Just in time for the season of new backpacks, lunch boxes, and school supplies, the Office of Management and Budget (OMB) has assigned some homework to contractors looking to participate in Federal financial assistance programs for infrastructure. Consistent with its Build America, Buy America Act (BABA) mandates, on August 23, 2023, OMB published a Final Rule revising its Guidance for Grants and Agreements to implement BABA (Final Rule). This Final Rule follows the Proposed Rule of February 9, 2023 (Proposed Rule), which we previously discussed, in which OMB proposed creating a new part 184 in 2 Code of Federal Regulations (CFR), and revising 2 CFR 200.322, Domestic preferences for procurements, to implement the requirements in Section 70914 of BABA. With the guidance becoming effective October 23, 2023, contractors should not put off studying these requirements if they want to be prepared for the BABA tests that will undoubtedly come as agencies begin to implement this guidance.
Contractors should be aware of several key differences between the Final Rule and the Proposed Rule:
- Clarification of Applicability of BABA to Temporary versus Permanent Products and Supplies Used on Infrastructure Projects: Section 184.1 of the Proposed Rule specified that all of the iron, steel, manufactured products, and construction materials used in the project must be produced in the United States. The Final Rule revises this language to replace the phrase “used in the project” with “incorporated into the project.” This revision brings the Final Rule in line with OMB Memorandum M-22-11 (M-22-11), which provides that BABA only applies to products that are “consumed in, incorporated into, or affixed to an infrastructure project.” In other words, BABA applies only to products and supplies that are permanently incorporated into an infrastructure project; it does not apply to temporary elements such as tools, equipment, supplies, or equipment and furnishings that are used at or within an infrastructure project but are not an “integral part of the structure or permanently affixed to the infrastructure project.”
- Notable Revised Definitions:
- Component: The Proposed Rule did not define “component,” a term used in the “cost of components” test articulated in Section 184.5. The Final Rule defines “component” as “an article, material, or supply, whether manufactured or unmanufactured, incorporated directly into: a manufactured product; or, where applicable, an iron or steel product.” This is a modified version of the definition found at FAR 25.003, and it recognizes that the term “component” is used in the OMB guidance in relation to both manufactured products and iron and steel products.
- Construction Materials: The Proposed Rule identified seven “construction materials,” adding fiber-optic cable and optical fiber to the list provided by Congress in its Findings at Section 70911(5) of the BABA (i.e., nonferrous metals, plastic and polymer-based products, glass, lumber, and drywall). The Final Rule preserves the addition of fiber-optic cable and optical fiber to the definition of “construction materials,” adds “engineered wood” as a construction material subject to BABA, and clarifies that “fiber-optic cable” includes “drop cable.” OMB noted in the Final Rule that if these three items were not added to the definition of “construction materials,” they would instead be treated as manufactured products because they consist of more than one listed construction material (i.e., fiber-optic cable includes inputs of plastic and polymers and glass, and engineered wood includes inputs of lumber and plastic). OMB expressly stated its intent that these products be subject to the higher “construction material” standard for purposes of BABA compliance, recognizing that treatment of these items as manufactured products would result in a “different and less-stringent domestic content preference applying to them.”
- In contrast to the Proposed Rule, in the Final Rule, OMB has returned to an approach more consistent with M-22-11 in that the term “construction materials” is now defined as “articles, materials, or supplies that consist of only one of” the listed materials.
- In addition, the Final Rule addresses “minor additions” to construction materials, clarifying in the definition of “construction materials” at Section 184.3 that “[m]inor additions of articles, materials, supplies, or binding agents to a construction material do not change the categorization of the construction material.” OMB specifically declined to provide a specific definition of “minor additions” in the Final Rule, and it advises that Federal agencies are to exercise reasonable discretion in determining what constitutes a minor addition.
- Manufactured Products: The Proposed Rule defined “manufactured products” in the negative; i.e., manufactured products were defined as articles, materials, or supplies incorporated into an infrastructure project that (1) do not consist wholly or predominantly of iron or steel or both and (2) are not categorized as a construction material. The Final Rule includes an affirmative definition of “manufactured products”; i.e., articles, materials, or supplies that have been processed into a specific form or shape, or combined with other articles, materials, and supplies to create a product with different properties than those of the individual articles, materials, or supplies.
