Another Piece to the Puzzle: OMB Issues Proposed Guidance on “Build America, Buy America” Requirements
Wednesday, February 22, 2023

Coinciding nicely with the discussion of “Buy America” priorities at the February 7, 2023 State of the Union address, on February 9, 2023 the White House’s Office of Management and Budget (“OMB”) issued a proposed rule to implement Title IX of the Infrastructure Investment and Jobs Act (“IIJA”) – the Build America, Buy America (“BABA”) Act. See 88 Fed. Reg. 8374. The new Proposed Rule would amend OMB’s Guidance for Grants and Agreements to support federal agencies implementing the BABA requirements. In short, OMB is proposing to add a new Part 184 to Title 2 of the Code of Federal Regulations (“C.F.R.”), as well as clarifying language to the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards at 2 C.F.R. Part 200 (the “Uniform Guidance”), that address Congress’ “Buy America” mandate involving iron, steel, manufactured products, and construction materials used in federally-funded infrastructure projects. Though this new Proposed Rule does not provide perfect clarity reconciling all “Buy America” requirements, the Proposed Rule is an important piece of the puzzle that companies performing infrastructure work must understand. OMB is accepting comments on the proposed rule through March 13, 2023.

In case you’ve forgotten, the IIJA (originally passed in November 2021) required, by May 14, 2022, each federal agency to ensure that all funds made available for a federally-funded infrastructure project must ensure that “all of the iron, steel, manufactured products, and construction materials used in the project are produced in the United States.” Consistent with President Biden’s January 2021 Executive Order 14005 – and even the prior January 2019 Executive Order 13858 from President Trump – the BABA requirements again emphasized the government’s focus on securing domestic supply chains and bringing manufacturing back to the United States. What is interesting about the BABA requirements, though, is the scope of the statute and the curious overlap with other country of origin regimes – especially those already covering infrastructure projects funded by agencies like the U.S. Department of Transportation. In this article, we will walk you through the OMB’s Proposed Rule, highlighting key elements and lingering questions along the way. If you need help navigating some these issues, you’re not alone. Fortunately, the government is soliciting comments, giving industry the opportunity to improve this confusing and complicated issue.

SCOPE OF OMB’S PROPOSED RULE AND GUIDANCE

1. “Regulations” vs. “Guidance”

OMB previously released in April 2022 Memorandum M-22-11, “Initial Implementation Guidance on Application of Buy America Preference in Federal Financial Assistance Programs for Infrastructure,” to assist federal agencies and industry alike in understanding what they needed to do to comply with the BABA mandate. It seems the new Proposed Rule is aimed at supplanting – or perhaps replacing – this initial guidance; but ultimately the new Proposed Rule proffers no drastic departures from the M-22-11 guidance. Rather, the Proposed Rule would codify much of this prior guidance, creating an entirely new part in the OMB’s regulations: Title 2, Part 184 of the Code of Federal Regulations.

By adding this new Part 184, OMB is proposing government-wide guidance for all federal agencies, as well as recipients of federal funds through grant or other assistance agreements. This is an important distinction to remember – OMB regulations found under Subtitle A of Title 2 are just that: guidance. OMB makes very clear that “Publication of the OMB guidance in the CFR does not change its nature – it is guidance and not regulation.” 2 C.F.R. § 1.105(a)-(b). Ultimately, it is left to the individual federal agencies to adopt any OMB guidance found in Subtitle A as regulation – which generally can be found in Subtitle B of Title 2. See 2 C.F.R. § 1.05(b). Accordingly, it will be up to the individual federal agencies to give any actual regulatory effect to this Proposed Rule in implementing BABA requirements.

By releasing “guidance,” instead of mandatory regulations, OMB is able to establish recommended baselines for compliance with the BABA’s mandates, while simultaneously recognizing that more restrictive country of origin requirements may override these baseline obligations. For example, where the Federal Transit Administration’s (“FTA”) “Buy America” requirements already impose a 100% manufacturing requirement on iron, steel, and other manufactured products, the FTA is not expected to adopt the lesser BABA requirements for manufactured products (requiring only 55% domestic content). On the flip side, where the FTA regulations currently do not address specific “Buy American” requirements for “construction materials,” OMB’s Proposed Guidance may need to be used as a baseline for the FTA to further expand its “Buy America” requirements for covered infrastructure projects.

2. Infrastructure Projects vs. Other Federal Spending

BABA applies specifically to federally funded infrastructure projects. The Proposed Rule defines infrastructure projects as “any activity related to the construction, alteration, maintenance, or repair of infrastructure in the United States, regardless of whether infrastructure is the primary purpose of the project.” This is an extremely broad application of BABA requirements and will undoubtedly create a compliance nightmare for industry – after all, federally funded projects entirely unrelated to “infrastructure” may still be required to comply with BABA’s mandate to the extent any small piece of the program remotely touches on “infrastructure.” In other words, contractors will not be able to merely “bucketize” projects as infrastructure vs. non-infrastructure, but rather companies may need to perform detailed analyses of every part of a project to determine what, if any, country of origin requirements may apply on any given day. Contractors should carefully negotiate their contracts and seek guidance from federal agencies where needed to best understand their compliance obligations up front.

