Buy America Requirements for Federally Funded Airports (2013)

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8 II. BUY AMERICAN AND DIRECT FEDERAL PROCUREMENTS All transportation grant Buy America provisions evolved from the BAA, which applies to direct pro- curement of goods by federal agencies.14 An under- standing of the BAA is therefore essential to inter- preting the Buy America provisions in transportation grant programs. This section intro- duces the BAA, with a focus on the elements of the BAA that were later adopted in part by the AIP Buy America provision. These BAA elements are illustrated with examples involving FAA procure- ments and airport construction projects. A. Statutory Language Like most federal agencies, the FAA is subject to the requirements of the BAA.15 This legislation cre- ates a preference for domestic goods, including do- mestic unmanufactured goods (“unmanufactured articles, materials, and supplies that have been mined or produced in the United States”)16 (empha- sis added) and domestic manufactured goods (those “that have been manufactured in the United States substantially all from” domestic components—i.e., from goods that were themselves “mined, produced, or manufactured in the United States”)17 (emphasis added). As a general rule, only such domestic goods 1) “shall be acquired for public use” in the United States (emphasis added),18 or 2) shall be used in the performance of a “contract for the construction, alteration, or repair of any public building or public work” within the United States 19 (emphasis added). “Public building or public work” includes airports, terminals, and other airport facilities belonging to or constructed by the federal government, and “public use” includes the use of airports, terminals, and other facilities by the federal government.20 Therefore, the BAA applies principally to the direct procurement of materials, equipment, or con- structed facilities by the federal government (al- though the text of the BAA does not expressly limit itself to direct procurement by the federal govern- ment21). 14 Pub. L. No. 72-428, Tit. III, 47 Stat. 1520 (Mar. 3, 1933); See also infra Pt. III.B. 15 41 U.S.C. §§ 8301–8305 (2011). 16 41 U.S.C. §§ 8302(a)(1), 8303(a)(1) (2011). 17 41 U.S.C. §§ 8302(a)(1), 8303(a)(2) (2011). 18 41 U.S.C. § 8302(a)(1) (2011) (emphasis added). 19 41 U.S.C. § 8303(a) (2011) (emphasis added). 20 41 U.S.C. § 8301(1) (2011); 48 C.F.R. § 2.101 (2011). 21 See Antilles Cement Corp. v. Acevedo Villa, 408 F.3d 41, 48 (1st Cir. 2005) (stating that “it is at least arguable that the BAA applies to public works contracts entered There are a number of exceptions codified in the BAA statute, which may permit the acquisition or use of nondomestic goods in certain circumstances. These exceptions include: • Public Interest. Where the head of the federal department determines that the acquisition or use of domestic goods is “inconsistent with the public interest.”22 • Unreasonable Cost. Where the head of the fed- eral department determines that the cost of domes- tic goods is unreasonable.23 • Unavailability. Where there are not “sufficient and reasonably available commercial quantities” of domestic goods, and domestic goods “are not of a satisfactory quality.”24 • Insignificance. Where the federal contract value is less than the “micro-purchase threshold,” which is currently $3,000.25 The BAA statute itself does not provide clear definitions, guidance, or numeric thresholds for certain key terms.26 For example, it is unclear from the text of the statute how much assembly must take place in the United States for goods to have been domestically “manufactured” or “produced.” Likewise, the fact that domestically manufactured goods must be comprised “substantially all” from domestic goods indicates that some portion of the finished product may consist of foreign goods, but the text of the statute itself does not specify what percentage of the product may be nondomestic. Also, the text of the statute does not clearly distin- guish between goods that are “produced” domesti- cally and those that are “manufactured” domesti- cally, which could be important in certain cases because the “substantially all” criterion applies literally only to domestically manufactured goods. The statute does not define “manufactured” goods and “unmanufactured” goods, but clearly states that domestic unmanufactured goods include some that are “produced” in the United States, differen- tiating between unmanufactured goods that are “produced” and raw goods that are “mined.” Also into” by state and local governments as well, since the BAA itself purports to apply to all public works contracts). 22 41 U.S.C. §§ 8302(a)(1), 8303(b)(3) (2011). 23 41 U.S.C. §§ 8302(a)(1), 8303(b)(3) (2011). 24 41 U.S.C. §§ 8302(a)(2)(B), 8303(b)(1)(B) (2011). 25 41 U.S.C. §§ 1902(a), 8302(a)(2)(C), 8303(b)(1)(C) (2011). 26 See Textron, Inc., Bell Helicopter Textron Div. v. Adams, 493 F. Supp. 824, 831 (D.D.C. 1980) (“[P]resently there are no uniform guidelines interpreting such critical terms as ‘manufacture,’ ‘end product,’ ‘component,’ or ‘sys- tem’” in the BAA.).

9 with regard to the BAA exceptions, the statute does not clarify what constitutes “unreasonable” cost, “sufficient and reasonably available” quantity, or “satisfactory quality.” Likewise, it is unclear from the statute text itself what might constitute a valid “public interest” exception that does not involve unreasonable cost, insufficient quantity, or unsatis- factory quality. The following discussion illustrates how the statutory language has been clarified over the years by executive orders, regulations, administra- tive decisions, and case law. B. Legislative History The legislative history of the BAA from 1933 has been documented in previous TRB Legal Research Digests,27 and has been acknowledged to be “sparse and confusing.”28 Representative Charles Eaton, speaking in support of the BAA on the House floor, said that it would “foster and protect American industry, American workers and American invested capital.”29 Supporters of the BAA clearly intended to pro- tect the interests of domestic manufacturers of me- chanical and electrical equipment. The BAA was introduced by Senator Hiram Johnson, who stated that the BAA would ensure that German manufac- tured goods, including turbines and generators, would not be used in the construction of the Boul- der Dam.30 Senator Johnson stated that his intent was that the BAA would also prevent assembly in the United States of final products assembled from foreign components.31 Senator Johnson appeared to intend for all components of procured manufac- tured goods to be domestic goods, unless one of the exceptions was satisfied. Supporters of the BAA also clearly intended to protect the interests of domestic suppliers of con- struction materials. Senator James Davis, a former steel worker himself, spoke in support of the BAA on the Senate floor, saying it would “help stem the tide of foreign competition and thus prevent further reduction of wages for the American worker.”32 27 JAYE PERSHING JOHNSON, GUIDE TO FEDERAL BUY AMERICA REQUIREMENTS 4 (Transit Cooperative Research Program, Legal Research Digest 17, 2001); JAYE PERSHING JOHNSON, GUIDE TO FEDERAL BUY AMERICA REQUIREMENTS–2009 SUPPLEMENT 4 (Transit Cooperative Research Program, Legal Research Digest 31, 2010). 28 Allis-Chalmers Corp., Hydro-Turbine Div. v. Fried- kin, 635 F.2d 248, 257 n.17 (3d Cir. 1980). 29 76 CONG. REC. 1896 (1933), cited in Textron, 493 F. Supp. at 830. 30 76 CONG. REC. 3267 (1933); see also DANA FRANK, BUY AMERICAN: THE UNTOLD STORY OF ECONOMIC NATIONALISM 66 (1999). 31 76 CONG. REC. 3267 (1933). 32 76 CONG. REC. 1933 (1933). Senator William King, speaking in favor of the BAA on the Senate floor, stated that the BAA would also create a preference for domestic bulk construction materials, specifically including ce- ment and lumber.33 Therefore, since 1933, Buy America provisions have used common statutory language to govern the procurement of both construction materials and mechanical and electronic equipment. As discussed herein,34 this two-fold role of Buy America provi- sions has generated much of the confusion regard- ing BAA compliance, due to inherent differences in facilities construction and equipment procurement. Nevertheless, this practice of using common lan- guage to apply Buy America requirements to both equipment procurement and construction projects has continued in transportation grant programs such as the AIP. C. Presidential Clarification On December 17, 1954, President Dwight Ei- senhower issued an executive order35 to establish uniform standards for application of the BAA. First, the order clarified that the BAA applies to procurement by executive branch agencies of the Federal Government.36 Second, the order clarified that goods would be “considered to be of foreign origin” only if the costs of foreign components con- stituted at least 50 percent of the costs of the end product.37 This weakened the BAA considerably, since it allowed for a significant portion of the end product to consist of foreign components without any of the statutory BAA exceptions necessarily being satisfied. The stated primary purpose of the executive or- der was to clarify application of the Unreasonable Cost and Public Interest exceptions to the BAA. A bid to supply domestic goods would be “deemed to be unreasonable” or “deemed to be inconsistent with the public interest” if it was higher than a competing bid to supply foreign goods, after apply- ing a surcharge to the portion of the competing “bid or offered price of materials of foreign origin.”38 The standard surcharge would be 6 percent (if including import duties and costs incurred after arrival in the United States)39 or 10 percent (if excluding import duties and costs incurred after arrival in the United States, or if the bid to supply foreign goods 33 FRANK, supra note 30, at 66. 34 See infra Pt. II.E.i. 35 Exec. Order No. 10,582, 19 Fed. Reg. 8,723 (Dec. 17, 1954), available at http://www.archives.gov/federal- register/codification/executive-order/10582.html. 36 Id. § 1. 37 Id. § 2(a). 38 Id. § 2(b). 39 Id. § 2(c)(1)

