New Buy American rules in the Federal Acquisition Regulation took effect just after the Biden administration arrived. But they were developed during the Trump administration. The changes seem small, but they’re significant. Federal Drive with Tom Temin got a few items to watch out for from procurement attorney Joseph Petrillo.
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Tom Temin: Joe, the 55% up from 50% rule for American content, what does this all mean? This is something that’s been on the books as 50% for decades now, correct?
Joe Petrillo: Yes, these rules are very, very old. And we now have some changes to them that in main increase the possibility of getting domestic producers providing goods to the federal government, including the Department of Defense. And the domestic content rules now have required 50% for a very, very long time. And now it’s 55%. It’s not a huge increase. But obviously, that’s going to increase some degree of domestic subcontracting, which is going to help provide more jobs for Americans. The question is whether changes like this result in retaliation abroad, we’ll have to see what the answer to that is. But for now, the rules are going to increase the requirement for domestic content, and that’s probably going to increase some production here. So that’s mainly for manufactured goods.
Tom Temin: And that would include everything from printers to fleets for example of automobiles.
Joe Petrillo: Right. Now, there are some limitations on how this applies, which I’ll get into in a bit. But the biggest I think change is for items that are predominantly iron and steel, the minimum is now 95%, domestic content. Now there is an exclusion for commercial off the shelf fasteners in those, but to the extent that you’re talking about something that’s custom made iron and steel, and I think this will predominantly affect construction supplies, you now have a very high domestic content requirement.
Tom Temin: Interesting. So I guess for shipbuilding, there’s a lot of steel in that. And so you can’t get the beams and whatever the pig iron and so forth from Korea, for example, is a major supplier of this stuff. And for construction, it’s beams that buildings are made of. So does that mean that if you hire a construction company for federal work, that company has to use US made steel?
Joe Petrillo: That will probably be the case in the construction area. There are exceptions, which I’ll get into in a minute. But one of the other changes that I think is significant is the price evaluation penalty. The Buy American Act is not an outright prohibition on items that do not meet the domestic content requirement. Instead, there’s a price evaluation penalty associated with purchasing the non-domestic item. And that penalty for years was 6% for purchases by everyone other than DoD, and 12% if the domestic offer was a small business. Those percentages have now jumped to 20%, and 30% for small business competition. DoD always had an extremely high penalty of 50%, and that stays where it was.
Tom Temin: What is a price penalty? How does it work?
Joe Petrillo: Well, in evaluating the price of a domestic content supply that’s being offered or construction that’s being offered, versus one that doesn’t meet the domestic content requirements, you add that percentage to the price of the non-domestic item and use that in the price comparison. If you’re talking about a low bid situation, this can be very significant.
Tom Temin: Sure. So if two bidders each bid, and they both bid $1, if one of them is offering the item that’s too much foreign content, then it now becomes $1.20 or $1.30.
Joe Petrillo: Exactly. And that can disqualify that offer from getting the award.
Tom Temin: See how good I am at math in my head.
Joe Petrillo: You’re doing great, Tom. So let me let me also explain, though, that we’re talking here about the Buy American Act. And a lot of procurements are subject not to the Buy American Act, but to the Trade Agreements Act. In general, when you have supplier service contracts that exceed $182,000, they’re going to be subject to the Trade Agreements Act, although there’s an exception to that which is the DoD has carve outs of a lot of their procurements, weapon systems, communication, electronics, things like that, which are not subject to the Trade Agreements Act, but instead to the Buy American Act. So it’s kind of a patchwork quilt of rules. And looking at this and thinking about how it interacts and the general goals of increasing domestic procurement without hurting our own international standing in terms of trade, it makes you wonder whether this isn’t a good time to look at the whole system top to bottom and try to make something that works a little better.
Tom Temin: And so the Buy American Act means that an item above $182,000, there’s different rules. So getting back to the example of a new building, that’s going to be more than $182,000.
Joe Petrillo: Well, the thresholds are different for construction. But in any event, you’re right. There’s a blunted impact of the Buy American Act because of the Trade Agreements Act. On the flip side of that the Trade Agreements Act is supposed to open up a lot of foreign markets to American businesses. And once again, you have the trade off, you exclude others at the cost of being excluded yourself, or you open up and face foreign competition.
Tom Temin: And just getting back to that little detail about domestic COTS fasteners, commercial off the shelf fasteners are not covered by the iron and steel minimums. That would be like a package of staples or something could come from China.
Joe Petrillo: Well, you know, in the construction business, you’re probably talking about bolts and screws and things like that.
Tom Temin: And what we have you you’ve taken a look at the just out of GAO statistics on protests, they came out with that I guess about a month ago for fiscal 2020. Any interesting trends, because the numbers, the total numbers of protests, seem to be about on par with prior years?
Joe Petrillo: Yeah, there’s no major change, there’s a slight decrease in total bid protest filings. If you look at the trend, though, since FY 2016, protests are down by more than 20%. So that that’s of some significance. Interestingly, the sustained rate remains the same, it’s been extremely consistent about 15%. But the effectiveness rate has bumped up. And the effectiveness rate consists of situations in which the protester gets some relief. And it includes situations where the agency takes corrective action as well as those where it loses the protest and has to take action in that sense as well. The 51% effectiveness rate is very high, higher than it’s been generally, which has been consistently in the mid to high 40s. And it’s interesting to speculate why that might be. And I think there’s a clue also in the fact that this past fiscal year, there was a much more heavy use of alternative dispute resolution. And the number of cases resolved by alternative dispute resolution have gone up to 124 from 40 in the prior fiscal year. And that suggests to me that with the stresses we’ve had, because of the pandemic, perhaps folks are concentrating more on efficiently resolving protests. If you have a problem with your procurement, I think the agency has been more inclined to fix it than fight it. And that’s probably resulted in quicker resolutions and to some extent more effectiveness for protesters.
Tom Temin: Joseph Petrillo is a procurement attorney with Petrillo and Powell. Thanks so much.
Joe Petrillo: Thank you, Tom.