OMB Issues Final Buy America Rule And Guidance For Infrastructure Projects - Construction & Planning

On August 14, 2023, the Office of Management and Budget (OMB) released a pre-publication version of final guidance implementing the Build America, Buy America Act (BABAA).¹ The guidance adds a new Part 184 in 2 C.F.R. and clarifies in 2 C.F.R. 200.322 that federal agencies must implement BABAA with regard to federally funded infrastructure projects. OMB had issued a notification of proposed guidance on February 9, 2023, which Akin reported on in an earlier client alert. The final guidance considers the more than 2,000 comments received in response to the notice of proposed guidance. While the final guidance largely reflects the proposed guidance, OMB makes certain changes to Part 184 and includes commentary in the preamble, some of which is clarifying and some of which raises new questions regarding implementation of and compliance with BABAA. The final guidance is effective 60 days after it is published in the Federal Register. OMB also has stated that it will update its Initial Implementation Guidance on Application of Buy America Preference in Federal Financial Assistance Programs for Infrastructure issued on April 18, 2022 (referred to as M-22-11).

Overview of the Final Guidance

The guidance states that Part 184 is intended to be high-level coordinating guidance for federal agencies to use in their implementation of BABAA—ensuring that "none of the funds made available for a federal financial assistance program for infrastructure may be obligated for a project unless all of the iron, steel, manufactured products, and construction materials used in the project are produced in the United States [(U.S.)]."² Among the changes to Part 184 from the proposed guidance are the additions of definitions, including the definition of construction materials, manufactured products and components; clarification of how recipients of federal financial assistance should classify products as steel or iron, construction materials or manufactured products; addition of new categories of construction materials and clarification how to determine if a construction material is manufactured in the U.S.; and additional of information regarding how to determine whether 55% of the cost of a manufactured product is from components produced in the United States.

Key Takeways from the Final OMB Guidance

Applicability. OMB revised Section 184.1 to clarify that BABAA applies only to products that are permanently incorporated into a project or an integral part of infrastructure and not items temporarily brought to the construction site or that are not permanent fixtures. OMB replaced "used in the project" with "incorporated into the project." OMB states in the preamble that BABAA does not apply to equipment and furnishings, such as movable chairs, desks and portable computers or equipment that is used at or within the finished infrastructure project, that are not an integral part of the structure or permanently affixed to the infrastructure project.
The preamble states that while BABAA does not apply when federal financial assistance is provided directly to for-profit entities (per 2 C.F.R. Part 200), federal agencies may apply BABAA to agreements for federal financial assistance for infrastructure with for-profit entities and may want to do so "to create a level-playing field" for discretionary grant programs or for other reasons. This underscores the importance of carefully reviewing notices of funding opportunity, loans and grant awards as federal departments and agencies may include BABAA requirements in grant agreements with private entities.
Classification of Products. The guidance provides further clarity that items should only be classified as falling into a single category or bucket. The final guidance states that the classification of a product as steel, iron or a manufactured product is made when the product is "brought to the work site" for incorporation into the infrastructure project. This clarity is helpful since, for example, a product like a coating can be categorized as a manufactured product if it is incorporated into an infrastructure project directly or it can be part of the manufacturing process of steel or iron.
Definitions for Key Terms. Part 184 includes definitions of key terms, including iron or steel products, manufactured products, construction materials and materials identified in Section 70917(c) of BABAA as being exempt from BABAA (e.g., aggregates and cement and cementitious materials).
- "Predominantly of Iron or Steel or a Combination of Both" – Section 184.3 adopts the Federal Acquisition Regulation (FAR) test for iron or steel—meaning wholly or predominantly made of iron or steel (e.g., more than 50%). This is different from the Federal Transit Administration (FTA) regulation that applies to structural iron or steel. The definition adopted by OMB, however, does not incorporate FAR-specific waivers or exemptions, such as the language related to commercial-off-the shelf (COTS) fasteners. Labor costs are also not included when determining whether the product meets the applicable threshold.
- "Manufactured products" – OMB added a definition of manufactured products in the final guidance, which is "[a]rticles, 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." Additionally, OMB dropped the reference to raw materials to clarify that a manufactured product may also be created by combining manufactured components, which are not raw materials, while retaining the language on "different properties." By retaining such language, OMB acknowledged that not just any combination of materials produces a manufactured product. For example, a mixture of raw materials in an unprocessed or minimally processed state, such as minimally processed fill dirt, should not be classified as a manufactured product. This definition does not make clear the types of activities that will be sufficient to constitute manufacturing in the U.S. versus mere assembly. This lack of clarity has the potential to lead to legal challenges.³
- "Construction materials" – OMB revised this defined term in Section 184.3 from the proposed guidance to apply to construction materials that contain "only one" of the listed materials. OMB also added three new construction materials—fiber optic, optical fiber and engineered wood—to its list in Part 184's final guidance, which had been identified in the proposed guidance issued in February 2023. Language relating to minor additions was also added to the second paragraph in the definition.