10 was less than $25,000).40 These surcharges likewise weakened the BAA, since domestic goods would thereafter be considered unreasonable and contrary to the public interest, despite being only 6 to 10 percent more expensive than comparable foreign goods. The head of the federal agency could elect to use a higher surcharge only after submitting a written justification for the higher surcharge to the President.41 The executive order further weakened the BAA by requiring agencies to compare total bid prices after applying the surcharge only to line items corresponding to foreign goods. It is likely that many domestic goods, which would compare favorably in price to similar foreign goods, could be rejected under this approach due to the higher cost of other line items in the domestic bid. The executive order did not provide any addi- tional reasons, except for Unreasonable Cost, where a Public Interest exception to the BAA might be satisfied, implying that those exceptions are one and the same. However, the executive order pro- vided a list of reasons why the head of the federal agency might determine that it is not in the public interest to purchase foreign goods, even where one of the BAA exceptions would otherwise permit it. These reasons included: • Where a “fair proportion” of the domestic bid is attributable to small business concerns.42 • Where the domestic bidder “undertakes to produce substantially all of such materials in areas of substantial unemployment.”43 • Where rejection of foreign goods “is necessary to protect essential national-security interests.”44 The 1954 executive order appeared to weaken the BAA substantially from the original intent of its congressional sponsors. As a result, federal agencies could procure foreign goods that were only moderately less expensive than comparable Ameri- can goods, and could procure goods assembled do- mestically where nearly half of the components were foreign. At the same time, federal agencies could selectively employ a stricter domestic prefer- ence by invoking the public interest. In recent years, the Public Interest exception to the BAA has become associated with exceptions for trading partners.45 In 1979, in the Trade Agree- ments Act (TAA), Congress first granted the Presi- dent the authority to waive the BAA requirements to permit federal procurement of foreign goods from 40 Id. § 2(c)(2). 41 Id. § 5. 42 Id. § 3(b). 43 Id. § 3(c). 44 Id. § 3(a). 45 See infra Pt. II.D.i.5. certain trading partners, including signatories to specific agreements, specifically including the World Trade Organization (WTO) Agreement on Government Procurement and the Agreement on Trade in Civil Aircraft.46 This would generally have the effect of treating goods from those trading partners as domestic goods for purposes of the BAA. However, notably, the United States specifi- cally excluded the FAA from the list of entities cov- ered by the WTO Agreement on Government Pro- curement.47 The FAA was excluded because other signatories were not willing to extend domestic preferences to American-manufactured air traffic control equipment.48 Similar express exclusions for FAA procurements were subsequently inserted into various U.S. free trade agreements, including those with Bahrain, Chile, Morocco, and Oman.49 There- fore, the FAA is not bound to extend domestic treatment to those foreign goods in its direct pro- curements. However, there was no such exclusion for the FAA in the North American Free Trade Agreement (NAFTA) with Canada and Mexico, which expressly requires the U.S. Department of Transportation to treat goods from those countries as domestic for purposes of the BAA.50 D. Federal Regulations i. Federal Acquisition Regulations The current regulations implementing the BAA are in Title 48 (Federal Acquisition Regulations or FAR) of the Code of Federal Regulations (C.F.R.). The FAR provides additional guidance for inter- 46 Trade Agreements Act of 1979, Pub. L. No. 96-39, §§ 301, 303, 93 Stat. 144 (1979). 47 World Trade Org., Agreement on Government Pro- curement, U.S. App. 1, Annex 1, WT/Let/482/Rev. 1 (Oct. 1, 2004), available at http://www.wto.org/english/tratop_e/gproc_e/usa1.doc. 48 TODD B. TATELMAN, CONG. RES. SERV., INTERNATIONAL GOVERNMENT-PROCUREMENT OBLIGATIONS OF THE UNITED STATES: AN OVERVIEW 9–10 n.52 (2005), http://www.fas.org/sgp/crs/misc/RL32211.pdf. 49 U.S.-Bahrain Free Trade Agreement, Annex 9-A-1, available at http://www.ustr.gov/trade-agreements/free- trade-agreements/bahrain-fta; U.S.-Chile Free Trade Agreement, Annex 9.1, § A, available at http://www.ustr.gov/trade-agreements/free-trade- agreements/chile-fta/; U.S.-Morocco Free Trade Agree- ment, Annex 9-A-1, available at http://www.ustr.gov/ trade-agreements/free-trade-agreements/morocco-fta/; U.S-Oman Free Trade Agreement, Annex 9, § A, available at http://www.ustr.gov/trade-agreements/free-trade- agreements/oman-fta/. 50 North American Free Trade Agreement, Annex 1001.1b-3 (“[B]uy national requirements on articles, sup- plies and materials acquired for use in construction con- tracts covered by this Chapter shall not apply to goods of Canada or Mexico.”).

11 preting the statutory text of the BAA. The FAR reiterates that the BAA “applies to supplies ac- quired for use in the United States”51 (emphasis added) and “applies to contracts for the construc- tion, alteration, or repair of any public building or public work in the United States”52 (emphasis added). “Building or work” is defined to include airports and terminals, and “construction” is fur- ther defined to specifically include any construc- tion, alteration, or repair (including painting) of airport facilities and terminals.53 “Acquisition” is defined as “acquiring by contract with appropriated funds of supplies or services (including construc- tion) by and for the use of the Federal Govern- ment,” and “contract” is defined to include “all types of commitments that obligate the Govern- ment to an expenditure of appropriated funds” but does “not include grants and cooperative agree- ments”54 (emphasis added). Therefore, in the air- port context, the FAR implementation of the BAA originally applied only to direct procurement by the Federal Government of airport supplies or con- structed facilities, but not to airport development funded by FAA grants. Since 1996, the FAR has not applied to the FAA.55 However, the FAR continues to apply to most other federal agencies, and it remains the most widely applicable implementation of the BAA statute. Therefore, the FAR is instructive for its clarification of certain key terms that exist in both the BAA and the AIP Buy America provision, and which terms are not clearly defined in the BAA statute itself. The following discussion addresses FAR guidance for these statutory requirements and exceptions. 1. Substantial Domestic Manufacture.—The FAR clarifies how to determine whether manufac- tured goods or construction materials are manufac- tured “substantially all” from domestic components, so that the end product itself qualifies as a domes- tic good. The FAR uses what it calls the “compo- nent test,” which is a two-part test.56 The FAR makes it clear that the component test, which is used to determine whether goods are of U.S. origin for purposes of the BAA, is distinct from the “sub- stantial transformation” test, which is used to de- termine the country of origin under the Trade Agreements Act.57 First, to qualify as domestic goods under the component test, the goods “must be manufactured 51 48 C.F.R. § 25.100(b) (2011). 52 48 C.F.R. § 25.200(b) (2011). 53 48 C.F.R. § 2.101 (2011). 54 48 C.F.R. § 2.101 (2011). 55 See infra Pt. II.D.ii. 56 48 C.F.R. § 25.001(c)(1) (2011). 57 48 C.F.R. § 25.001(c) (2011). in the United States”58 (emphasis added). Second, consistent with the 1954 executive order, “[t]he cost of domestic components must exceed 50 percent of the cost of all the components” of the article.59 Im- portantly, under the FAR, goods satisfying the component test are considered to be domestic goods, even if they include some foreign components. Be- cause these are considered domestic goods, they are not considered exceptions and thus not subject to any reporting requirements. A component is defined as “an article, material, or supply incorporated into an end product or con- struction material.”60 Therefore, the manufacturing location for BAA purposes is the location where the components are assembled or incorporated into the end product. While that location must be in the United States, final assembly in the United States is insufficient for determining that the article is a domestic good—the cost of its components must also be determined. The cost of each component, for purposes of the component test, is either the con- tractor’s cost of acquiring the component (including taxes, duties, and costs of transporting the compo- nent to the place of assembly or manufacture), or the contractor’s cost of manufacturing the compo- nent (including manufacturing labor and overhead, but excluding profit).61 The contractor’s cost of as- sembling the components into the end product does not factor into the cost determination. Because components are those materials or products that are directly incorporated into the end product by the contractor, it is possible that compo- nents may themselves be manufactured goods com- posed partially of domestic subcomponents and partially foreign subcomponents. In that case, the manufactured component would be considered a domestic good if the component itself satisfies the two-part component test (final assembly in the United States, and at least 50 percent domestic subcomponents).62 Therefore, under the BAA, con- tractors can count the entire cost of the component towards the domestic portion of the end product for purposes of the component test. Unlike the AIP Buy America provision, contractors subject to the BAA are not required to count as foreign the cost of any foreign subcomponents of predominantly do- mestic components. It is conceivable, therefore, that under the BAA, a given end product could qualify as a domestic good even though the value of more than 50 percent of its components and sub- components are of foreign origin, since the BAA analysis does not extend to the subcomponent level. 58 48 C.F.R. § 25.101(a)(1) (2011). 59 48 C.F.R. § 25.101(a)(2) (2011). 60 48 C.F.R. § 25.003 (2011). 61 48 C.F.R. § 25.003 (2011). 62 48 C.F.R. § 25.101(a) (2011).

