Government Contracts

In his inaugural address, and in his recent address to Congress, President Trump declared that he would rebuild the country with “American hands and American labor” following two simple rules: “Buy American and hire American.”¹ Is there authority and precedent for doing this? The answer in federal financing of procurements is—yes; but the how remains an unknown. The following peers into the future and provides some ways to answer the how.

Precedent for an Unprecedented Administration

Substantial precedent supports executive power to regulate the actions of government contractors. In AFL-CIO v. Kahn, the Court of Appeals for the D.C. Circuit found that the executive branch’s powers included creating President Nixon’s federal procurement compliance program to deny government contracts to bidders that did not meet certain voluntary wage and price controls.² In upholding that program, the court found that when the executive branch relied upon powers delegated to it by congressional legislation (in that case, the Federal Property and Administrative Services Act ³), executive branch authority was at its greatest. Kahn and similar precedents raise the question of what existing legislative delegations President Trump could rely upon to make sweeping domestic preference changes within the procurement sphere.

Obvious examples of domestic preference programs include the Buy American Act, the Trade Agreements Act, and the transportation sector’s “Little Buy America” requirements. This existing legislative authority, however, comes with limitations and drawbacks. Other approaches may require executive orders, subject to court challenge, or additional legislation. Predicting what will occur with a Trump Administration is a daunting task, but here is our quick best glimpse into that future.

Buy American Act and Trade Agreements Act

One source of procurement authority the Trump Administration might use to encourage domestic production and sourcing is the Buy American Act (“BAA”).⁴ Under the BAA, acquisitions above the micro-purchase threshold (currently $3,500 for most items) must be manufactured in the United States, and at least 50% of the cost of components must be spent for U.S. component content.⁵ Although there are exceptions (such as elimination of the latter component test for commercial off the shelf items), this statute imposes a relatively stringent domestic preference requirement.⁶

However, the Trade Agreements Act (“TAA”)⁷ in effect relaxes the BAA by waiving BAA requirements for acquisitions over certain thresholds (generally $191,000) for any items manufactured (“substantially transformed”) in the many foreign nations with which the United States has a qualifying trade agreement.⁸ Most prominently, these include Canada, Mexico, the United Kingdom, Germany, and Japan—but not China or India.⁹

Furthermore, the TAA grants the president broad authority to grant BAA waivers or to lift existing BAA waivers.¹⁰ President Trump could potentially use this authority as part of a trade negotiation to eliminate the existing waivers under the BAA/TAA for products from, for example, Mexico, or another currently TAA-qualified nation. Conversely, he could offer BAA waivers—which in effect treat imported items as though they were made in the United States—to other countries as a carrot in other trade negotiations.

Analogous Transportation Sector “Little Buy America” Requirements

The new administration might also look to the “Little Buy America” programs in federally subsidized highway, airport, and transit projects for opportunities to impose new domestic sourcing requirements upon contractors. These additional Little Buy America programs require the government to prefer U.S.-made products when partially or fully funding certain infrastructure, highway, and transit projects, such as those administered by the Federal Aviation Administration,¹¹ Federal Highway Administration,¹² and the Federal Transit Administration.¹³ Each of these federal-subsidy programs has its own set of rules and exceptions to Little Buy America requirements that the new administration may consider tweaking to encourage more domestic production.¹⁴

For example, certain federally subsidized transit projects mandate (with various exceptions) that final assembly must occur in the United States ¹⁵ and that the cost of components produced in the United States must be more than 60% of the cost of all components.[16] These domestic source requirements already have an enormous impact on the sourcing of supplies used in federally subsidized transit projects and strongly encourage production in the United States. Because suppliers in that sector have established supply chains and U.S. facilities based on the existing stringent rules, significant rule changes could result in less competition and higher costs. However, the domestic sourcing rules in the transportation sector may provide fertile analogies the Trump Administration could seek to apply in other sectors to foster U.S.-based manufacturing.

The Limitations and Potential Drawbacks of Existing Legislation

-  Exceptions for Information Technology and Other Items

The BAA, the TAA, and the Little Buy America transportation programs all include exceptions and, in some cases, exceptions to the exceptions. While a detailed discussion of those exceptions is outside the scope of this article, current rules specifically exclude “information technology that is a commercial item” from Little Buy American requirements.¹⁷ There are also exceptions in the Little Buy American regulations for other items that the U.S. government has found to be unavailable in sufficient quality and/or quantity to justify imposing restrictions.¹⁸ Thus, existing legislation and rules provide only incomplete coverage for the policy of “Buy American and hire American.”