- Predominantly of Iron or Steel: The Proposed Rule did not provide a specific definition for the term “predominantly of iron or steel.” The Final Rule adopts a definition of “predominately of iron or steel or a combination of both” that is “generally consistent with the FAR definition”; i.e., a product where “the cost of the iron and steel content exceeds 50 percent of the total cost of all its components. The cost of iron and steel is the cost of the iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product and a good faith estimate of the cost of iron or steel components.”
- Section 70917(c) Materials: The Proposed Rule did not provide specific clarification of the treatment of materials that were explicitly excluded from the definition of “construction materials” in Section 70917(c) of the BABA (cement and cementitious materials; aggregates such as stone, sand, or gravel; or aggregate binding agents or additives). The Final Rule provides additional clarity on “Section 70917(c) materials” (referred to as “excluded materials” in the Proposed Rule) by adding a definition of those materials, identifying them as a separate product category (in an effort to provide a common system for Federal agencies to distinguish between the product categories established in BABA), and explaining that there are circumstances where Section 70917(c) materials may be considered components of manufactured products.
- Applicability to For-Profit Entities: M-22-11 specified that the guidance therein applied only to “non-Federal” entities as defined at 2 CFR 200.1, and it explained that for-profit organizations are not considered non-Federal entities. The Final Rule clarifies that 2 CFR 200.101(a)(2) allows federal agencies to impose subparts A through E of the OMB Guidance for Grants and Agreements in 2 CFR part 200 to for-profit entities, including the domestic preferences at 200.322.
- Cost of Components: The Proposed Rule solicited comments on how OMB should determine the “cost of components” for manufactured products, set forth in Section 184.5. The Final Rule preserves a definition of “cost of components” that is in line with the Federal Acquisition Regulation (FAR) but modifies the definition so that the term “contractor” is replaced with “manufacturer” (which was the term used in the Proposed Rule but is specifically defined in the Final Rule as “the entity that performs the final manufacturing process that produces a manufactured product”), and the Final Rule replaces the term “end product” with “manufactured product.”
- Waiver Process: The Final Rule does not make material changes to the waiver process set forth at Section 184.7; however, the Final Rule clarifies that “recipients” rather than non-Federal entities may request waivers from the Federal awarding agency. In other words, subrecipients will not be the entities requesting waivers from the Federal awarding agency, as they are expressly excluded from the definition of “recipient” at 2 CFR 200.1.
- International Obligations: The Proposed Rule did not discuss the relationship between BABA preferences and international trade agreements. While the Final Rule does not explicitly include a statement in the part 184 guidance that the BABA requirements “shall be applied in a manner consistent with United States obligations under international agreements,” the Final Rule includes an extensive discussion on the effect of international trade agreements on BABA preferences. The Final Rule points to Section 70914(e) of the BABA (which specifies that the Buy America preference must be applied in a manner consistent with U.S. obligations under international trade agreements), and it reminds stakeholders that a waiver of the requirements in the public interest may be appropriate where obligations under an international agreement are in effect.
Prior to the effective date of the part 184 guidance contained in the Final Rule (October 23, 2023), the OMB will issue an updated memorandum to replace M-22-11 and remove direct conflicts between M-22-11 and the Final Rule. However, stakeholders hoping for comprehensive and authoritative guidance stemming from the Final Rule may be disappointed, as the OMB makes clear that the new part 184 is “not intended as comprehensive guidance on all topics related to the implementation of BABA.” Instead, the guidance in the Final Rule “is intended to be high-level coordinating guidance for Federal agencies to use in their own direct implementation of BABA, as required under section 70914 of BABA.” Thus, while the guidance in the Final Rule is a welcome step toward consistent application of BABA requirements across agencies, contractors looking for a passing grade will still need to study up on the controlling requirements of the Federal agency administering a given infrastructure project to ensure they are able to ace compliance with that specific agency’s requirements.