12 The BAA and the FAR distinguish between goods that are “manufactured” and those that are “produced” in the United States. The component test only applies to manufactured goods. Although manufactured goods are not defined in the BAA or the FAR, the focus on “components” and “assembly” in the FAR indicates that “manufactured goods” probably refers primarily to mechanical and elec- trical equipment (e.g., vehicles) and not to bulk construction materials such as asphalt or Portland cement, which (unlike “mined” or raw goods) have undergone some processing or production. Because the component test does not apply to those goods that are “produced” domestically but not “manufac- tured,” the implication is that such goods must be produced domestically, entirely of domestic raw materials, in order to be considered domestic goods. This apparent middle category of “produced” goods (somewhere between raw goods and manufactured goods) is a somewhat sophisticated feature of the BAA that is not replicated in the AIP Buy America provision. It also stands in contrast to a number of state and local Buy National and Buy Local stat- utes, which treat bulk construction materials such as cement as “manufactured” goods.63 2. Reporting.—Each federal agency subject to the FAR is required to submit an annual report to Congress detailing the agency’s acquisitions of goods with a place of manufacture outside the United States.64 Since any article manufactured outside the United States would not satisfy the two-part component test, this report will only in- clude goods that are acquired as exceptions to the BAA. However, it is conceivable that the report could exclude some foreign goods acquired under exceptions to the BAA. For example, in the case of foreign unmanufactured goods (those mined or pro- duced in another country), or manufactured goods assembled in the United States substantially from foreign components, those goods are not subject to this reporting requirement even though they can only be acquired under one of the exceptions to the BAA. However, in the case of construction materi- als, if any construction materials are acquired un- der any exception to the BAA, the federal agency must make written findings justifying the excep- tion and make those findings available for public inspection.65 Because the FAA has not been subject to the FAR since 1995, the FAA is unique among federal agencies in being exempt from these BAA reporting requirements. Likewise, as will be shown, the AIP Buy America provision is unique among the trans- 63 See Antilles Cement Corp. v. Acevedo Vila, 408 F.3d 41, 43 (1st Cir. 2005). 64 48 C.F.R. § 25.004 (2011). 65 48 C.F.R. § 25.202(b) (2011). portation grant provisions in that it exempts the FAA from reporting or publicly disclosing all Buy America waivers that it grants. 3. Unavailability.—The FAR provides guidance for applying the Unavailability exception to the BAA. Specifically, the FAR provides a list of arti- cles, materials, and supplies where it has been de- termined “that domestic sources can only meet 50 percent or less of total U.S. government and non- government demand.”66 However, goods on the list are not automatically exempted from BAA re- quirements. Federal agencies subject to the FAR are still required to perform market research and seek out domestic sources before procuring foreign goods on the list.67 Those agencies are not allowed to purchase foreign goods (either as end products or substantial components—i.e., more than 50 percent of the value of an end product) if market research reveals that domestic goods on the FAR list are available “in sufficient and reasonably available commercial quantities of a satisfactory quality to meet the requirements of the solicitation.”68 As will be seen, FAA projects are not subject to this market research requirement, neither in projects subject to the BAA nor those subject to the AIP Buy America provision. While the FAR list is not conclusive as to whether goods qualify for the Unavailability excep- tion, it is also not an exhaustive list of all goods that might satisfy the exception. Federal agencies subject to the FAR can also use the Unavailability exception to purchase foreign goods that are not on the FAR list, where there are no offers to supply domestic goods in response to an open solicitation.69 This illustrates that the BAA is not intended to impede a federal project that can only be accom- plished with foreign goods. 4. Unreasonable Cost.—The FAR also provides guidance for applying the Unreasonable Cost ex- ception to the BAA. This evaluation takes place only when a federal agency subject to the FAR so- licits bids, and the lowest bid does not satisfy the basic BAA requirements because it offers to supply foreign goods. If the agency received a competing bid to supply only domestic goods, a surcharge is applied to the noncompliant low bid for evaluation purposes only.70 If the surcharged price is still lower than the lowest domestic bid, then the Un- reasonable Cost exception applies and the agency may acquire foreign goods from the low bidder. Otherwise, the domestic bid is considered “reason- able,” even though it is not the lowest bid, and the 66 48 C.F.R. §§ 25.103(b)(1)(i), 25.104(a) (2011). 67 48 C.F.R. § 25.103(b)(1)(ii) (2011). 68 48 C.F.R. § 25.103(b)(1)(iii) (2011). 69 48 C.F.R. § 25.103(b)(3) (2011). 70 48 C.F.R. § 25.105(b) (2011).

13 agency may not use the Unreasonable Cost excep- tion to purchase the foreign goods.71 When the goods in question are construction materials, or the lowest domestic bidder is a large business, the surcharge to be applied to the non- compliant low bid is 6 percent,72 which is the de- fault surcharge value from the 1954 executive or- der. When the lowest domestic bidder is a small business, or the procurement is a small business set-aside, the surcharge to be applied to the non- compliant low bid is 12 percent73 (except in the case of construction materials). In other words, there is generally a higher barrier for the government to purchase foreign goods when domestic small busi- nesses can supply the goods, albeit at greater cost. This is consistent with the Public Interest prefer- ence for small business concerns espoused in the 1954 executive order. Note that the amount of the Unreasonable Cost surcharge depends on the small-business status of the lowest domestic bidder, not necessarily the small-business status of the domestic bidder’s sup- plier, nor the manufacturer of goods that the do- mestic bidder offers to supply. Therefore, it is con- ceivable that the 12 percent surcharge could prefer domestic goods manufactured by a large business, as long as a small business is the party seeking the government contract. Also, as in the 1954 executive order, the head of a federal agency subject to the FAR may determine that higher surcharges are appropriate, so long as that agency’s evaluation criteria are published in agency regulations.74 Therefore, an agency could elect to impose a stronger preference for goods from domestic busi- nesses of any size standard. However, the Unreasonable Cost exception, as implemented in the FAR, is so flexible that agen- cies can also significantly weaken the domestic preference. For example, where the solicitation calls for best-value pricing, such that the agency uses evaluation criteria other than the bid price, the Unreasonable Cost surcharge applies only to the cost component of the overall evaluation.75 Therefore, an offer to provide foreign goods can overcome the surcharge by outscoring the domestic bidders in the other evaluation criteria, such as by providing superior technical quality. This FAR pro- vision effectively creates a new Superior Quality exception to the BAA, one that is not expressly stated in the statute itself. It permits the procure- ment of foreign goods even where the domestic bid 71 48 C.F.R. § 25.105(c) (2011). 72 48 C.F.R. §§ 25.105(b)(1), 25.204(b) (2011). 73 48 C.F.R. § 25.105(b)(2) (2011). 74 48 C.F.R. § 25.105(a)(1) (2011); see also 48 C.F.R. § 25.204(b) (2011). 75 48 C.F.R. § 25.502(a)(3) (2011). would otherwise be considered reasonable based on cost comparison alone. Conversely, a domestic bid- der can win a solicitation by earning a superior technical evaluation even if its bid would otherwise be considered unreasonable based solely on its comparison to the surcharged cost of foreign goods. Although the FAR no longer applies to the FAA, the FAA has adopted nearly identical requirements for the Unreasonable Cost exception to the BAA, including the 6–12 percent surcharge and the best- value surcharge approach.76 However, the AIP Buy America provision adopts a flat 25 percent differen- tial and applies it to the overall project cost,77 which means that the Unreasonable Cost exception is much less likely to be invoked on an AIP project than on a project subject to the BAA. In fact, there are no known instances of Unreasonable Cost waivers being granted under the AIP Buy America provision. 5. Public Interest.—The FAR clarifies that the Public Interest exception to the BAA applies where the federal government “has an agreement with a foreign government that provides a blanket excep- tion to the Buy American Act.”78 Specifically, under the Trade Agreements Act, the BAA has been waived for transactions covered by the WTO Agreement on Government Procurement or other Free Trade Agreements (FTAs).79 These trade agreements apply to most federal government ac- quisitions or construction contracts exceeding cer- tain dollar thresholds specified for each trading partner.80 This effectively requires goods whose country of origin is a specified trading partner to be treated as domestic goods for purposes of the BAA. One important point is that in determining whether the country of origin of the foreign goods is a trading partner, the FAR does not use the two- part component test, but instead uses the “substan- tial transformation” test.81 That is, if the compo- nents of a foreign product are transformed “into a new and different article of commerce, with a name, character, or use distinct from the original article” at a location within the borders of the trad- ing partner, then that foreign product is treated as a domestic good for BAA purposes.82 This is true regardless of the origin of its component parts. In other words, the product of a trading partner is 76 Fed. Aviation Admin., Acquisition Mgmt. Pol’y § 3.6.4 (Oct. 2006), available at http://fast.faa.gov/AMSPolicy.cfm?CFID=40798511&CFT OKEN=51562370&p_title=AMS%20Policy. 77 49 U.S.C. § 50101(b)(4) (2011). 78 48 C.F.R. §§ 25.103(a), 25.202(a)(1) (2011). 79 48 C.F.R. § 25.402(a)(1) (2011). 80 48 C.F.R. § 25.402(b) (2011). 81 48 C.F.R. § 25.001(c)(2) (2011). 82 Id.

