Following the proposed regulations issued in February 2023 (which we have previously covered), the Guidance - effective October 23, 2023 - defines terms such as “manufactured products,” “predominately iron or steel products,” and “construction materials.”2 To promote consistency between the BABA domestic content requirements3 and the Buy American Act4 domestic component requirements in the Federal Acquisition Regulation (FAR), OMB also includes guidance for determining the “cost of components” of manufactured products that aligns closely with FAR requirements. In addition, the Guidance sets forth the circumstances under which a recipient may seek a waiver of the BABA domestic content requirements and the procedures to be followed to request waivers.
In February 2023, OMB issued a proposed rule to implement the BABA.5 The proposed rule sought to standardize the BABA requirements by creating new regulations at 2 CFR Part 184 and by amending the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (commonly known as the “Uniform Guidance”) at 2 CFR § 200.322 to require compliance with the new rules. Notably, the Uniform Guidance, which governs grants and cooperative agreements, previously only instructed recipients to “provide a preference for the purchase, acquisition, or use of goods, products, or materials produced in the United States.” 2 C.F.R. § 200.322(a) (emphasis added). OMB’s new Buy America requirement creates mandatory domestic content standards and introduces new burdens for all infrastructure grant recipients, subrecipients, and third-party contractors.6
The Guidance includes definitions for key terms, including “predominately iron or steel products,” “manufactured products,” and “construction materials” to be utilized under federally funded programs:
The BABA imposes Buy America preferences on certain “construction materials” used in federally funded infrastructure projects. The Guidance expands the list of construction materials to include non-ferrous materials, plastic and polymer-based products, glass, fiber optic cable, optical fiber, lumber, engineered wood, and drywall, and clarifies that “drop cable” is included within the meaning of “fiber optic cable.” The Guidance also modifies the manufacturing standard for certain construction materials.
The Guidance revises the definition of “manufactured products” to include: “articles, materials, or supplies that have been: (i) processed into a specific form or shape; or (ii) combined with other articles, materials, or supplies to create a product with different properties than the individual articles, materials, or supplies.”
In the Guidance, OMB adopts a definition of “predominately of iron or steel” that is generally consistent with the definition in the Federal Acquisition Regulations, at FAR 25.003 (defining what constitutes items “predominantly of iron or steel” in the context of domestic preference application). The Guidance defines “predominately of iron or steel” as any product for which the cost of the iron and steel content exceeds 50% of the total cost of all components, based on “a good faith estimate.”7
55% Cost of Components Test
Under the BABA, at least 55% of the total cost of all components of a manufactured product delivered under or incorporated into a federally funded infrastructure project must be mined, produced, or manufactured in the United States. This “55% rule” was consistent with the Buy American Act domestic component requirement applicable to Federal Acquisition Regulation-based procurement contracts at the time the BABA was enacted into law in 2021. However, the domestic component thresholds of the Buy American Act have been subject to phased-in percentage increases since the BABA’s enactment.8
The Guidance includes standards for determining the cost of components of manufactured products under BABA, as follows:
for components purchased by the manufacturer, the acquisition cost, including transportation costs to the place of incorporation into the manufactured product (whether or not such costs are paid to a domestic firm), and any applicable duty (whether or not a duty-free entry certificate is issued); or
for components manufactured by the manufacturer, all costs associated with the manufacture of the component, including transportation costs to the place of incorporation into the manufactured product, plus allocable overhead costs, but excluding profit. Cost of components does not include any costs associated with the manufacture of the manufactured product.
The Guidance defines “component” to mean “an article, material, or supply, whether manufactured or unmanufactured, incorporated directly into: (i) a manufactured product; or, where applicable, (ii) an iron or steel product.” This definition is a modified form of the “component” definition used at FAR 25.003. The Guidance defines “manufacturer” to mean the entity that performs the final manufacturing process that produces a manufactured product. It does not identify what is required for processing to be considered the “final manufacturing process,” but we would expect that the process would be akin to what is required under the Buy American Act.
In its discussion of “kits,” OMB clarifies that the manufacturer should be considered the entity that performs the final manufacturing process that produces the kit, and not the contractor that assembles it on the work site, i.e., fastens or connects the kits. Thus, transportation costs to the work site should not be considered. In this context, the place of incorporation does not mean the place of incorporation into the infrastructure project, but the place at which the manufacturer established the elements of the kit to be acquired for the infrastructure project.
