President-elect Trump has promised to use tariffs as economic levers to benefit the U.S. Perhaps strangely, tariffs figure into federal acquisition rules and practices. Lots of things to fulfill federal contracts some from other countries. The Federal Drive with Tom Temin get a detailed look now from Haynes Boone procurement attorney Dan Ramish.

Interview transcript:

Dan Ramish Well, Tom, the Buy America Act does apply to many federal contracts, but depending on the dollar threshold of the contract and whether certain exceptions apply, the Trade Agreements Act may also apply and may call for foreign supplies. Now, there are restrictions under different trade agreements as to what materials can be subject to tariffs, of course. But under the Buy American Act components of end products that are sold to the federal government can also be subject to tariffs. And that’s a common place where it might come into play. So either materials under the Trade Agreements Act where the only consideration is whether the item that’s being sold to the government was substantially transformed in the United States or manufactured in the United States. And there isn’t a look behind the scenes as to what parts or materials might have gone into that end product that’s transformed or manufactured or components subject to the components test under the Buy America Act may also be affected by tariffs.

Tom Temin All right. And since tariffs could widen, then it sounds like a lot of contractors could be subject to higher costs for what they acquire on behalf of the government then. Is that what we’re driving at?

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Dan Ramish Yes. And in many cases, the federal government has long term fixed price contracts where the price that sold to the government doesn’t vary with the contractor’s cost experience. So there are specific mechanisms where the contractor may still be able to recover, but that’s going against the general rule for fixed price contracts.

Tom Temin Okay. So if something does get more expensive as a result of a tariff, you said there are some avenues for relief. What are they?

Dan Ramish So the primary avenue for relief is far 52.229-3, the federal, state and local taxes clause. And that clause provides for relief for after imposed federal taxes. Now, after imposed, importantly, it has a timing component, so it has to go into effect after the contract effectiveness date. So contractors that are proposing or bidding on federal contracts right now might not be able to recover under this taxes clause because the tariffs may go into effect on day one of the Trump administration. And therefore, the contract effect in the state might actually be after the tariffs go into effect.

Tom Temin Right. So you really want your contract in effect before the tariffs, and then if the tariffs hit you, then you’ve got this clause under FAR 52.229-3.

Dan Ramish Yes, that’s right. You also have to provide prompt notice and you have to tell the government that you didn’t include any contingency or reserve to cover the increased cost of the duty.

Tom Temin So the presumption is if there’s already a tariff on something that’s built into the contract as it stands. But if a tariff increases on something that already had a tariff, that would count as something you could get recovery from.

Dan Ramish That’s exactly right. So contractors always have the responsibility to know what taxes apply that factor into their price and to include that in the price. So it’s really changes after the contract is awarded. So contractors that have current fixed price contracts that have already been awarded might be able to recover under this clause. But there are important limitations in addition to the notice and timing.

Tom Temin We’re speaking with Dan Ramish. He’s a procurement attorney with Haynes Boon. And exactly what are the limitations?

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Dan Ramish So the other important limitation is that there is no recovery under the clause for higher domestic prices. So the clause covers duties imposed on foreign goods, but if tariffs on foreign goods result in increases in market prices for U.S. products and materials, then the higher cost of domestic items can’t be recovered. And there was actually a case that addressed the specific issue during President Trump’s first term. Pangea, Inc., ASBCA 62561. The president issued proclamations to impose a 10% tariff on imported aluminum and a 25% tariff on imported steel effective March 23, 2018, and the contractor was not in fact using foreign imported steel. The contract was subject to the Buy American Act and it included 52. 225-9 Buy America Act construction materials. So the contractor was actually using domestic steel, but their cost went up because of the tariffs on foreign steel. U.S. steel manufacturers essentially raised their prices, matching the increases to foreign steel. And Pangea tried to recover the added costs for American steel that were really attributable to the tariffs. And the board denied the claim, ruling that it wasn’t persuaded that an increase in the price of domestic steel resulting from a tariff on foreign steel was a federal tax within the meaning of the tax clause.

Tom Temin Right. That’s kind of shame on the steel industry. The idea of a tariff is to give them a price advantage. And here they were just simply saying, well, we’ll be the same price as what the tariff prices are of our competitors.

Dan Ramish Yes. Well, reacting to the changes in the market, of course, some might say taking advantage, but such is the way of things. And we may well see increases in the cost of American steel if there are new steel tariffs in the second Trump administration.

Tom Temin Right. And this just doesn’t affect China, which is the common country or Russia or something, if we import anything from Russia. He’s talking about Mexico and Canada, countries that not just our adversaries, but also allies. And in many of those cases, those materials are okay under the FAR.

Dan Ramish Yes. And as we talk about, Tom, there are trade agreements, constraints in some of those cases. But in some cases, the administration may try to renegotiate some of those trade agreements. And that may be the case with Canada and Mexico from some of the things we’ve been hearing and reported in the media.

Tom Temin Right. So contractors then should really pay attention to this and watch the tariff activity and really know what it is that they’re buying that could be subject to those tariffs because otherwise you lose, your profits go down in fixed price contract.

Dan Ramish Right. That’s critically important. Of course, we should mention that there are cost reimbursement contracts where the contractor would be able to recover the higher costs as long as it stays within the cost ceiling or the funded amount. But the other element here, Tom, is that it may be possible for contractors to economic price adjustment clauses to capture some of these risks so that they don’t have to price in the contingency.

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Tom Temin Right. So when you are negotiating, you should have that economic price adjustment clause in and try to get the government to agree to that, because of this changed atmosphere where tariffs could come into your materials.

Dan Ramish Yes. And it makes sense for the government as well and for the taxpayer, because otherwise they’re going to be paying for the contingency, which may or may not play out, of course, as we know. You never know in advance exactly what an administration is going to do or how things will develop. So by including an economic price adjustment clause there, you’re taking that contingency out of the equation so that the government doesn’t have to pay for it necessarily unless it comes to bear. And the far says that economic price judgment clauses can be used when there’s serious doubt concerning the stability of market or labor conditions that will exist during an extended period of contract performance and when contingencies that would otherwise be included in the contract price can be identified and covered separately in the contract.

Tom Temin Therefore, variable prices for materials have always been a concern for contractors. Now we just have a new variable that could be introduced in a widespread way, and that’s what people should be aware of.

Dan Ramish Yes, and that kind of widespread risk is exactly the kind of risk where an economic price adjustment makes sense, where it’s not contractor specific, but it may be something that could affect all offers. If there is a constraint there as well, the FAR economic price adjustment clauses generally only limit the amount of adjustment upwards to a total of 10% of the original contract unit price.

Tom Temin All right. Well, whatever happens, make sure you reread FAR section 52. 229-3. That’s the operative clause here.

Dan Ramish Yes. Bottom line, contractors are going to need to pay careful attention to navigate this issue and take each bid and proposal case by case to figure out what makes sense.

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