14 treated as a domestic good even if most of its com- ponents originate in non-trading-partner foreign countries. The WTO Agreement on Government Procure- ment and most FTAs do not apply to grant pro- grams such as the AIP.83 Therefore, foreign goods that would satisfy the Public Interest exception under the BAA do not necessarily qualify for a Pub- lic Interest waiver under the AIP Buy America pro- vision. In fact, as will be seen, it is unclear what would qualify for a Public Interest waiver on an AIP project, as there are no known instances of Public Interest waivers under the AIP Buy America provision. For construction projects subject to the BAA, the FAR implies that the Public Interest exception ap- plies where the head of the federal agency deter- mines that it would be “impracticable” to limit pur- chases of certain construction materials to domestic goods.84 There is no guidance in the FAR for deter- mining impracticability, although presumably it is distinct from Unavailability and Unreasonable Cost. This appears to give federal agencies subject to the FAR wide latitude to purchase foreign con- struction materials, so long as they satisfy the writ- ten justification requirement described above.85 Although the FAR no longer applies to the FAA, as will be seen in the following section, the FAA has directly adopted Impracticability as a separate, standalone exception to the BAA that applies only to direct FAA procurements of construction materi- als. ii. Acquisition Management System (AMS) On November 15, 1995, Congress authorized the creation of an Acquisition Management System (AMS) for the FAA “that addresses the unique needs of the agency and, at a minimum, provides for more timely and cost-effective acquisitions of equipment and materials.”86 The legislation also expressly stated that the FAR and certain other federal laws would not apply to the FAA’s new AMS.87 However, Congress did not exclude the FAA from the BAA. This section summarizes how the BAA has been implemented in the AMS for direct FAA procurements. 1. Overview.—The FAA’s AMS includes both pol- icy and guidance.88 AMS policy is mandatory and 83 See infra Pt. III.C.ii.3. 84 48 C.F.R. § 25.202 (2011). 85 See supra Pt. II.D.i.2. 86 Department of Transportation and Related Agencies Appropriations Act, Pub. L. No. 104-50, § 348(a) (1995). 87 Id. § 348(b). 88 Fed. Aviation Admin., AMS Policy vs. Guidance, http://fast.faa.gov/AMSPolicyVsGuidance.cfm (last visited July 24, 2012). “applicable to all activities associated with the analysis of agency needs for products, services, and facilities.”89 AMS guidance includes templates for contract provisions, which “should be followed unless there is a rational basis for adopting a dif- ferent approach.”90 The FAA’s mandatory AMS policy regarding for- eign acquisition is, “The FAA will comply with the tenets of the [BAA] as part of the agency’s best value determination during the contractor selection process”91 (emphasis added). By indicating a prefer- ence for best-value pricing, this suggests that the FAA’s typical evaluation criteria include factors other than cost. As described above, best-value pric- ing decreases the protection for domestic goods un- der the BAA, because the Unreasonable Cost sur- charge only applies to the cost of foreign goods and not to the other evaluation criteria.92 The FAA’s AMS guidance largely adopts the FAR provisions relevant to acquisition of supplies93 and acquisition of construction materials.94 The AMS guidance expresses “a strong preference for acquiring only domestic end products.”95 The AMS guidance adopts the FAR’s two-part component test for determining whether manufactured goods are substantially domestic.96 2. Exceptions and Exclusions.—As noted previ- ously, the FAA is expressly excluded from various free trade agreements as well as the WTO Agree- ment on Government Procurement, but the FAA is not excluded from the Agreement on Trade in Civil Aircraft or NAFTA.97 Accordingly, in its 1996 crea- tion of the AMS system, the FAA adopted contract procurement guidance extending domestic treat- ment only to signatories of NAFTA98 and parties to the Agreement on Trade in Civil Aircraft,99 for pro- curements subject to those agreements. In the case of construction materials, unlike the FAR, the AMS 89 Id. 90 Id. 91 Fed. Aviation Admin., Acquisition Mgmt. Pol’y § 3.6.4 (Oct. 2006), available at http://fast.faa.gov/AMSPolicy.cfm?CFID=40798511&CFT OKEN=51562370&p_title=AMS%20Policy. 92 48 C.F.R. § 25.502(a)(3) (2011). 93 Fed. Aviation Admin., Acquisition Mgmt. Guidance, T3.6.4 § 1 (Oct. 2007). 94 Fed. Aviation Admin., Acquisition Mgmt. Guidance, T3.6.4 § 2 (Jan. 2011). 95 Fed. Aviation Admin., Acquisition Mgmt. Guidance, T3.6.4 § 1(a) (Oct. 2007). 96 Id. 97 See supra Pt. II.D.i.5. 98 Fed. Aviation Admin. Acquisition Mgmt. Pol’y, T3.6.4 § 6(c) (Apr. 2011). 99 Fed. Aviation Admin. Acquisition Mgmt. Guidance, T3.6.4 § 6(d) (Apr. 2011).

15 guidance treats Canadian and Mexican construc- tion materials as domestic goods (rather than as a Public Interest exception) when the contract is sub- ject to NAFTA.100 Since those purchases are not considered to be exceptions to the BAA, the FAA (unlike other federal agencies) is exempt from re- porting or documenting those purchases of foreign goods. The “strong preference” for domestic goods in the AMS guidance is subject to the following addi- tional exceptions: • Public Interest. Requires a written, nondele- gable determination by the FAA Administrator.101 • Unreasonable Cost. Where the low bid offers to supply foreign goods, the contracting officer (CO) is to apply a surcharge to the low bid and compare it with the lowest domestic bid. The AMS directly adopts the default FAR surcharge amounts of 6 percent for supplies (where the lowest domestic bidder is a large business) and construction mate- rials, or 12 percent for supplies where the lowest domestic bidder is a small business.102 • Unavailability. As in the FAR, this exception applies “[w]hen a competitive acquisition results in no offers of domestic end products.”103 The AMS also directly adopts the FAR list of unavailable do- mestic items.104 However, unlike the FAR, the AMS does not require the CO to perform market re- search to determine whether items on the list are actually unavailable domestically. Therefore, the FAA may procure foreign goods from the FAR list even when it could acquire those goods from domes- tic sources. Furthermore, under the AMS, items on the list “may be treated as domestic products,”105 so the FAA is not required to report or document these purchases of foreign goods as exceptions to the BAA. Therefore, it is somewhat easier for the FAA to acquire certain foreign goods than it is for federal agencies that are subject to the FAR. • Impracticability. Although the BAA does not expressly provide an Impracticability exception, it is suggested in the FAR as a subset of the Public Interest exception for construction materials.106 100 Fed. Aviation Admin., Acquisition Mgmt. Guidance, T3.6.4 § 2(b)(4) (Jan. 2011). 101 Fed. Aviation Admin., Acquisition Mgmt. Guidance, T3.6.4 § 1(b)(2) (Oct. 2007); Fed. Aviation Admin., Acqui- sition Mgmt. Guidance, T3.6.4 § 2(b)(2) (Jan. 2011). 102 Fed. Aviation Admin., Acquisition Mgmt. Guidance, T3.6.4 § 1(d)(1) (Oct. 2007); Fed. Aviation Admin., Acqui- sition Mgmt. Guidance, T3.6.4 § 2(b)(3)(a) (Jan. 2011). 103 Fed. Aviation Admin., Acquisition Mgmt. Guidance, T3.6.4 § 1(b)(3)(c) (Oct. 2007). 104 Fed. Aviation Admin., Acquisition Mgmt. Guidance, T3.6.4 § 1(e) (Oct. 2007). 105 Id. 106 See supra Pt. II.D.i.5. Under the AMS, for construction materials only, the CO may determine that “[i]t is impracticable to use a particular domestic construction material.”107 This suggests that under the AMS, unlike the FAR, the Impracticability exception is distinct from the Public Interest exception, since only the Adminis- trator may find a Public Interest exception under the AMS. Once again, this makes it somewhat eas- ier for the FAA to acquire foreign construction ma- terials than it is for federal agencies subject to the FAR, since the FAR requires the head of the federal agency to authorize any Public Interest (or Imprac- ticability) exception to the BAA. • Insignificance. Purchases of $3,000 or less.108 The AMS implementation of the BAA largely mir- rors the FAR, although the AMS slightly relaxes the BAA requirements for direct FAA procure- ments. Most notably, individual COs are not re- quired to research whether items on the FAR list of unavailable materials are actually unavailable do- mestically, and individual COs may conclude that it is impracticable to purchase construction materials domestically. 3. Reporting and Documentation.—Under the AMS, where the FAA acquires any foreign goods under an exception to the BAA, the CO is required to document the basis for the exception and to make the documentation justifying the exception available for public inspection.109 On its face, this requirement appears somewhat more stringent than either the FAR public inspection requirement, which only applies to procurement of foreign con- struction materials, or the FAR reporting require- ment, which only applies to manufactured goods assembled in foreign countries.110 Under the AMS, the FAA’s public inspection requirement is ex- tended to all foreign goods procured under excep- tions to the BAA, including unmanufactured goods and manufactured goods assembled domestically substantially of foreign components. However, upon closer inspection, the AMS documentation requirement is significantly relaxed for FAA procurements in comparison to other fed- eral procurements subject to the FAR. First, the AMS public inspection requirement does not extend to procurements of common items from the FAR list of goods unavailable domestically, or to procure- 107 Fed. Aviation Admin., Acquisition Management Guidance, T3.6.4, § 2(b)(3)(b) (Jan. 2011). 108 Fed. Aviation Admin., Acquisition Management Guidance, T3.6.4, § 1(b)(1) (Jan. 2011); Fed. Aviation Admin., Acquisition Management Guidance, T3.6.4 § 2(b)(1) (Jan. 2011). 109 Fed. Aviation Admin., Acquisition Mgmt. Guidance, T3.6.4 § 1(c) (Oct. 2011); Fed. Aviation Admin., Acquisi- tion Mgmt. Guidance, T3.6.4 §§ 2(c), 2(d) (Jan. 2011). 110 See supra Pt. II.D.i.2.

