles, which could be some time as OMB issues a revised Memorandum M-22-11 and the agencies tweak the guidance with separate regulations for their own infrastructure projects and grants.
Lastly, we cannot overemphasize that recipients – contractors and suppliers – will need to regularly review their supply chains and acquisition policies to be certain they satisfy the BABA preferences. Companies will need to stay informed about the latest changes to keep ahead of the compliance requirements.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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