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“Buy-American” and Davis-Bacon Requirements for Stimulus-Funded Projects: New Federal Guidance Has Arrived

In an advisory circulated in late February of this year, McKenna Long & Aldridge LLP (“MLA”) noted that the considerable grant funds to be made available under the federal stimulus package, known as the American Recovery and Reinvestment Act (“ARRA”), would come with substantial strings attached. On April 23, the Office of Management and Budget (“OMB”) issued detailed interim guidance to agencies in implementing ARRA provisions related to two major topics: (1) domestic sourcing (“Buy American”) requirements that apply to certain iron, steel, and manufactured goods; and (2) the wage rate requirements that apply to certain projects pursuant to the federal Davis-Bacon Act. The interim rule will be incorporated into 2 CFR as Part 176. Comments on this guidance are invited and should be received no later than June 22, 2009.¹

The “Buy American” Requirements

On March 31, 2009, the Obama Administration published a new Federal Acquisition Regulation (“FAR”) to implement the well-publicized Buy American restriction in § 1605 of ARRA. The interim FAR states that all steel, iron, and manufactured goods used as construction material in the construction, alteration, maintenance, or repair of a public building or a public work must be produced or manufactured in the United States. In the following week, on April 3, 2009, OMB published guidelines clarifying that state-awarded construction projects must follow the same requirement. 

ARRA requires the Buy American restriction to comply with U.S. obligations under international agreements, including the Free Trade Agreements (e.g., NAFTA) and the World Trade Organization Government Procurement Agreement (“WTO GPA”). These require the U.S. to waive Buy American restrictions and to treat products from those countries as if they were domestic. Federal contractors can purchase iron, steel, and manufactured goods from countries with which we have a Trade Agreement (e.g., Canada, Mexico, Australia) or countries that are members of the WTO GPA (e.g., European Union members, Japan and Korea). This waiver applies when the prime contract has an estimated value of $7,443,000 or more. For subcontractors, the agreement with the prime contractor should include a FAR clause identifying whether the Buy American restriction is waived due to an international agreement.

Notably, the U.S. does not have an international agreement with Brazil, China, or India. Iron, steel and manufactured goods from these countries cannot be used in a federal contract unless another exception applies, such as (1) nonavailability, in the absence of sufficient and reasonably available commercial quantities of a satisfactory quality; (2) unreasonable cost; or (3) where application of the Buy American restriction would be inconsistent with public interest. 

Many U.S. states must also comply with the international agreements and accordingly waive the Buy American restriction. Each state, however, differs with respect to which international agreement applies (if any) and which state entities must follow the international agreement. The April 3, 2009, OMB guidance contains an Appendix identifying the rules that apply to each state. State contractors should also be aware that U.S. obligations under international agreements do not apply to mass transit and highway projects funded with Federal funds. These projects cannot use iron, steel, or manufactured goods from another country unless a specific waiver is granted.   

The Davis-Bacon Wage Rate Requirements

The Davis-Bacon Act, 40 U.S.C. §§ 276a-276a-7, provides that locally prevailing wages and fringe benefits must be paid to laborers and mechanics employed on federally funded contracts exceeding $2,000 that may involve construction, alteration, maintenance or repair. The new interim rule clarifies that all programs or activities funded by ARRA and meeting the Davis-Bacon criteria will be subject to the requirements of Davis-Bacon. The awarding agency must include the following provision in issuing grant announcements or requesting applications:

“Section 1606 of the Recovery Act requires that all laborers and mechanics employed by contractors and subcontractors on projects funded directly by or assisted in whole or in part by and through the federal government pursuant to the Recovery Act shall be paid wages at rates not less than those prevailing on projects of a character similar in the locality as determined by the Secretary of Labor in accordance with subchapter IV of chapter 31 of title 40, United States Code.

Pursuant to Reorganization Plan No. 14 and the Copeland Act, 40 U.S.C. 3145, the Department of Labor has issued regulations at 29 CFR parts 1, 3, and 5 to implement the Davis-Bacon and related Acts. Regulations in 29 CFR 5.5 instruct agencies concerning application of the standard Davis-Bacon contract clauses set forth in that section. Federal agencies providing grants, cooperative agreements, and loans under the Recovery Act shall ensure that the standard Davis-Bacon contract clauses found in 29 C.F.R. 5.5(a) are incorporated in any resultant covered contracts that are in excess of $2,000 for construction, alteration or repair (including painting and decorating).”

The foregoing language in ARRA substantially expands the scope of Davis-Bacon, as illustrated below. 

Opponents of this significant expansion in coverage argued that the Davis-Bacon wage rates would artificially inflate labor costs, and therefore make ARRA-funded projects more expensive for communities. However, there was substantial support for expanding this Depression-era legislation in the new Congress. The broad language of the application clause — which sweeps into all Davis-Bacon projects “funded in whole or in part” by ARRA — will make it almost impossible for fund recipients to employ such time-honored avoidance strategies as subgranting federal funds to non-profit corporations. Careful phasing or segmenting of projects, with separate contracts for each phase clarifying whether or not ARRA funds are used, and careful segregation of funds, remains the best avenue for grant recipients and contractors who desire to avoid application of the Davis-Bacon Act wage and benefit calculations to their public works.

¹ Comments may be sent to the Office of Management and Budget by accessing http://www.regulations.gov and typing “Recovery Act Guidance” (in quotes) in the Comment or Submission search box. Then click Go and follow further instructions.