16 ments of foreign construction materials under NAFTA, because the AMS exempts those items as domestic goods rather than as exceptions to the BAA. Also, unlike federal agencies subject to the FAR, the FAA is exempt from reporting to Con- gress on its procurement of foreign manufactured goods. Therefore, there is much less available docu- mentation of foreign goods purchased by the FAA than there is for other federal agencies. E. Application to Airports Partially as a result of the AMS relaxation of BAA requirements, the BAA has only a marginal impact on FAA procurements. Therefore, there are very few reported cases involving BAA disputes in FAA procurements, particularly after adoption of the AMS in 1996. This section summarizes the available BAA cases relevant to airports, most of which are administrative opinions in response to bid protests. These cases illustrate the most common disputes under the BAA: Whether goods are manufactured substantially all from domestic components, what constitutes a manufactured construction material, and how to apply the Unreasonable Cost exception. Although these same issues may arise under the AIP Buy America provision, the more precise statu- tory language of the AIP provision appears to be designed to clarify these elements of the BAA that are regularly disputed. Therefore, a review of the following cases is helpful to gain an appreciation for the AIP Buy America provision. i. Substantial Domestic Manufacture 1. Supplies.—As discussed above, the FAA adopts the two-part component test to determine whether manufactured goods that include some foreign components may be considered domestic goods. Federal agencies may procure goods that satisfy this component test without demonstrating that the goods satisfy one of the statutory exceptions to the BAA. Under the component test, first, the goods must be “manufactured in the United States.”111 Second, the goods must be comprised “substantially all from articles, materials, or supplies mined, pro- duced, or manufactured in the United States.”112 These requirements are illustrated in a number of early 1970s opinions involving French manufac- turer Thomson-CSF. a. American Standard Protest of Texas Instru- ments/Thomson-CSF Contract for Instrument Landing Systems (1970).—In 1970, the federal gov- ernment sought to enter into a multi-year pro- curement contract for instrument landing systems (ILS) to be “installed at airports to guide aircraft 111 41 U.S.C. §§ 8302(a)(1), 8303(a)(2) (2011). 112 Id. along a predetermined path to a landing ap- proach.”113 The acquisition was set up as a two- phase procurement process.114 First, interested con- tractors would respond to the federal government’s request for technical proposal (RFTP) to demon- strate their technical ability to manufacture an ILS to the desired specifications.115 Second, the gov- ernment would accept cost proposals only “from those contractors who have manufactured and can demonstrate at an operating airfield” an ILS that passed an FAA flight check.116 Although Thomson-CSF could manufacture an ILS that satisfied the technical requirements, it realized “it needed to team with a United States company in order to comply with the Buy American Act.”117 Thomson-CSF and Texas Instruments (TI) entered into a 1-year working agreement to jointly pursue opportunities in the American ILS mar- ket.118 Under this arrangement, TI responded to the RFTP as the prime contractor, disclosing Thomson- CSF as its subcontractor.119 Although TI was ex- perienced at manufacturing airport surveillance radar (ASR) systems, it had never manufactured an ILS.120 In January 1970, as part of its review of TI’s technical proposal, FAA representatives inspected a French-manufactured Thomson-CSF ILS at Bre- tigny airfield in France.121 In May 1970, the federal government determined that TI (with Thomson- CSF on its team) satisfied the technical require- ments and was qualified to provide a cost proposal in the second step of the procurement process.122 TI’s cost proposal to provide the initial 29 ILS units was $2.656 million, less than half the $5.453 mil- lion cost proposal from the only other qualified manufacturer, American Standard, Inc.123 Ameri- can Standard protested the bid decision, alleging that TI was not a qualified ILS manufacturer, and that the procurement would violate the BAA due to TI’s reliance on the capabilities of foreign manufac- turer Thomson-CSF.124 By analyzing the two phases of the procurement process separately, the Comptroller General deter- 113 Am. Standard, Inc. v. Laird, 326 F. Supp. 492, 493 (D.D.C. 1971) 114 Id. at 495. 115 Id. 116 Id. 117 Id. 118 Id. 119 Id. at 496. 120 Id. at 495. 121 Id. at 496. 122 Id. at 497. 123 To American Standard, Inc., No. B-168269(2), 1970 WL 4393, at *1 (Comp. Gen. Sept. 2, 1970). 124 Id. at *2–3.

17 mined,125 and the U.S. District Court for the Dis- trict Columbia affirmed,126 that an award to the TI team satisfied procurement regulations. First, be- cause the BAA did not apply to the technical quali- fications phase, TI satisfied the requirement for ILS manufacturing experience and technical capa- bility, based on the demonstrated past performance of its foreign subcontractor Thomson-CSF.127 Fur- thermore, the decision to award based on TI’s cost proposal did not violate the BAA because TI pro- posed to manufacture the ILS delivered under the contract in the United States.128 Although TI alone did not have the necessary experience or capability, Thomson-CSF would share its “technological knowledge, design data, trade secrets, patent rights, manufacturing techniques and its other proprietary interests” to TI, and Thomson-CSF per- sonnel would “direct the manufacture of the ILS” by TI personnel.129 Thomson-CSF personnel would be responsible for installing the first five ILS at airports, whereas TI would be responsible for in- stalling the remainder. At the time it submitted its technical proposal, TI was under the impression that “some critical or difficult to manufacture components and subas- semblies” would be manufactured by Thomson-CSF in France and imported while TI developed the ca- pability to completely manufacture the ILS.130 However, the imported components were expected to “comprise much less than the 50 percent of the system allowed by the ‘Buy American’ act,” so the final product would be manufactured “substantially all” of domestic components.131 However, the gov- ernment team evaluating technical proposals (which included FAA representatives) was con- cerned about the use of foreign components manu- factured by Thomson-CSF in France, due to con- cern “that metric tools would be needed for repair and maintenance purposes and that there may be difficulties in replacing these parts.”132 To address that concern, TI and Thomson-CSF worked to- gether to identify American subcomponents that could substitute for the foreign subcomponents used in Thomson-CSF’s French manufacturing process, and concluded that the ILS could be manu- factured using only domestic parts (even though the components assembled in France out of domes- tic subcomponents would not qualify as domestic 125 Id. at *5. 126 Am. Standard, Inc. v. Laird, 326 F. Supp. 492, 504 (D.D.C. 1971). 127 Id. at 499. 128 Id. at 496–97. 129 Id. at 502. 130 Id. at 496–97. 131 Id. 132 Id. at 497. goods under the two-part component test). Fur- thermore, by the time the District Court issued its opinion in 1971, TI had become “increasingly more sophisticated” about ILS manufacturing under the “tutelage” of Thomson-CSF under their working agreement, so that an even smaller percentage of the ILS components would have to be manufac- tured by Thomson-CSF in France than originally contemplated.133 Neither the Comptroller General’s opinion nor that of the District Court addressed what portion of the $2.656 million contract price would be paid to foreign manufacturer Thomson-CSF. For example, the proposal disclosed that Thomson-CSF would be supplying supervisory labor and proprietary tech- nology.134 Depending on the financial value of the subcontract and working agreement between TI and Thomson-CSF, a substantial portion of the prime contract price could have effectively been a “pass-through” to Thomson-CSF using the domestic manufacturer, TI, as a conduit. Furthermore, American Standard suggested that the terms of the subcontract and working agreement should be of interest to the federal government, as future pro- curements of the identical ILS could be subject to “the vicissitudes of the foreign policies of the French government, since the latter can control the transfer of T-CSF technology and key people to the U.S.”135 However, neither the Comptroller General nor the District Court treated these as relevant considerations under the BAA, which required only that the ILS be “manufactured in the United States substantially all from” domestic goods, and did not account for the costs of final assembly labor in the United States. The arrangement between TI and Thomson-CSF satisfied the component test, as TI personnel would assemble the ILS in the United States, substantially all from domestic parts and components. As the Comptroller General stated, the policy issues raised by American Standard “may be appropriate for consideration by Con- gress,” but the award to TI did not violate the BAA.136 b. Texas Instruments Protest of General Dynam- ics/Thomson-CSF Contract for Airport Surveillance Radar (1973).—Some contemporary opinions in similar situations suggest that the financial value of a subcontract to a foreign manufacturer is a relevant consideration when determining whether goods are manufactured “substantially all from” domestic components, even where the foreign sub- contract involves only labor and not goods. In 1973, 133 Id. at 503. 134 Id. at 502–03. 135 To American Standard, Inc., No. B-168269(2), 1970 WL 4393, at *5 (Comp. Gen. Sept. 2, 1970). 136 Id.