Still, even considering the broad scope of BABA’s applicability, BABA does not necessarily create obligations for other federal spending, whether through the procurement process (where we generally have the Buy American Act and the Trade Agreements Act), or through other grant and assistance opportunities. For this reason, the OMB Proposed Rule does not eliminate the current Uniform Guidance’s “domestic preference” found in 2 C.F.R. § 200.322, but rather augments the lenient preference (requiring domestic sourcing “to the greatest extent practicable”) with a cross-reference to the proposed Part 184 when federal awarding agencies are dealing specifically with infrastructure projects. This approach, of course, makes sense given the Uniform Guidance’s applicability to all types of federal grant and assistance programs, including those beyond infrastructure.

OMB thus leaves the door open for federal agencies to adopt – or continue using – their own preference requirements for grant programs, and even takes into consideration State and Local preferences that may attach to grant funds flowing through states. Though, on the one hand, this appears to be a logical approach to guidance, the overlay between BABA requirements and other “Buy American” regimes demonstrates a continuing disconnect among these requirements that the federal government still has not addressed, let alone acknowledged. Instead, federal agencies are left to sort out which “more restrictive” standard might apply given any number of relevant factors – including where the funding is coming from and what types of projects are being contemplated. In this respect, “Buy America” compliance continues to be a bit like trying to solve a jigsaw puzzle, unsure which piece fits into which gap.

KEY ELEMENTS OF OMB’S PROPOSED GUIDANCE

With all the caveats and limitations listed above, the OMB’s Proposed Guidance still gives current and prospective contractors vital information on what to expect when undertaking projects subject to BABA’s requirements. The Proposed Guidance also expressly solicits input from industry on assisting OMB in finalizing this Guidance – giving contractors the present ability to influence policy that may affect their compliance obligations in the future. Below we highlight some of these key elements of the Proposed Rule.

1. Iron & Steel Products

The new Part 184 would require that all manufacturing processes for “iron and steel” products – from the initial melting stage through the applications of coatings – occur in the United States. This requirement would be applicable to products made wholly of iron or steel, as well as products made predominantly of iron or steel, or both, but OMB does not (yet) adopt a definition of what it means for a product to be made “predominantly” of iron or steel. OMB expressly requests input from industry on whether the Guidance should adopt the definition of “predominantly” currently used under the Buy American Act – that is, when 50% or more of the cost of a product’s components stems from iron and/or steel content. Absent comments to the contrary, we think it likely that OMB will adopt this familiar definition.

2. Manufactured Products

“Manufactured products” under BABA are required to: (1) be manufactured in the United States, and (2) include more than 55% U.S.-origin content (as measured by the total cost of components). OMB recommends adopting the FAR’s definition of “cost of components,” which would include acquisition costs (including transportation) and applicable duties for acquired components, and costs of manufacturing the component (excluding profit) for components manufactured by the company. See FAR 25.003. Importantly, applying this definition for manufactured products typically results in the cost of labor being excluded from the cost of component calculation – a significant portion of the costs typically incurred by onshoring manufacturing. Industry may be able to use this opportunity to advocate for a more expansive view of “cost of components” to include the increased value taking place in the U.S. Still, industry should recognize that OMB’s Proposed Rule indicates a strong desire to conform its guidance to current Buy American Act requirements and reduce duplicity of federal obligations. This is by way of saying that this might not be the time for OMB to blaze a new trail implementing new and broader “Buy America” policy.

Along those lines, the Proposed Guidance does not currently provide definitions for “end products” or “components” – key terms required by most contractors to fully understand their compliance obligations under these domestic content regimes because a company needs to know where the end product and the component manufacturing is taking place to meet the BABA requirements. OMB again recommends adopting the definitions used in the FAR, but is permitting industry the opportunity to suggest further “conforming changes” to best make these definitions align with work conducted under covered infrastructure programs.

Interestingly, OMB does not address whether the BABA domestic content “threshold” will be raised above 55% in the years to come. As a reminder, when the IIJA/BABA was signed into law in November 2021, the FAR had just been amended to increase the Buy American Act’s domestic content threshold to 55% (from 50%), and the FAR Council was in the process of increasing this threshold even further – eventually implementing a scaled approach to a 75% threshold by 2029. Currently, the Buy American Act threshold sits at 60%, and is scheduled to increase to 65% in January 2024. Yet with all the talks of desires to mirror the Buy American Act’s requirements, OMB has not addressed whether it will take on a similar scaled approach; although the wording of the Proposed Rule (and the underlying statute) certainly seems to leave room for increases down the line. Given the Biden Administration’s continued emphasis on “Buy American” – including remarks regarding construction materials at the State of the Union – we would not be surprised if this BABA domestic content threshold follows a similar “step-up” trajectory over time.

