On April 18, President Trump signed the “Presidential Executive Order on Buy American and Hire American” (the Order), which declares the Executive branch’s policy to buy American goods and rigorously enforce and administer laws governing entry into the United States of workers from abroad.  The Order is keeping with President Trump’s campaign promises regarding hiring American workers and promoting U.S. manufacturing, and signals a renewed focus on domestic sourcing requirements as well as the likelihood of greater restrictions on work visas for non-U.S. citizens.

Overview.  For U.S. government contractors, the Order’s bite comes from its commitment to the “immediate enforcement and assessment of domestic preferences according to the Buy American Laws.”  As used in the Order, the term “Buy American Laws” is broad and includes “all statutes, regulations, rules, and Executive Orders relating to Federal procurement or Federal grants including those that refer to ‘Buy America’ or ‘Buy American’ that require, or provide a preference for, the purchase or acquisition of goods, products, or materials produced in the United States, including iron, steel, and manufactured goods.”

Under that umbrella, the Order directs the heads of all agencies, among other things, to:

  1. assess the monitoring of, enforcement of, implementation of, and compliance with Buy American Laws within their agencies;
  2. assess the use of waivers within their agencies by type and impact on domestic jobs and manufacturing; and
  3. develop and propose policies for their agencies to ensure that, to the extent permitted by law, federal financial assistance awards and federal procurements maximize the use of materials produced in the United States, including manufactured products; components of manufactured products; and materials such as steel, iron, aluminum and cement.

With regard to the granting of waivers or exemptions from the Buy American Laws, the Order stipulates that, “to the extent permitted by law, public interest waivers from Buy American Laws should be construed to ensure the maximum utilization of goods, products, and materials produced in the United States.”  And, before granting a public interest waiver, the relevant agency is directed to “take appropriate account of whether a significant portion of the cost advantage of a foreign-sourced product is the result of the use of dumped steel, iron, or manufactured goods or the use of injuriously subsidized steel, iron, or manufactured goods.”

Separately, the Secretary of Commerce and the U.S. Trade Representative are directed to assess the impacts of all U.S. free trade agreements and the World Trade Organization Agreement (the WTO Agreement) on Government Procurement on the operation of Buy American Laws, including their impacts on the implementation of domestic procurement preferences.

Impact on Government Contractors.  Although the Order does not create any new domestic preference rules, it clearly articulates a renewed commitment to enforcing those that are already in place.  Ramped up enforcement could impact U.S. government contractors in a number of ways.  Among the areas to keep an eye on are the following:

  • Increased Oversight by Contracting Officers. In the immediate wake of the Order, contracting officers (COs) can be expected to refocus their attention on including domestic sourcing provisions in government contracts and zealously enforcing those obligations.  COs are also less likely to grant public interest waivers from those requirements.

In response to this renewed interest, government contractors should review the domestic sourcing requirements of their existing contracts and any newly issued requests for proposal (RFPs).  In particular, contractors should confirm that the appropriate domestic sourcing clause or clauses are inserted into the subject RFP or contract and that all representations regarding the origin of goods supplied to the government are accurate.

The Buy American Act (BAA), for example, applies to many contracts for the U.S. government’s acquisition of supplies and construction materials.  Where the BAA applies, it creates a price preference for domestic products over foreign products.  The Trade Agreements Act (TAA), however, preempts the BAA for any federal acquisition of products and services valued above a threshold set by the U.S. Trade Representative – which is currently set at $203,000 for most contracts.  Where the TAA applies, the government may purchase only products that (1) are wholly grown, produced, or manufactured in, or (2) have been “substantially transformed” in, the United States or another “designated country.”

The requirements of the BAA and TAA – and their corresponding impact on contractors – therefore, vary significantly.  And the potential repercussions of violating these clauses in a U.S. government contract cannot be overstated.  Violations of the BAA or TAA can expose government contractors to severe penalties, including, but not limited to, False Claims Act liability and suspension and debarment.  Accordingly, with the U.S. government paying more attention to the inclusion and enforcement of domestic sourcing provisions, U.S. government contractors, now, more than ever, need to ensure that their contracts delineate the proper clauses for application – and need to steadfastly adhere to the applicable requirements.

  • Potential Changes to the Cost of Components and/or Substantial Transformation Tests. Currently, the BAA uses a two-part test to define a “domestic end product” or “domestic construction material.”  Namely, the subject product/material must be manufactured in the United States and satisfy a formula based on the cost of domestic components.  The component test, however, has been waived for acquisition of commercially available off-the-shelf items.  Under the TAA, the test to determine country of origin is “substantial transformation” (i.e., transforming an article into a new and different article of commerce, with a name, character, or use distinct from the original article).

The Order, however, signals a potential impending change to the BAA and TAA domestic sourcing formulas.  In particular, by directing the assessment of the impacts of U.S. free trade agreements and the WTO Agreement on the operation of Buy American Laws, and by directing agency heads to develop and propose policies to ensure that federal procurements maximize the use of materials produced in the United States, including components of manufactured products, Trump seems to be hinting his disapproval for the current requirements to his executive agencies, Congress, and U.S. government contractors alike.  How those requirements will change (if at all), will likely depend upon the feedback that the administration receives from the agency heads at the 150-day mark, though it seems reasonable to expect that the standards for compliance could be tightened.

  • Train, Train and Retrain. In our experience, when government contractors run afoul of domestic sourcing requirements, it is typically because employees are unaware of or do not fully appreciate the applicable requirements.  With the administration, agency heads, and COs turning their attention to these requirements, government contractors ought to do the same.  Policies and procedures should be dusted off and reviewed to ensure they include clear instructions for compliance with domestic sourcing clauses.  And the personnel responsible for ensuring compliance, such as those in manufacturing and supply chain, should be retrained on the domestic sourcing restrictions in the company’s government contracts and the company’s directions for adhering to those provisions.