United States: The Two-Part Manufacturing Test Under The Buy American Act

Congress enacted the Buy American Act ("BAA") during the Great Depression, in order to protect American industry from foreign competition on federal procurement contracts. While the BAA is simplistic in its policy goal of promoting domestic purchasing, government contractors and subcontractors are often faced with complex and confusing rules for compliance.

The operative language of the BAA provides:

Only unmanufactured articles, materials, and supplies that have been mined or produced in the United States, and only manufactured articles, materials, and supplies that have been manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States, shall be acquired for public use unless the head of the department or independent establishment concerned determines their acquisition to be inconsistent with the public interest or their cost to be unreasonable1.

The Government flows down BAA requirements to government contractors in the form of standardized clauses contained in the Federal Acquisition Regulation ("FAR") and Defense Federal Acquisition Regulation Supplement ("DFARS").

The key to understanding the BAA is determining whether the solicited goods or "end products" are domestic, i.e. were mined, produced, or substantially manufactured in the United States. The FAR defines an "end product" as "those articles, materials, and supplies to be acquired for public use."2 The analysis of whether an end-product qualifies as domestic is done using a two-part test.3 First, the end-product must be manufactured in the United States; second, more than 50% of all component parts (determined by cost of the components) must also be manufactured in the United States. If a product meets this two-part test, then it can be considered a "domestic end product" under the BAA. End products that do not qualify as domestic under this test are treated as foreign.

The DFARS establishes a slightly difference scheme than the FAR with regard to the BAA. While the FAR only considers domestic production, the DFARS considers both domestic production and "qualifying country" production. The reason for this distinction is that the Department of Defense ("DOD") has negotiated its own trade agreements with certain countries.4

Determining whether a product was manufactured in the United States can be challenging. Neither the BAA nor the FAR/DFARS defines the term "manufacture" or "manufacturing." However, as established by published decisions of the Government Accountability Office ("GAO"), the lynchpin of determining whether a good was manufactured domestically is whether there was a "substantial change in the physical character" of the good, whether there were separate manufacturing stages involved, or whether there was one continuous process. While the GAO has affirmatively excluded activities like packaging or testing from the manufacturing process, the determination of whether a particular article was domestically manufactured must be done on a case-by-case basis.

Questions often arise as to whether end products that are manufactured in the United States solely from foreign material can qualify as "domestic end products." Consider a hypothetical scenario in which a prime contractor engages a subcontractor to provide steel plates that the prime contractor will incorporate into an end product being manufactured for DOD. The prime contractor flows the requirements of DFARS 225.252-7001(c) to its subcontractor, requiring the subcontractor to deliver only "domestic end products." The subcontractor procures steel from China (a non-qualifying country under the BAA), manufactures the steel in the United States, and provides it to the prime contractor. Is the subcontractor in compliance with the BAA requirements of its subcontract. The short answer is, it depends on the various manufacturing processes employed by the subcontractor.

In cases where an end product is manufactured in the United States solely from material from other than the United States or a qualifying country, GAO has held that the end product can qualify as a "domestic end product" if there are two manufacturing phases—both occurring in the United States—the first of which transforms the material into a "component" and the second of which manufactures the component into the end product. "[W]here it is alleged that a foreign material has been manufactured into a component domestically and the component in turn manufactured into an end item domestically, [the GAO] ha[s] also looked at where the manufacturing process consists of two distinct phases, the first yielding a component that is distinguishable from the original material and the second yielding an end item that is distinguishable from the component."5 Thus, as it pertains to the hypothetical scenario involving the manufacture of foreign steel, the question becomes whether the manufacturing process employed by the subcontractor satisfies the two-part test for end products manufactured solely from foreign material—that the material has to be transformed first to a component, and then to an end product in distinct phases.

Case law in this area can be somewhat instructive, although sometimes less than clear. Fortunately, for contractors attempting to understand whether two manufacturing processes have taken place, GAO has taken a practical approach based on the facts of each case. For example, in Davis Walker Corp., GAO held that foreign galvanized steel was subject to two distinct manufacturing processes, where the first process involved taking foreign steel rods and converting them into "bright wire," and the second process involved taking the "bright wire" and converting it into galvanized steel.6 Similarly, in Yohar Supply Co., GAO found two manufacturing processes to have taken place when the company stamped out components from rolled sheets of foreign steel, bent these components into shape, and smoothed them.7

In another case, however, GAO found that first taking foreign sulfadiazine and converting it into tablet form, and second, putting the tablets into bottles, constituted a single manufacturing process.8 GAO reached a similar conclusion in a case involving solvent dye. The alleged manufacturing process consisted of first modifying the foreign material "through a series of processes" into a "processed mixture," and second, taking the "processed mixture" and "sifting and selecting the contract compliant material" from the processed mixture. The GAO held that the purported second step of "sifting and selecting" was not a manufacturing process.9

Contractors at any tier attempting to ascertain whether their end products are compliant with the BAA should be asking specific questions of their own processes or their subcontractors processes. Having a clear understanding of the source of the material, the contractors' supply chain, and the manufacturing processes used to create the end product will greatly assist contractors in determining compliance with their contracts.

Footnotes

[1] 41 U.S.C. § 8302(a)(1).

[2] 48 C.F.R. § 25.003.

[3] 48 C.F.R. § 25.101

[4] 48 C.F.R. § 252.225-7001.

[5] City Chemical, LLC, B-296135.2, B-296230.2, 2005 CPD ¶ 2005.

[6] B-0184672, 76-2 CPD ¶ 192 (1976).

[7] B-225480, 87-1 CPD ¶ 152.

[8] To S.F. Durst & Co., Inc., 46 Comp. Gen. 784, 784 (1967). The GAO reached a similar conclusion in City Chemical, LLC, B-296135.2, B-296230.2.

[9] Id.; but see Marbex, Inc., Comp. Gen. Dec. B-225799, 87-1 CPD ¶ 468 (sterilization of gloves has been held not to constitute manufacture because there was no "material alteration" of the product); Blodgett Keypunching Co., Comp. Gen. Dec. B-153751, 76-2 CPD ¶ 331 (keypunching information on a magnetic tape was not "manufacture").

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