Of course, given Congress expressly ordered the FAR Council to raise the threshold to 75% in Section 70921 of the IIJA – a mandate glaringly missing from BABA – perhaps agencies intend on holding steady at 55% unless otherwise directed. Only time will tell, and we already have enough problems understanding these requirements in the here-and-now without complicating things by trying to predict the future. For now, BABA compliance means: (a) manufactured in the U.S.; and (b) at least 55% domestic content, as measured by “cost of components.” This seems clear enough to help companies plan and comply.

3. Construction Materials

The addition of “construction materials” to “Buy America” requirements as a discrete subset requiring unique manufacturing requirements is probably one of the most significant impacts of these new rules, especially considering that most existing infrastructure domestic preference requirements do not address “construction materials” at all (instead typically treating “construction materials” as a type of “manufactured product”). Under BABA, products that qualify in this new category of “construction materials” must be “produced in the United States,” meaning that “all manufacturing processes” must occur in the U.S. The Proposed Rule identifies eight discrete categories of “construction materials,” some of which are identified in the statute, and some of which appear to be the results of discussions with industry.

“Construction materials” are defined to include: (1) non-ferrous materials, (2) plastic and polymer-based products, (3) composite building materials, (4) glass, (5) fiber optic cable, (6) optical fiber, (7) lumber, and (8) drywall. Under the proposed 2 C.F.R. § 184.6, OMB suggests spelling out the specific required “manufacturing processes” for each of these listed categories – providing much more material-specific guidance than typically found under existing domestic preference requirements. OMB is open to comment from industry on additional categories of “construction materials,” as well as which key manufacturing processes should be mandated domestically in the final rule.

Notably, neither cement nor other aggregates are considered “construction materials” under the Proposed Rule. OMB calls for comments specifically on how aggregates should be treated under the regulations, noting that these materials are expressly excluded under BABA, particularly with regard to combinations of raw materials that contain aggregates and other covered raw materials. Why are such common construction materials excluded from the definitions? The legislative history is not clear, but it seems likely that industry influence and lobbying likely resulted in the carve-out.

4. Distinguishing Between Categories of Products

Currently, the Proposed Rule contemplates “manufactured products” being a catch-all category to identify essentially any products that do not fall into the “discrete” categories of (1) iron or steel, or (2) construction materials. This includes products that contain minority amounts of iron and steel, as well as construction materials that contain two or more of the listed construction material, or products that contain a listed construction material with other materials. This expansive view could be interpreted to mean that every discrete product or material incorporated into the infrastructure project must meet one of the enumerated “produced in the United States” requirements for either: (1) iron and steel; (2) manufactured products; or (3) (enumerated) construction materials. Notably, where the Buy American Act recognizes certain exemptions for commercially-available off-the-shelf (“COTS”) products (including certain iron and steel fasteners), no such exemption currently is contemplated by OMB’s Proposed Rule, nor are any other products expressly excluded from coverage.

5. Waivers

As under most domestic preference regimes, limited waivers generally are available, including for: (1) public interest, (2) nonavailability, and (3) unreasonable cost. However, in line with OMB’s April 2022 Guidance, BABA waivers ultimately must be issued by the federal funding agency, and even then, only after public notice and coordination with the White House’s Made in America Office (“MIAO”). Contractors should expect this waiver process to be time intensive and plan accordingly – start coordinating early with all parties involved in the waiver process (including recipients, subrecipients, and contractors under infrastructure projects), and ensure timely submission of comprehensive waiver requests.

CONCLUSION

OMB’s Proposed Rule and Guidance offers a baseline approach to implement Congress’ BABA mandate for federally-funded infrastructure projects. The Proposed Rule provides federal agencies with guidance on how to handle waiver requests, and offers detailed guidance on applying regulations to the use of “construction materials” – a use not commonly covered by agency-specific domestic preference requirements. Industry is reminded that public comments are due March 13, 2023, giving contractors the opportunity to speak up now on outstanding questions regarding implementation and definitions needed for compliance.

“Buy America” is and always has been a patch-work process, with dozens of federal agencies imposing dozens of similar, but not identical, requirements. This new Proposed Rule is a piece of the puzzle, but it’s not the whole thing. Companies are wise to make sure they understand the specific “Buy America” requirement they need to meet before agreeing to deliver under any contract or program. And hopefully these new baseline BABA requirements will help make that compliance process a bit more predictable.

 

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