With supply chains potentially shifting, maintaining compliance with regulations requires enhanced diligence
Although many of the "Liberation Day" tariffs that President Trump announced on April 2 have been postponed or reduced, tariffs on many imports are now 10% or higher, which is significantly higher than they were prior to the announced tariffs. Although these tariffs are causing many questions and issues for supply chain management generally, they also pose a number of unique concerns for companies certifying the country of origin of items under federal awards.
Background on country-of-origin certifications under federal awards
Many federal contracts and grants require the awardee to provide certifications about the country of origin of items used in the performance of the award. These certifications could fall under any number of laws, including (but not limited to):
- The Buy American Act,
- A Buy America statute,
- The Build America, Buy America Act ("BABA"), or
- The Trade Agreements Act.
These laws are often referred to as "domestic-preference laws" (the Trade Agreements Act waives the Buy American Act for products or materials originating in certain countries).
If the prime contractor or prime recipient ("prime") does not manufacture all of the items they provide or use under the award, they then flow down the certification to lower-tier suppliers, setting off a series of supply chain certifications that will eventually be passed on to the federal government. These certifications are important given that the government has pursued criminal and civil charges against persons and companies that provide inaccurate country-of-origin certifications, and companies should work closely with their legal teams to assess the accuracy of their certifications or to determine if lower-tier certifications adequately protect the company.
With the increase in tariffs, a supplier's certification could become inaccurate if the company changes its supply chain, but they could also become inaccurate even if the company maintains its exact same supply chain. The remainder of this article will explain how these certifications may become inaccurate and what suppliers should do to maintain the continual accuracy of their certifications in a world of continually changing tariffs and what primes can do to protect themselves.
Changes to supply chain
As companies assess the impact of the tariffs, many are weighing options for moving their own foreign manufacturing facilities or replacing existing suppliers with new ones in different countries. Either type of move could impact the country-of-origin analysis of the items covered by the company's current contracts or agreements. This is particularly true for foreign-origin items provided under the Trade Agreements Act.
For all companies that are subject to that law pursuant to their contracts, they should closely review their contracts and related documents to determine what exactly the company has committed to provide (or not provide) or what the company is certifying in its sales and other documents (such as purchase orders or invoices). Companies that have committed to providing items from certain countries must ensure that changes to the company's supply chain are flagged for review prior to the change being implemented. If a change is implemented before the relevant team has been able to address or approve the change, the company risks a breach of contract or submission of a false certification.
For primes that rely on the certifications from their suppliers, the constant changes increase the likelihood that prior certifications are stale. Primes, therefore, also need to review their supplier contract documents to ascertain whether suppliers have a continual obligation to provide items from specified countries or whether they provided a certification that was accurate only as of a certain date and not for future dates. Even if their suppliers have committed to provide items from certain countries, primes should be on the lookout for supplier notices of changes that put the prime on notice that the supplier is not complying with the contract requirement; supplying such items to the government will make the prime subject to liability to the federal government even if the prime may be able to pursue legal action against the supplier. If primes do not have information from their suppliers about ongoing compliance, they will need to reassess what certifications they can obtain and how they can track each supplier certification/delivery with the delivery to the government.
Maintaining the same supply chain
But even if a company maintains its exact same supply chain, the tariffs could still impact the accuracy of a country-of-origin certification. This is particularly true for certifications that an item is American (referred to as "domestic" or "produced in the United States" under the relevant laws/regulations). Under the schemes discussed above, there are different analyses to determine whether an item is deemed American, and some of these—like the Buy American Act and the Build America, Buy America Act—rely on a cost-of-components analysis. Indeed, both of those schemes require that the cost of components mined, produced, or manufactured in the United States be greater than a specified percentage of the total cost of all of the item's components (the percentage differs under the regulations for the two laws—For current deliveries, the Federal Acquisition Regulation (FAR) clauses implementing the Buy American Act require that the cost of components exceeds 65%. This amount increases to 75% in 2029. The regulation implementing BABA requires that the cost of components exceeds 55%) For components purchased by the manufacturer of a manufactured product, the costs of a component include "any applicable duty."
Thus, as tariffs change quickly and suppliers' lower-tier suppliers change the costs they are charging for items, a supplier's certifications may be accurate for one shipment and inaccurate for another shipment made even just a day apart. If increased tariffs directly or indirectly increase the cost of any foreign component, suppliers must therefore revisit whether any increase impacts the prior determination that their item can be certified as American. Indeed, failing to update the analysis could result in a false statement or certification that the product or material is "domestic" (Buy American Act) or "produced in the United States" (BABA), potentially creating liability for a breach of contract or false certification. This means suppliers using any foreign components must ensure that their certifications are not blanket statements of compliance and that they reflect that they are only accurate as of the date provided. It also means that they should have a system that limits personnel from providing certifications unless/until the certification can be deemed accurate.
Similar to addressing country-of-origin certifications, primes should be on the lookout for supplier notices of changes that put the prime on reasonable notice that the supplier is not providing American goods or that it is providing goods despite not having an updated cost-of-components analysis. Primes may also need to assess what certifications they can obtain and how they can track each supplier certification/delivery with the delivery to the government.
Originally published by Supply Chain Management Review.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