-  The Potential for Higher Costs—The Domestic Preference Premium

Although encouraging procurement from production facilities in the United States is a laudable goal, domestic sourcing can raise costs; to the extent U.S.-sourced products cost more than foreign counterparts, requiring American materials increases costs to the government. If the Trump Administration strengthens domestic preference requirements, contractors, and ultimately taxpayers, will face increased costs for performance under government contracts. Indeed, increased costs and related sourcing difficulties may discourage commercial entities from seeking government contracts altogether—a reduction in competition that could negatively impact the price and quality of goods and services procured by the government.

-  Prospective Application Only

It is unlikely that any changes made by the Trump Administration would affect procurements already underway. But the federal contracting community will want to monitor how the administration’s emphasis on retaining or resuscitating domestic manufacturing may affect future procurements and to adjust proposal and contracting strategies accordingly.

The Prospects for Additional Legislation

In addition to unilateral action from the Trump Administration, legislators have already filed bills that would restrict or eliminate certain exceptions within the BAA, the TAA, or the Little Buy America laws.¹⁹ If enacted, these bills would broaden the programs in line with the general objectives of President Trump’s policy.

The Future and What Can Be Done Now to Prepare for It

Given President Trump’s public statements on buying and hiring American, and such legislative initiatives, companies serving the U.S. government would do well to evaluate their sourcing methods and production strategies not only in light of current rules, but also in light of potentially stricter enforcement of existing provisions and potential additional restrictions that could arise during the new administration.

But, perhaps the best guidance on how to prepare comes from another Donald—Donald Rumsfeld—who famously said:

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.²⁰

We have taken our best guess, but what President Trump will do in the future is potentially an “unknown unknown.”

This alert was written by Alfred Wurglitz, Nathanael Hartland and Sarah Miller in the Government Contracts practice group at Miles & Stockbridge.

¹ Donald Trump, U.S. President, Inaugural Address (Jan. 20, 2017), available at http://www.cnn.com/2017/01/20/politics/trump-inaugural-address. See Donald Trump, U.S. President, Address to a Joint Session of Congress (Feb. 28, 2017), available athttp://www.cnn.com/2017/02/28/politics/donald-trump-speech-transcript-full-text (“This effort [to rebuild U.S. infrastructure] will be guided by two core principles: Buy American, and Hire American.”).
² 618 F.2d 784 (D.C. Cir. 1979) (en banc).
³ 40 U.S.C. §§ 101-1315 (2012).
⁴ 41 U.S.C. §§ 8301-8305 (2012).
⁵ 48 C.F.R. §§ 2.101, 25.101 (2016).
⁶ 48 C.F.R. § 25.103 (2016).
⁷ 19 U.S.C. §§ 2501-2582 (2012).
⁸ 48 C.F.R. § 25.402 (2016).
⁹ However, Taiwan is included among the WTO Government Procurement Agreement nations. 48 C.F.R. § 52.225-5 (2016).
¹⁰ 19 U.S.C. § 2511 (2012).
¹¹ 49 U.S.C. § 50101 (2012).
¹² 23 U.S.C. § 313 (2012); 23 C.F.R. § 635.410 (2016).
¹³ 49 U.S.C. § 5323(j) (2012); 49 C.F.R. § 661 (2016).
¹⁴ A side by side comparison of the Department of Transportation’s Little Buy America provisions is available at https://www.transportation.gov/sites/dot.dev/file/docs/buy_america_provisions_side_by_side.pdf 
¹⁵ 49 U.S.C. § 24305 (2012).
¹⁶ 49 C.F.R. § 661.11 (2016).
¹⁷ 48 C.F.R. § 25.103(e) (2016).
¹⁸ E.g., 48 C.F.R. §§ 25.103(b)(1)(i), 25.104 (2016).
¹⁹ Isaac Sancken, Lipinski Introduces “Buy American” Bill to Boost Job Creation and Ensure Taxpayer Dollars Are Spent in the U.S., CHICAGO TRIBUNE, Feb. 7, 2017.
²⁰ Donald H. Rumsfeld, U.S. Secretary of Defense, Dept. Defense News Briefing (Feb. 12, 2002), available at http://archive.defense.gov/Transcripts/Transcript.aspx?TranscriptID=2636.

Any opinions expressed and any legal positions asserted in the article are those of the author(s) and do not necessarily reflect the opinions or positions of Miles & Stockbridge P.C. or its other lawyers. This article is for general information purposes and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Because legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel. If you would like additional information on the subject matter of this article, please feel free to contact any of the lawyers listed above. If you communicate with us, whether through email or other means, your communication does not establish an attorney-client relationship with either Miles & Stockbridge P.C. or any of the firm's lawyers. At Miles & Stockbridge P.C., an attorney-client relationship can be formed only by personal contact with an individual lawyer, not by email, and requires our agreement to act as your legal counsel together with your execution of a written engagement agreement with Miles & Stockbridge P.C.