Federal Acquisition of Foreign Supplies and Services

Throughout this installment series we've tried to unravel some of the tangled rules and conventions of government contracting. There is perhaps no topic, however, that is a better candidate for unraveling than today's.

Foreign contracting in the U.S. is an important subject not only if you work for a foreign-owned company, but also if you're with a domestic company selling products manufactured (in whole or in part) outside of the U.S.

When a company has won a federal contract selling a foreign-made product, losing vendors may find themselves asking, What about the Buy American Act? Doesn't that apply? What's going on here?

In truth, the Buy American Act doesn't carry as much weight as one might assume. Let's take a closer look.

Scope of the Buy American Act

Congress passed the Buy American Act (BAA) in 1933 to encourage purchasing of American-made goods. The act was altered significantly in 1979 when Congress passed the Trade Agreements Act (TAA).

The Trade Agreements Act applies to an acquisition -- and usurps application of the Buy American Act -- for supplies or services if the estimated value of the acquisition exceeds certain thresholds. Currently, the thresholds are as follows:

  • Procurement of supplies and services -- $169,000
  • Procurement of construction services -- $6,481,000
These threshold amounts change about every two years to reflect the value of the U.S. dollar against the currencies of other nations. The estimated value includes the value of all contract options.

To fall under a TAA exemption, a supply or service must originate from a "designated country." To see a list of such countries, go to FAR 25.003, Definitions. It's a large list.

Ireland is an example of a designated country. Thus, in a federal procurement of a supply or service from Ireland with an estimated value above $169,000, or of construction services from Ireland with an estimated value above $6,481,000, the BAA does not apply -- i.e., the company selling the supply or service is treated like an American company.

The North American Free Trade Agreement (NAFTA) has a similar effect on the Buy American Act, except that Canada and Mexico receive even more favorable treatment. Under NAFTA, the thresholds are $25,000 for Canadian supplies and $56,190 for Mexican supplies. The NAFTA threshold for construction acquisitions is $7,304,733 for both countries.

Buy American Penalties

It's important to remember that, when it applies, the Buy American Act does not stop a federal buyer from purchasing a foreign product. Instead, the buyer must add an evaluation penalty to the cost of a product that is not a "domestic end-product." A "domestic end-product" is one that is (1) manufactured in the U.S., and (2) composed of at least 50 percent U.S.-made components.

Civilian agency buyers must add a 6-percent penalty to an offered price for foreign-made products or a 12-percent penalty if the competing domestic vendor is a small business or operates in a labor surplus area. Defense agency buyers add a 50-percent penalty to the foreign company's offered price.

After a buyer tacks on such a penalty to the cost of the foreign-made product, he or she might still determine of course that the company offering the product is the low offeror and, therefore, entitled to an award.

But the penalties make winning a lot less likely. Not surprisingly there is great incentive to classify products as American-made. When a product is made up of a number of components manufactured in more than one country, the determination can get a bit complicated. When in a gray area, a vendor will typically err on the side of its self interest and certify the product as "American-made." A losing vendor that believes the winning vendor improperly classified its product has the right to protest the certification.

Trade Agreements Act

Again, the Trade Agreements Act applies (and supersedes the Buy American Act) to procurement of supplies and services over $169,000 and construction services over $6,481,000.

Congress passed the TAA to meet certain requirements under the General Agreement on Tariffs and Trade (GATT). The TAA requires federal agencies to treat the products of countries that have signed the GATT's Government Procurement Code (GPC) as favorably as those produced in the U.S.

The Trade Agreements Act classifies three types of products:
  • American-made: produced in the United States.
  • Designated country end products: produced in a country that has signed the GPC.
  • Non-designated country end products: produced in a country that has not signed the GPC.
If the TAA applies, a vendor must certify which one of the three categories the particular procured product falls under. If the product falls under the third category (e.g., product manufactured in Taiwan, a non-designated country), the buyer is not allowed to acquire the product.

The first and second categories are treated the same -- i.e., no penalty is added to the cost of products from a "designated country."

The following are exempt from application of the TAA:
  • Acquisitions set aside for small businesses,
  • Acquisitions of arms, ammunition, or war materials, or purchases indispensable for national security or for national defense purposes, including all services purchased in support of military forces located overseas,
  • Acquisitions of end products for resale,
  • Acquisitions of products or services from Federal Prison Industries, Inc. and nonprofit agencies employing people who are blind or severely disabled,
  • Certain sole source acquisitions,
  • Acquisitions of automatic data processing, telecommunications and transmission services, except enhanced (i.e., value-added) telecommunications services,
  • Research and development acquisitions,
  • Acquisitions of transportation services (including launching services, but not including travel agent services),
  • Acquisitions of utility services.
FAR 25.401

With the production of products going increasingly global, it becomes more and more important to know the rules on foreign product contracting. We hope you've found this latest installment useful in sorting through.

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