By Christopher Ward and Robert Thompson, K2 Integrity
Passing the historic $1 trillion Infrastructure Investment and Jobs Act (IIJA) in November 2021, which allocates more than $550 billion in new infrastructure spending, was an early priority of the Biden administration. The IIJA, which includes the Build America, Buy America Act (BABA), contains numerous provisions aimed at expanding, strengthening, and adding consistency to existing domestic sourcing regulations. These changes—further complicating the landscape in an already murky area of regulation—could potentially cause disruption and increased risk for owners and sponsors of construction and infrastructure projects that are recipients of federal funding.
Here’s what you need to know about the potential impact of the IIJA and how to ensure you have the right compliance monitoring programs in place to navigate the evolving landscape:
Buy America: Then and Now
BABA establishes a domestic content procurement preference for all infrastructure projects receiving federal funding and requires the head of each federal agency to “ensure that none of the funds made available for a federal financial assistance program for infrastructure, including each deficient program, 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.” This new guidance, which went into effect on 14 May 2022, applies to all federal financial assistance, whether or not it is funded through the IIJA. Federal agencies may provide waivers for several reasons, such as when an important product is not made domestically, when domestic sourcing would cause an overall project cost increase of greater than 25 percent, or when it is otherwise not in the public interest.
These provisions have been added on top of two existing federal domestic sourcing requirements, the Buy American Act and the Buy America Act, which are frequently confused and often used interchangeably. Both seek to promote the purchase of domestic goods and materials. The Buy American Act, originated in the 1930s and refined over the years, applies only to direct purchases made by the federal government valued at more than $10,000. The Buy America Act dates to 1982, typically applies to mass transit infrastructure procurements receiving federal funding, and covers certain types of material purchases such as iron, steel, and manufactured products. Cost thresholds, impacted materials, and specific requirements vary depending on the federal government agency that awards the funds. In addition to these federal requirements, construction and infrastructure projects in states such as New Jersey, New York, and Illinois must also comply with state-specific requirements.
While previously Buy America applied primarily to transportation infrastructure, BABA expands the types of infrastructure projects covered. BABA’s definition of infrastructure covers, at a minimum, the “structures, facilities, and equipment” for:
- roads, highways, and bridges
- public transportation
- harbors and other maritime facilities
- intercity passenger and freight railroads
- freight and intermodal facilities
- water systems, including drinking water and wastewater systems
- electrical transmission facilities and systems
- broadband infrastructure
- buildings and real property
Previously, Buy America requirements applied mainly to iron, steel, and certain manufactured goods. BABA expands coverage to additional materials, including:
- non-ferrous metals
- plastic and polymer-based products
- optical fiber
- drywall, and certain other construction materials such as lumber
BABA also adds to President Biden’s January 2021 Executive Order by directing the Office of Management and Budget (OMB) to establish a “Made in America” Office within OMB to “maximize and enforce compliance with Made in America laws.” Federal agencies have been asked to coordinate their “terms and conditions” for effectuation of BABA requirements with the Made in America Office prior to incorporating them into applicable awards.
The Biden administration has clearly made domestic sourcing a priority. In a January 2021 press release, the White House stated: “Federal law requires government agencies to give preferences to American firms, however, these preferences have not always been implemented consistently or effectively.” The Made in America Office will aim to standardize domestic sourcing policies across federal agencies and reduce the use of waivers and has stated it will make all granted waivers available online for the public to “review, scrutinize, and assess.”
Implications for Recipients of Federal Funds
The broadening of Buy America coverage under the IIJA and BABA will likely present various complications for owners of construction and infrastructure projects. In addition to ensuring compliance with law’s provisions internally, they must also contend with external issues:
- Supply chain concerns. Schedules could be impacted due to supply chain issues caused by limited options for domestic sourcing.
- Increased project costs. Due to the higher cost of American labor and materials, along with the increased market power of domestic producers, the price of construction projects will likely only continue to rise.
- Onboarding of new members of the supply chain. Suppliers of nonferrous materials, likely unfamiliar with existing Buy America requirements, will need to be educated and vetted to ensure they are complying with fine print definitions of “production” and “manufacturing.” Industries related to electric vehicles, broadband, and energy grids, which previously may not have been subject to domestic sourcing requirements, will now have to get up to speed. The expanded scope of subjected materials will have huge impacts on project sourcing, procurement, and costs. A 2020 estimate by the FHWA of the distribution of costs on federal aid highway construction contracts in excess of $1 million found that steel only accounted for 5% of project costs.
- Increased enforcement. Compliance often “flows down” from agencies to specific projects, and ultimately rests at the project level. Penalties for noncompliance (both intentional and unintentional), however, can include removal of federal funding from projects and corrective action and rework leading to increased project costs. In many cases, noncompliance has resulted in criminal charges and fines. It is still somewhat unclear how enforcement will be implemented, but the OMB has indicated that “agencies should proactively engage with oversight entities, including Inspectors Generals and the U.S. Government Accountability Office.” Project owners should expect audits, records requests, and inquiries into documentation of compliance on their projects.
Next Steps: Implementing a Robust Compliance Program
In a changing landscape of regulations, it is imperative that expectations and requirements are clearly defined, including at the project level of infrastructure projects. Ultimately, a robust compliance program is key to ensuring a successful project outcome. Some components of such a program include:
- Provisions for compliance should be clearly defined in contractual documents, and contractors should be required to provide an outline or plan detailing how they will ensure and track compliance (i.e., Buy America Log) early in the project, or even in their project bids.
- Roles and responsibilities should be clearly defined so that compliance can be effectively managed and any necessary mitigation can be implemented in a timely manner.
- Contractors should assign Buy America tracking and oversight to competent, experienced quality assurance and quality control individuals, and Buy America compliance checks should be incorporated into project workflows, especially purchasing and quality control. Buy America should not be an afterthought on complex construction projects—ample resources should be assigned to this area.
- Steps should be taken to ensure that proper records are kept by those tasked with the tracking of domestic sourcing compliance, including contractors, consultants, and project management. Record keeping is of paramount importance, especially if an audit is performed, and project quality assurance/quality control programs should clearly indicate the information that should be retained.
- Owners should task bidders and contractors to identify suppliers and long lead items as early as possible to mitigate potential delays.
- Audits should be performed at the project level to ensure compliance with controls that have been established.
The use of an independent monitor can provide expertise to ensure that the goals outlined above are achieved. Firms that supply these monitoring services, such as K2 Integrity, have experience helping clients design and implement robust domestic sourcing compliance programs and can provide continued assistance in this evolving environment.
To learn more about K2 Integrity’s compliance monitoring services, please contact Christopher Ward or Robert Thompson.