18 TI protested an FAA decision to award a contract to General Dynamics for the design and manufacture of the next-generation ASR system.137 While TI may have lacked expertise at ILS manufacturing, TI was “one of the leading suppliers of ASR equip- ment to FAA in the past,” and was the incumbent manufacturer of the previous-generation ASR sys- tem,138 so TI did not need to team with Thomson- CSF to buttress its technical proposal in this case. Therefore, Thomson-CSF teamed with General Dy- namics, which submitted a cost proposal of $17.7 million to supply 31 ASR units, more than $4 mil- lion less than TI’s cost proposal.139 TI contended that the FAA’s procurement of the ASR units from General Dynamics would violate the BAA due to the involvement of Thomson-CSF. However, the Comptroller General noted that Thomson-CSF would not be “delivering an end product or any components” as a subcontractor to General Dynamics, but would merely be “furnish- ing certain design efforts to be utilized by General Dynamics in producing the end product.”140 On its face, this “oversight” arrangement appears very similar to the prior ILS teaming arrangement be- tween Thomson-CSF and TI. However, because General Dynamics was an experienced manufac- turer of ASR systems, it is unlikely that General Dynamics’ arrangement with Thomson-CSF in- volved such an extensive licensing agreement or such an extensive transfer of proprietary technol- ogy from the foreign manufacturer. In this case, the Comptroller General specifically considered the financial value of General Dynam- ics’ subcontract with Thomson-CSF, apparently rejecting its position in the American Standard protest that consideration of financial arrange- ments is better left to Congress. The Comptroller General concluded that “the dollar amount of the Thompson [sic] subcontract is $1.6 million which is substantially below 50 percent of the value of the total end product cost cited by the [Buy American] Act.”141 Because Thomson-CSF was not providing any components or manufacturing labor, under its own precedents, the value of the Thomson-CSF contract should not have been relevant to the Comptroller General. The procurement satisfied the BAA because more than 50 percent of the cost of goods was attributable to domestic components, and the final assembly occurred in the United States. 137 To Akin, Gump, Strauss, Hauer & Feld, 53 Comp. Gen. 5, GAO B-177847, July 10, 1973. 138 Id. at 7. 139 Id. at 6. 140 Id. at 11. 141 Id. It could be argued that the Thomson-CSF work- ing agreements with TI and General Dynamics illustrate a loophole in the BAA, in conflict with the congressional intent to ensure that government spending helps domestic industry. These cases demonstrate that a prime contractor can pass a substantial portion of federal procurement funds through to a foreign manufacturer via mechanisms other than manufacturing subcontracts, such as licensing agreements or design subcontracts, in such a way that the procurement itself satisfies the BAA component test. However, it could also be ar- gued that the BAA served its intended purpose in these cases by supporting domestic employment. In both procurements, substantially all components of the ILS and ASR units would be manufactured in the United States by employees of the domestic prime contractors. Those employees would be paid for their labor even if their employers, the domestic manufacturers, were losing money overall under their financial arrangements with Thomson-CSF. Furthermore, while the foreign manufacturer was sharing its technical expertise and supervising the manufacturing process, the domestic manufactur- ers would develop capabilities and expertise that they did not have previously. TI and General Dy- namics may have been obligated to pay Thomson- CSF a licensing fee to continue to practice those technologies on future contracts. However, without the BAA, there would have been less incentive for Thomson-CSF to team with TI and General Dy- namics, and the domestic manufacturers would never have had the opportunity to develop that expertise. 2. Construction Materials.—Due to the Substan- tial Domestic Manufacture requirement in the BAA, where a federal procurement or construction project incorporates some amount of foreign goods, it may still satisfy the BAA without an exception being invoked. Although the BAA requires raw goods or unmanufactured goods acquired or used by the federal government to be of domestic origin, manufactured construction materials acquired or used by the federal government need only satisfy the component test: final assembly in the United States, substantially all of domestic components. Foreign goods that would be noncompliant if ana- lyzed independently may comply with the BAA if the foreign goods are considered only insubstantial components of the overall manufactured construc- tion materials. Therefore, it is critical to determine how “construction materials” are defined for BAA purposes. For supply acquisitions (e.g., procurement of equipment), it is generally easy to identify the manufactured goods that are acquired—they will typically be specified as line items on the purchase order or other contract. For construction contracts, however, identifying the manufactured construc-

19 tion materials can be more difficult. Congress clearly did not intend for federal agencies to con- sider the constructed facility to be a “manufactured good” under the BAA, since the text of the BAA forbids the use of foreign manufactured goods in construction, and expressly applies the BAA to pro- curement or use of construction materials. Where those construction materials are manufactured goods, then under the BAA component test those construction materials may contain an insubstan- tial percentage of foreign components and still comply with the BAA. Therefore, for purposes of determining BAA compliance, it can be critical whether the foreign goods are themselves construc- tion materials, or are merely components of manu- factured construction materials. The FAA’s AMS adopts the FAR definition of a construction material as “an article, material, or supply brought to the construction site,” including those manufactured goods brought onto the con- struction site “pre-assembled” from other articles, materials, or supplies, for incorporation into the building or work.142 However, the AMS and FAR also define construction materials to include some specific systems, including “emergency life safety systems,” that are assembled at the construction site from their individual components.143 Therefore, there is an allowance for some foreign goods to be brought onsite, combined with domestic goods, and assembled onsite into a “construction material,” which is then considered to be a domestic good for purposes of the BAA. a. Incorporation of Foreign Steel and Wiring Brought onto the Construction Site—Strand Hunt Construction (2001).—A 2001 decision by the FAA Office of Dispute Resolution for Acquisition (ODRA) addresses the issue of identifying the construction material, where some foreign components are brought onto the construction site.144 The FAA Alaska Region contracted for the construction of an air traffic control tower and related facilities at Merrill Field in Anchorage, Alaska.145 A dispute arose between the FAA and its prime contractor regarding the incorporation into the structure of wiring and steel reinforcing mesh that were not of domestic origin.146 The FAA considered the wiring and mesh to be construction materials, but the con- tractor’s position was that they were only compo- 142 Fed. Aviation Admin., Acquisition Mgmt. Guidance, T3-6-4 § 13(e) (Jan. 2011). 143 Id. 144 Contract Dispute of Strand Hunt Construction Un- der Contract No. DTFA04-97-C-10022, No. 99-ODRA- 00142 (Fed. Aviation Admin. 2001), available at http://www.pubklaw.com/rd/other/ODRA-01-171.pdf. 145 Id. § 1. 146 Id. § 2, ¶¶ 54, 58, 83. nents of manufactured construction materials, and that the manufactured construction materials themselves were domestic goods under the compo- nent test.147 The wiring was of Canadian origin, and was in- stalled onsite by an electrical subcontractor as part of the environmental controls system for the facil- ity.148 It was undisputed that the wiring was brought onto the site for incorporation into the con- trols system, not preassembled into the controls system. However, the prime contractor argued that the environmental controls system was an “emer- gency life safety system” that should be treated as a single construction material, estimating that two- thirds of the environmental controls system “was in some way related to basic life safety issues.”149 The FAA agreed to this designation, but still required the contractor to demonstrate the percentage of the controls system composed of foreign components.150 (Since it was undisputed that the system was as- sembled onsite, the contractor only needed to dem- onstrate compliance with the second part of the component test.) After accounting for the cost of the Canadian wiring and the other components of the controls system, the contractor demonstrated “that the made-in-America content of the control system was 82%.”151 This was more than sufficient to meet the Substantial Domestic Manufacture criteria of the BAA and justify the use of Canadian wiring. In fact, the ODRA held the FAA responsible for the delay involved in the contractor certifying BAA compliance of the controls system, because the FAA had previously acknowledged that “the controls system [was] over 50% American made.”152 The steel reinforcing mesh was admittedly a component of the exterior insulation and finishing system (EIFS), although the contractor could not seriously contend that EIFS was an “emergency life safety system.” EIFS panels were manufactured by a subcontractor in a hangar at Merrill Field of components including cement, reinforcing mesh, and polystyrene insulation.153 Since those materials were all brought onto the airport for manufacture of EIFS panels, the FAA treated each component as a “construction material” for BAA purposes.154 Some of the steel mesh was of Canadian or German origin.155 However, the contractor argued that the foreign mesh was an insubstantial component of 147 Id. § 2, ¶¶ 59, 84. 148 Id. § 2, ¶¶ 82–83. 149 Id. § 2, ¶ 87. 150 Id. § 2, ¶ 89. 151 Id. § 2, ¶ 90. 152 Id. § 2, ¶¶ 89, 92, 110. 153 Id. § 2, ¶ 51–52. 154 Id. § 2, ¶ 54. 155 Id. § 2, ¶¶ 54, 58.