Further, OMB provides that the term “kit” means a product that is acquired for incorporation into an infrastructure project from a single manufacturer or supplier that is manufactured or assembled from constituent components on the work site by a contractor. A kit may be treated and evaluated as a single and distinct manufactured product regardless of when or how its individual components are brought to the work site. In contrast to a kit, other manufactured products are manufactured or preassembled before they are brought to a work site.
On the definition of “produced in the U.S.” applicable to iron or steel products, the Guidance clarifies that an article, material, or supply incorporated into an infrastructure project must meet the Buy America standards for only the single category in which it is classified. Thus, in the case of iron or steel products, the Buy America requirement does not apply directly to non-iron or -steel components. In addition, consistent with existing practice, the requirement for iron or steel does not restrict the origin of the raw materials used in production of the iron or steel, but requires that all manufacturing processes of the iron or steel product occurred in the U.S.
The Guidance contains provisions addressing the proposal and issuance of Buy America waivers. Under OMB’s initial guidance, the BABA preference potentially can be waived if (i) iron, steel, manufactured products, or construction materials are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality; (ii) the inclusion of iron, steel, manufactured products, or construction materials produced in the United States will increase the cost of the overall project by more than 25 percent; or (iii) the application of the preference is “inconsistent with the public interest.” Although OMB did not make material changes to this guidance, it did incorporate editorial changes pertaining to the format, contents, and supporting materials required for waiver requests from recipients. Waiver requests must be made available for public comment for a period of no less than 15 days and are subject to review by OMB.
While OMB’s Guidance provides additional clarity regarding implementation of the BABA domestic content requirements under federally funded infrastructure projects, it also leaves some issues unaddressed. For example, OMB does not define the term “kit”, but rather leaves federal agencies with discretion on how this concept should be applied in practice when classifying products. It also fails to specify the level of processing that will be required for processing to constitute a “final manufacturing process.” While federal procurement contractors have long experience with Buy American Act and certain agency-specific Buy America requirements, expansion of these domestic content restrictions generally into federal financial assistance awards changes the landscape for many recipients of federal grants and cooperative agreements.
We have deep experience advising businesses on the challenges and opportunities of the Buy America and Buy American Act requirements. Please feel free to reach out to the authors if you would like additional information about the Guidance or other assistance concerning the complex and evolving area of domestic content preferences and restrictions.
Authored by Joy Sturm, Mary Anne Sullivan, Stacy Hadeka, Maya Desai, Mike Mason, Bill Ferreira, Craig Lewis, Allison Pugsley, and Mike Scheimer.
1 The BABA applies to federal financial assistance awards, but does not apply to federal procurement contracts.
2 See 88 Fed. Reg. 57750 (Aug. 23, 2023). OMB expressly noted that the Guidance is not a rule per the Administrative Procedures Act. However, as is the case with a final rule, applicable regulations will be revised to reflect the final Guidance and OMB will submit it to Congress and to the Comptroller General consistent with rulemaking procedures set forth in 5 U.S.C. 801(a).
3 The OMB Guidance uses the term “domestic preferences” throughout in speaking of the domestic content requirements of the BABA. Notably, unlike the domestic “evaluation preferences” applied under the Buy American Act (and implementing FAR clauses under FAR Subpart 25.1), the domestic content standards of the BABA are domestic content restrictions.
4 41 U.S.C. §§ 8301-8305.
5 See 88 Fed. Reg. 8,377 (Feb. 9, 2023). Although individual agencies such as the U.S. Department of Transportation (DOT) funded projects have subject to domestic content requirements for decades, the BABA program applies to infrastructure projects government-wide, across all agencies. Since the BABA statute was signed into law, agencies have continued to implement the legislation through their own guidance and waivers. For example, DOT recently finalized a “Buy America” waiver. See Waiver of Buy America Requirements for De Minimis Costs and Small Grants | US Department of Transportation at 88 Fed. Reg. 55,817 (Aug. 16, 2023). The U.S. Department of Energy (DOE) also previously issued guidance on the implementation of the Buy America requirement for infrastructure projects.
7 The Federal Highway Administration (FHWA) has issued guidance on the “predominately” of iron or steel standard. December 22, 1997 FHWA Memorandum, https://www.fhwa.dot.gov/programadmin/contracts/122297.cfm.
8 The FAR Buy American Act threshold was increased from 55% to 60% on October 25, 2022, and will be increased to 65% in calendar year 2024, and 75% in calendar year 2029. FAR § 25.101. This requirement has been waived for commercial-off-the-shelf (COTS) items. Id.