Additionally, OMB categorized "fiber optic cable" and "optic fiber" as separate, standalone construction materials in Section 184.3 because, per industry guidance in the public comments, they are considered two separate items. Accordingly, each item has its own specific manufacturing standards laid out in Section 184.6.⁴

OMB declined to add paint, coatings and brick to the list of construction materials despite commentors requesting that OMB do so. Instead, OMB choose to continue to classify those products as manufactured products. OMB noted the manufacturing process for some construction materials include the application of "coatings" and that coatings frequently constitute different materials than the construction material itself and may or may not be considered minor additions. OMB further clarified its intent that other additions, such as coatings, do not change the categorization of a construction material if they are added through a manufacturing process specifically described in that construction material's standard at Section 184.6. For example, adding a coating to aluminum, even if not considered a minor addition, would not convert the aluminum "construction material" to a "manufactured product" because coatings are specifically identified in the manufacturing process for non-ferrous metals. However, coatings themselves do not require domestic sourcing if compromised of different materials—meaning domestic sourcing is not required for the coating itself.

"All Manufacturing Processes" for Construction Materials. Section 184.3 defines all manufacturing processes for a construction material that must occur in the U.S. It also describes the standards that define "all manufacturing processes" in the case of construction materials.
Construction Materials v. Manufactured Products. OMB clarified in response to comments that if two or more listed construction materials are combined, or if a listed construction material is combined with another item (except for minor additives and binding agents) before being brought to the site, then the product should be classified as a manufactured product rather than as a construction material.
Cost of Components of Manufactured Products. Part 184 includes guidance for determining the cost of components of manufactured products. Section 184.5 uses a modified version of the "cost of components" test found in FAR 25.003 to determine whether 55% of the cost of components of a manufactured products are produced in the U.S. OMB replaced "contractor" used in the FAR with "manufacturer" to clarify that the focus is on the manufacturer of the manufactured product.
Concept of a Kit as a Manufactured Product. The preamble to the guidance states that there may be circumstances where a manufacturer manufactures kits that are discrete products, machines or devices performing a unified function. The preamble further states that kits should be considered manufactured products even if components are brought to the infrastructure project site separately and manufactured or assembled there. For purposes of determining the cost of components of a kit, the manufacturer is considered the entity that performs the final manufacturing process and not the contractor who assembles the kit at the worksite. Further, transportation costs to the worksite are not included. The place of incorporation is the place there the manufacturer established the components of the kit to be acquired for the infrastructure project. This term is not incorporated into Part 184. OMB states that agencies should use reasonable discretion in interpreting how to apply BABAA regarding kits.
Buy America Waivers. Part 184 restates the circumstances a waiver may be justified. The new Section 184.7 includes guidance on the process that a federal agency should implement to allow recipients to request waivers, including the process a federal agency should follow in issuing proposed and final waivers. OMB clarified in the preamble, but not in part 184, that state and local governments that are parties to trade agreements can seek public interest waivers to procure from trade agreement countries.
Forthcoming Updated Memorandum. Prior to the effective date of the final guidance, which is 60 days after its publication in the Federal Register, OMB will be issuing an updated memorandum to replace its initial implementing guidance M-22-11.

Parting Thoughts

With BABAA being applicable to infrastructure projects that receive federal financial assistance under any law (with the exception of disaster assistance funding), federal agencies will continue to grapple with how to implement the law; recipients of financial assistance must determine how best to ensure compliance from its contractors, including when and how to evaluate requests for waivers; and contractors must determine if their products comply with BABAA, how to ensure compliance from their subcontractors, whether, when and how to seek waivers, and the types of recordkeeping they must maintain. The implementation of the Buy American Act, which has many similarities to BABAA, has resulted in bid protests and other legal challenges regarding compliance and we expect similar challenges to arise under BABAA. For contractors, understanding compliance obligations, contract requirements, and the steps necessary to manage risk is key—particularly as agencies begin implementing the law.

Footnotes

1. Infrastructure Investment and Jobs Act, Pub. L. No. 117–58, 117th Cong. § 70911-70917 (2021).

2. Id. at § 70914(a).

3. Note that the BABAA requirements for manufactured products do not apply where a federal agency has a requirement in place that meets or exceeds the standard in BABAA. The FTA and Federal Aviation Administration have standards in place that are more stringent than BABAA and are continuing to apply those standards.

4. The standard for fiber optic cable was revised to clarify that it incorporates the standards for glass and optical fiber. Section 184.6.

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