20 the EIFS panels, which were assembled in the han- gar, then transported from the hangar to the con- trol tower construction site as pre-assembled pan- els.156 Because the hangar location was not within the bounds of the construction site, as defined by the construction contract, the ODRA agreed with the contractor that the EIFS panels themselves were domestically manufactured construction ma- terials for purposes of the BAA.157 Therefore, ODRA concluded that the FAA was responsible for delays involved in requiring the contractor to certify that the steel mesh itself was BAA compliant.158 b. Offsite Assembly of Hangar Door Components from Foreign Subcomponents, with Final Assembly at the Construction Site—Megadoor (1995).—The issue of how to identify the construction material for the Substantial Domestic Manufacture criterion has also arisen in the context of airport hangar doors.159 In 1995, the Office of the Inspector Gen- eral (OIG) conducted an investigation into the use of hangar doors supplied for federal hangar con- struction projects by Megadoor, Inc., a U.S. sub- sidiary of a Swedish company.160 According to the OIG, the hangar door system was designed by the Swedish company, which also supplied some for- eign subcomponents and instructed its U.S. sub- sidiary which subcomponents to purchase in the United States.161 The U.S. subsidiary assembled the subcomponents into components of hangar door systems to be shipped to the construction site, where the components would be assembled into the completed hangar door system.162 The issue was whether the completed hangar door system quali- fied as the “construction material,” or whether the “construction materials” were the individual com- ponents that were brought onsite and assembled into the final door system.163 If the latter were true, then several of the components would not comply with the BAA because of the high proportion of Swedish subcomponents. The COs determined that the hangar doors com- plied with the BAA, treating the completed hangar door system as the “construction material.”164 They supported this determination based on the project 156 Id. § 2, ¶ 59. 157 Id. § 2, ¶ 60. 158 Id. § 2, ¶ 61. 159 OFFICE OF INSPECTOR GEN., AUDIT REPORT NO. 95-207, BUY AMERICAN ACT REQUIREMENTS IN ACQUISITIONS OF VERTICAL LIFTING HANGAR DOORS (1995), available at http://www.dodig.mil/audit/reports/fy95/95-207.pdf. 160 Id. at 2. 161 Id. 162 Id. at 2–3. 163 Id. at 5. 164 Id. at 7. specifications, which had a separate section devoted to hangar doors. The OIG determined that position was supportable, but noted that other federal agen- cies took different positions. The Army Corps of Engineers, for example, would have treated each component arriving at the construction site as a “construction material.”165 Under the Corps inter- pretation, the hangar door system would be a col- lection of construction materials, some of which would not comply with the BAA. The Army Na- tional Guard, on the other hand, would have treated the constructed facility as a “construction material,” so that the hangar door system was only one component of the construction material.166 Un- der the National Guard interpretation, the con- structed facility would comply with the BAA even if the entire hangar door system was a foreign good, as long as 50 percent of all hangar components were of domestic origin. (Under the National Guard interpretation, the component test would condense to a one-part test, since the final assembly location would necessarily be the domestic construction site.) Due to the many conflicting interpretations of the BAA involving construction materials, the OIG declined to overturn the award to Megadoor.167 In- stead, the OIG called for clarification of the BAA requirements and terms.168 In particular, the OIG noted, the component test for determining whether manufactured goods are domestic under the BAA should “be made to conform” with the substantial transformation test for country of origin in the Trade Agreements Act.169 There was clearly enough uncertainty surrounding the FAR and AMS defini- tions of “construction material” that practically any given federal airport construction project could be determined to be either BAA-compliant or noncom- pliant, subject to the CO’s interpretation. Although construction materials under the BAA remain subject to interpretation for purposes of the component test, the AIP Buy America provision largely bypasses this confusion by applying the Substantial Domestic Manufacture criterion spe- cifically to equipment and facilities, rather than manufactured goods in general.170 Therefore, in the case of construction projects, the component test applies to the constructed facility, not to each con- struction material brought onsite. (This is similar to the Army National Guard approach described in the OIG report above.) Therefore, AIP grant recipi- ents can avoid controversies over identifying the 165 Id. at 7. 166 Id. at 6. 167 Id. at 9. 168 Id. 169 Id. at 10. 170 49 U.S.C. § 50101(b)(3) (2011).

21 “construction material,” and instead focus on whether the overall facility satisfies the component test. ii. Unreasonable Cost Federal agencies are frequently able to take ad- vantage of the Unreasonable Cost exception to the BAA, due to the rather low surcharges applied when evaluating the cost of foreign goods under the FAR and AMS. Therefore, perhaps most of the FAA procurements challenged under the BAA involve the Unreasonable Cost exception. In addition, the Unreasonable Cost exception to the BAA appears to provide a particularly broad avenue to purchase foreign goods, since the cost comparison of foreign and domestic goods can be further diluted by bun- dling the procurement of foreign goods with domes- tic goods, or by evaluating procurements on factors other than cost (e.g., technical quality). These and other issues with the Unreasonable Cost exception are illustrated by the following cases. 1. Surcharge Applied on a Line-Item Basis a. Boca Systems Protest of Print-O-Tape Contract for Flight Strip Recorders (1996).—In 1996, the FAA issued a single solicitation for 800 thermal printers and a 5-year supply of printer paper, or “flight strips,” to be used by air traffic controllers to record flight data.171 The FAA determined that two commercially available printers could satisfy the resolution requirements: a printer manufactured by Boca Systems, Inc. (a domestic small business), and a printer manufactured by IER (a foreign com- pany).172 The FAA received four proposals, one from Boca, and three from contractors offering to supply the IER printer.173 The low bid was from Print-O- Tape, Inc., a domestic paper manufacturer offering to supply its paper with the IER printer.174 Boca protested the award under the BAA.175 The ODRA determined that the FAA properly applied a 12 percent surcharge to the cost of foreign printers (but not the price of domestic paper) in Print-O- Tape’s bid.176 The surcharge increased Print-O- Tape’s total bid by $182,208, yet Print-O-Tape’s surcharged bid was still less than Boca’s bid, justi- fying award to Print-O-Tape under the Unreason- 171 Protest by Boca Systems, Inc. Under Solicitation DTFA02-96-R-60015, No. 96-ODR-0008 (Fed. Aviation Admin. 1997), aff’d, Fed. Aviation Admin. Order No. ODR- 97-15 (Mar. 7, 1997), available at http://www.faa.gov/about/office_org/Headquarters_offices/ agc/pol_adjudication/agc70/CaseFiles/view/docs/97_15DRO .pdf. 172 Id. § II. 173 Id. § II. 174 Id. § II. 175 Id. § IV.3. 176 Id. § IV.3. able Cost exception to the BAA.177 This case illus- trates a number of potential issues that can arise with application of the Unreasonable Cost excep- tion. First, because the BAA surcharge applies only to the procurement line items that are not domesti- cally manufactured, the FAA’s decision to bundle printers and paper in a single procurement could have influenced the outcome. Agencies with a pref- erence for a particular foreign-manufactured item might attempt to minimize the influence of the Un- reasonable Cost surcharge by bundling the pro- curement of those foreign goods with other supplies to which the BAA surcharge would not apply. In this case, Boca argued, if the printers were pro- cured separately from the paper, then Boca’s bid to supply 800 of its domestically manufactured print- ers may have been “reasonable” under the BAA, after applying the 12 percent surcharge to its com- petitors’ price for supplying 800 foreign printers.178 However, when combined with the price of 5 years worth of flight strips compatible with each printer, Boca’s total bid price (for printers and paper) was greater than Print-O-Tape’s bid (including the sur- charged cost of foreign printers). Therefore, Boca’s bid was considered “unreasonable” under the BAA, even if the price of its printer alone would compare favorably to the surcharged price of foreign print- ers. The ODRA concluded that it was rational for the FAA to combine the printers and a 5-year paper supply in the same procurement, in light of the FAA’s AMS Policy,179 “which encourages considera- tion of the entire life cycle of fielded systems.”180 It was important for the FAA to consider such factors as the compatibility of the printers and the paper, and to have a single contractor to contact when issues arose regarding either printer supplies or printer maintenance.181 Boca attempted to cast doubt on Print-O-Tape’s ability to provide software and maintenance ser- vices related to integrating and maintaining the foreign IER printers in the air traffic control sta- tions.182 First, the software source code was pre- sumably developed by, and would ultimately have to be supplied by, the foreign manufacturer IER. Second, the domestic paper manufacturer Print-O- Tape probably did not have the required technical 177 Id. § IV.3. 178 Id. § IV.2. 179 Fed. Aviation Admin., Acquisition Mgmt. Pol’y § 2.1 (Feb. 2004) (“FAA uses [lifecycle management] to determine and prioritize its needs, make sound invest- ment decisions, implement solutions efficiently, manage assets and services over their lifecycle.”). 180 Boca Systems, § IV.2. 181 Id. § IV.1. 182 Id. § IV.5.

