The White House Office of Management and Budget (OMB) has released proposed revisions for its Guidance for Grants and Agreements to support implementation of the Build America, Buy America Act provisions of the Infrastructure Investment and Jobs Act (IIJA). 

Released in follow-up to President Biden’s 2023 State of the Union, the OMB writes that the proposed revisions are “intended to improve uniformity and consistency in the implementation of ‘Build America, Buy America’ (BABA) requirements across the government.” Specifically, this means that federal agencies “must ensure that none of the funds made available for a federal financial assistance program for infrastructure may be obligated for a project unless all of the iron, steel, manufactured products, and construction materials used in the project are produced in the United States.”

Highlights of the proposed guidance

The OMB proposes:

• A new section for the uniform grant rules, 2 CFR Part 184, which would provide guidance for federal awarding agencies on how to implement the Buy America Preference for infrastructure projects.
• Using the definition of “cost of components” that the Federal Acquisition Regulation (FAR) uses for federal procurement, to help provide consistency for industry to meet one standard in determining the cost of components of manufactured products.
• Distinguishing manufactured products from construction materials. Specifically:
  
  • Manufactured products are defined as “articles, materials, or supplies incorporated into an infrastructure project that: (1) Do not consist wholly or predominantly of iron or steel or both; and (2) Are not categorized as a construction material.”
  • Construction materials are defined as articles, materials, or supplies incorporated into an infrastructure project that consist of only one or more of the following: 1) Non-ferrous metals, 2) Plastic and polymer-based products, 3) Composite building materials, 4) Glass, 5) Fiber optic cable, 6) Optical fiber, 7) Lumber, and 8) Drywall.

In addition, the OMB is seeking comment on:

• What other construction materials should be included in proposed guidance, including the following construction materials and their manufacturing processes: 1) Coatings (e.g., paint, stain, and “other coatings applied at the work site”), 2) Brick, and 3) Engineered wood products
• Whether to adopt a definition of “predominantly iron or steel items”  as contained in the FAR, which defines a product as “predominantly iron or steel” if the cost of the iron and steel content exceeds 50% of the products’ components’ total cost.

Comments on the proposed rules are due March 13, 2023.

What does CohnReznick think?

While the construction industry supports the principles of the Buy America provisions, there is real concern about the capacity of U.S.-based manufacturing to produce the raw materials needed to meet the accelerated demand that will be created by IIJA. The U.S. spent years closing manufacturing facilities and sourcing raw materials from less expensive international sources. Will new production facilities be in a position to meet this new demand? If yes, what will the impact be on material pricing and timeliness of delivery? The government recognized these challenges and granted extensions on the timing of implementation. However, those exemption periods have run out, and it is uncertain if the domestic capabilities have had the time to catch up.

What we are recommending is that our clients clearly establish the funding for projects they will be bidding on and ascertain if any of the federal program funds will be part of the financing stack. If it is determined that now or during the duration of the contract, federal program dollars will be utilized, a complete and detailed analysis must be performed of the compliance requirements and demands. The Buy America provisions and the prevailing wage impact have to be evaluated. When taking off the material components, the applicability of the Buy America provisions to the required raw materials must be determined.

Extra Perspective: Richard Meene, a principal in CohnReznick’s Government Contracting practice, noted that these evaluations are going to be particularly important when applying the “Buy America” lens to the provisions of the recent infrastructure spending acts, because the applicable criteria will depend upon the type of material or item and the geography of its origin, including whether it was supplied by a Trade Agreements Act country. But, he advised, don’t be too quick to count out an item that on first analysis appears to not meet Buy America requirements: There is a waiver process that provides the government significant flexibility to make exceptions, for reasons such as avoidance of extreme cost of domestic items, favoring disadvantaged communities, and other economic and social concerns. Where appropriate, organizations should prepare justifications and waiver requests as soon as possible. There is little guidance as to precisely what will qualify for waivers; however, from the administration’s messaging, it seems that waiver requests for proposals that demonstrate delivery of benefit to “Disadvantaged Communities” as defined in the IIJA will have elevated chances of success.

Finally, once all these applicability factors have been evaluated, an assessment needs to be completed to establish the availability and cost of these domestically manufactured construction materials. Contractors should be working with owners to agree on critical materials and to establish availability to pay for prepayment for stored-in-place material to make sure that critical path items will be available when needed. If the owner will not advance payments, the financing costs must be factored into their cost estimation.

The old saying “With great opportunities comes great responsibilities” will be particularly true as these federal programs roll out. While federal funding is likely to generate tremendous opportunities for contractors, the president has made it clear that he intends to see that projects built with these funds adhere to the labor and material conditions that have been set. Best efforts will likely not suffice. Be certain that as you seek work funded by federal dollars, your organization is up to the compliance and reporting standards that are being set and continue to be refined and developed.

Contact

Jack A. Callahan, CPA, Partner, Construction Industry Leader

732.380.8685