22 expertise to provide “the associated maintenance and engineering support” for the IER printers.183 In Print-O-Tape’s initial response to the solicitation, it indicated that it would provide source code for the IER printer software subject to a separate software licensing agreement.184 The contracting officer noti- fied Print-O-Tape that its offer must include soft- ware source code, and Print-O-Tape increased its total bid price and “unequivocally stated that the source code would be provided” as part of that re- vised price.185 The ODRA concluded that award to Print-O-Tape was justified because Print-O-Tape had secured “IER’s contractual commitment to supply the equipment and codes to Print-O- Tape.”186 However, the BAA surcharge applied only to the price of the foreign goods (printers), and not to the price of supplying software source code, inte- gration support, or maintenance of the printers after integration in the air traffic control centers. This outcome represents a potential loophole with the distinction in the BAA between goods and services. Services are not subject to the Unreason- able Cost surcharge, even though such services as installation and maintenance could be an impor- tant factor in the overall life cycle cost of manufac- tured goods, and the cost of those services in a do- mestic offeror’s bid could be largely a pass-through to the foreign manufacturer. More vexing is the question of the software license. Here, the domestic offeror revised its bid upward to account for provid- ing the printer source code to the FAA.187 Presuma- bly, this additional amount was passed through as a license fee to the foreign printer manufacturer who developed the software as part of developing the printer. It does not appear from the opinion that the FAA or ODRA considered whether the software itself constituted foreign goods, or whether the software license was an additional component of the printers, to which the BAA sur- charge should have been applied. However, a few years after the Boca Systems decision, Congress made the BAA inapplicable to federal government purchases “of information technology…that is a commercial item,”188 thus formally excluding most software purchases from the BAA. The ODRA thus rejected Boca’s arguments that the contract with Print-O-Tape violated the intent of the BAA by bundling the procurement of foreign goods with domestic goods and services. Print-O- Tape’s total bid for foreign goods, domestic goods, 183 Id. § IV.5. 184 Id. § IV.4. 185 Id. § IV.4. 186 Id. § IV.5. 187 Id. § II. 188 Consolidated Appropriations Act of 2004, Pub. L. No. 108-199, § 535, 118 Stat. 3 (2003). and services compared favorably to Boca’s domestic bid, with the BAA Unreasonable Cost surcharge applied only to the foreign goods in Print-O-Tape’s bid. The AIP Buy America provision, on the other hand, appears to be designed to avoid such contro- versies over bundling procurements. The AIP Buy America provision states that its Unreasonable Cost differential applies to “the cost of the overall project,” not just the individual line items.189 That clarification in the AIP Buy America provision re- moves the bundling loophole that might exist under the BAA, which Boca claimed was being used by the FAA to work around the BAA in favor of the foreign printers. Boca also implied that the bid specifications were drafted to favor IER. The FAA solicitation stated that either Boca or IER printers would sat- isfy the specifications, but it is conceivable that a contracting agency favoring a certain foreign- manufactured product could draft the bid specifica- tions so narrowly that no domestic goods would satisfy the specifications. In this case, Boca argued that the specifications were not narrow enough— that the Boca printers were of significantly higher quality than the IER printers,190 and therefore Boca could not compete with the lower cost of the less capable IER printers, even after the BAA surcharge was applied to the IER price. Relying on precedents where the bid protestor argued that specifications were drawn too narrowly in order to favor a com- petitor, the ODRA determined that the standard of review is whether the agency’s specifications are “rational; supported by substantial evidence.”191 The ODRA concluded that the FAA’s bid specifica- tions met that standard, pointing to “extensive re- search” by the FAA regarding the minimum re- quirements for its new printers.192 The less capable foreign IER printers “represented a quantum leap over the quality of the old dot-matrix printers,” and the advanced capabilities offered only by the do- mestic Boca printer were “not required.”193 There- fore, the ODRA upheld the FAA’s solicitation speci- fications, allowing offerors to supply the foreign IER printer and significantly underbid the more capable domestic Boca printer. Under a best-value procurement, which would evaluate bids on both price and technical quality, the outcome may have been different. 2. Surcharge Applies Only to Cost Element of Evaluation a. Litton Systems Protest of Thomson-CSF Con- tract for Airport Surveillance Radar Tubes 189 49 U.S.C. § 50101(b)(4) (2011). 190 Boca Systems, § II. 191 Id. § IV.1. 192 Id. § IV.1. 193 Id. § IV.1.

23 (1996).—A number of cases demonstrate how to apply the Unreasonable Cost surcharge in the con- text of FAA best-value evaluations. In 1983, the FAA issued an RFP for replacement Klystron tubes for use in its existing ASR units.194 The RFP stated that the contract would be awarded to the bidder “whose technical/cost relationship was the most advantageous to the government.”195 Thomson-CSF, the foreign ASR manufacturer, bid $172,550.196 Litton Systems, Inc., a domestic company that did not have a Klystron tube in production at the time, bid $110,000.197 Because of Litton’s inexperience, it effectively received a lower technical evaluation than Thomson-CSF. However, the evaluation ru- bric was not well defined, and the FAA accounted for Litton’s inexperience by adding $200,000 to Lit- ton’s $110,000 bid, representing the amount the FAA estimated it would cost Litton to develop the Klystron tube manufacturing capability.198 Even after applying the 6 percent Unreasonable Cost surcharge to Thomson-CSF’s $172,500 bid, it was still lower than the FAA’s $310,000 estimate of the “true development costs” of Litton’s bid.199 Litton protested because its actual bid price was less than Thomson-CSF’s surcharged bid price, and thus not unreasonable under the BAA. The Comp- troller General agreed with Litton,200 because the technical and cost components of the bids should be evaluated separately (with the Unreasonable Cost surcharge applying only to the cost component), and the two criteria should have been given equal weight (since the RFP did not specify otherwise).201 In that scheme, Litton would receive a lower tech- nical evaluation than Thomson-CSF, but its cost would be lower than that of Thomson-CSF, and thus not unreasonable under the BAA. The Comp- troller General ordered the FAA to reevaluate “Lit- ton’s proposal and consider whether an award to Litton would be advantageous to the govern- ment.”202 b. Optical Scientific Protest of Vaisala Contract for Automated Weather Observation System Sen- sors (2006).—Similarly, in 2006, Optical Scientific, Inc., protested the FAA’s decision to award a con- tract to Vaisala, Inc., for Automated Weather Ob- servation System (AWOS) visibility sensors manu- 194 In re: Litton Systems, Inc., Electron Tube Div., GAO B0215106, 63 Comp. Gen. 585, 586 (1984). 195 Id. at 587. 196 Id. at 590. 197 Id. 198 Id. 199 Id. at 590–91. 200 Id. at 591. 201 Id. at 586–88. 202 Id. at 591. factured in Finland.203 Vaisala outscored Optical Scientific on the technical evaluation, but Optical Scientific bid a lower price.204 Optical Scientific believed that its combined score would have been better than Vaisala’s if the FAA had imposed the Unreasonable Cost surcharge on Vaisala. However, the FAA’s AMS guidance (which directly adopted the language from the FAR) only required the Un- reasonable Cost surcharge to be applied when the foreign offer was the low bid, and it was undisputed that Vaisala bid a higher price than Optical Scien- tific.205 After the protest was filed, the FAA volun- tarily applied the Unreasonable Cost surcharge to the Vaisala bid, and its combined score was still better than that of Optical Scientific, rendering the BAA challenge moot.206 However, the ODRA agreed with Optical Scientific that, pursuant to the 1954 executive order,207 the Unreasonable Cost sur- charge “is automatically triggered whenever a for- eign offer and a domestic offer are submitted for a competitive federal contract,”208 not just when the offer to supply foreign goods is the low bid. The ODRA recommended updating the AMS guidance to clarify that the Unreasonable Cost surcharge is “mandatory in circumstances such as these where foreign and domestic offer are submitted for a com- petitive procurement.”209 The AIP Buy America provision does not appear to have a similar relaxation for best-value pro- curements. On an AIP project, an Unreasonable Cost waiver may be granted only where the use of domestic steel and manufactured goods “will in- crease the cost of the overall project by more than 25 percent.”210 There is no allowance in the text of the statute to compare bids based on any criteria except cost (e.g., technical quality). If there is a significant difference in technical quality between the domestic and foreign good (as in the Optical Scientific protest), or if there is no comparable do- mestic good in existence (as in the Litton Systems protest), then it would be more appropriate for an 203 Protest of Optical Scientific, Inc. Pursuant to Solici- tation No. DTFAAC-05-R-02321, No. 06-ODRA-00374 (Fed. Aviation Admin. 2006), aff’d, Fed. Aviation Admin. Order No. ODRA-06-387 (Aug. 18, 2006), available at http://www.faa.gov/about/office_org/Headquarters_offices/ agc/pol_adjudication/agc70/CaseFiles/view/docs/06_387fr. pdf. 204 Id. § II, ¶ 16. 205 Id. § III.A. 206 Id. § I. 207 Exec. Order No. 10,582, 19 Fed. Reg. 8,723 (Dec. 17, 1954), available at http://www.archives.gov/federal- register/codification/executive-order/10582.html. 208 Optical Scientific, § III.A. 209 Id. § III.A. 210 49 U.S.C. § 50101(b)(4) (2011).