‘Buy American’ compliance tricky in increasingly global economy

As Rapiscan Systems prepared to bid on a security-equipment contract last year, Vice President of Government Affairs Peter Kant thought he deserved an edge over his two competitors because only his company was based in the United States and set to manufacture the equipment domestically.

Rapiscan, a manufacturer of baggage- and cargo-screening systems in Hawthorne, Calif., was up against a British-based company and a U.S. company that had paired with a Chinese firm and planned to manufacture its equipment in China.

But Chemonics, the prime contractor managing the U.S. Agency for International Development's $40 million contract to screen cargo leaving and entering Palestinian territories and Israel, awarded the subcontract to the American-Chinese team. USAID had opted not to include a clause in the contract that would have required the supplier to assemble the equipment in the United States.

That decision, and Kant's ensuing disappointment, illustrate the growing debate over "Buy American" regulations as agencies struggle to comply with the complicated, decades-old legislation in a world driven by global supply chains. As agencies and contractors grow increasingly frustrated with the high costs of compliance, industry groups are pushing to liberalize the regulations.

The 1979 Trade Agreements Act, which governs most large government contracts, requires agencies to buy products that undergo "substantial transformation," or final assembly, in the United States or one of 30 approved countries that have trade agreements with Washington.

The 1933 Buy American Act, which has been altered over the years through a variety of exemptions, now applies mainly to smaller contracts and gives preference to products that originate in the United States or approved countries. The Defense Department is also restricted by the 1941 Berry Amendment, which governs the military's purchase of food, clothing, specialty metals, and other materials.

Forcing companies to comply with domestic-sourcing requirements runs up costs, said John Douglass, president of the Aerospace Industries Association, an Arlington, Va.-based group. "People are concerned with the rising cost of Defense Department weapons systems, and we have all these special rules that require [contractors] to specially build things in very small quantities," he said.

Because contractors often have large commercial businesses, too, which do not require domestic sourcing, companies end up building products separately for the Defense Department. This makes the products more expensive, Douglass said.

To comply with the Trade Agreements Act, IBM installed an expensive, industrial-strength computerized system to track where its products are assembled, which also runs up the cost, said Bruce Leinster, senior adviser to IBM and former director of the company's public-sector contracting.

The company gave up tracking the origin of all the components for smaller contracts, as the Buy American Act requires, because doing so would have been prohibitively expensive. IBM discloses the limits of its tracking abilities and lets agencies decide whether or not they're acceptable, Leinster said.

"It's become very difficult to create an IT product that is 51 percent American-sourced, simply because of the global marketplace of the industry," said Trey Hodgkins, director of defense programs for the Information Technology Association of America. In the IT sector, companies usually burn software and assemble products overseas, because it's cheaper, he said, adding, "It makes no sense for companies to do that here.... It's done wherever labor is cheapest."

Angela Styles, former head of federal procurement policy at the Office of Management and Budget and now a contracts lawyer at the Washington law firm Miller & Chevalier, said, "It's costing the government a lot to comply."

Styles said that departments and agencies would often prefer to buy a cheaper product that's made in China, for example, but the law forces them to buy the more expensive supplies made in approved countries.

Without spending a lot of money on audits, it's also difficult for government officials to verify the source of the items they purchase from companies. As a result, Styles said, some agencies simply looked the other way as contractors began doing more of their work in other countries during the 1990s and early 2000s.

A report last year by the Homeland Security Department's inspector general revealed that neither the department's contract database nor the Federal Procurement Data System was able to track data about the origin of purchased products. A 2002 Defense Department inspector general audit of military clothing purchases found that 67 percent lacked the required domestic-sourcing requirement clauses.

But evidence shows that agencies are getting stricter about compliance -- because they anticipate greater enforcement. In 2005, the Justice Department announced three major settlements with office-supply companies that had reportedly purchased supplies from China and Taiwan and then sold them to government agencies through contracts with the General Services Administration. Staples, Office Depot, and OfficeMax paid $7.4 million, $4.75 million, and $9.8 million, respectively.

"It was a wake-up call," Styles said.

As Justice was wrapping up its investigations of the office-supply companies, GSA began reminding contractors about the Trade Agreements Act through its newsletters, trade association outreach, and one-on-one discussions with contractors.

In June, Kenneth Krieg, undersecretary of Defense for acquisition, technology, and logistics, acknowledged that some Pentagon contracts were not in compliance with the Berry Amendment but contended that delaying the contracts could "seriously impact our ability to meet military needs." He told the four armed services to go forward with the contracts but to withhold payment on any parts of the contracts that violated the amendment until the problem could be fixed.

Some government procurement officials would like to see compliance made easier and less costly. "The world has changed, and the act just has to be overhauled," said one procurement official who asked not to be named.

In partial response to that sentiment, Congress eased restrictions on the Pentagon's sourcing requirements this year. The 2007 Defense Authorization Act excludes commercial electronic components from the Berry Amendment.

An aide to Rep. Duncan Hunter, R-Calif., chairman of the House Armed Services Committee until the Democrats take over in January, said that despite the exception, the new language will have the overall effect of strengthening domestic-sourcing requirements, because it clarifies exactly what contractors need to do.

Hunter has been the chief Buy American proponent. "Folks at the prime and subcontract levels now understand that they need to comply, and there's a realistic way for people to get into compliance," the aide said.

Hunter and other lawmakers, including Rep. Don Manzullo, R-Ill., have backed tighter restrictions for several years. Last year, Manzullo amended the Defense Authorization Act to require the Defense Department to buy only products with at least 50 percent of their components made in the United States. The amendment would also have prohibited the Pentagon from exempting a country from the Buy American Act without congressional approval.

At the time, Manzullo said that the amendment would "help restore the struggling U.S. industrial base and create jobs for Americans." The amendment was deleted from the final bill, however.

Not all Republicans share Hunter's views. David Marin, staff director for Rep. Tom Davis, R-Va., chairman of the House Government Reform Committee, said that Davis believes sourcing restrictions prevent agencies from buying the best available goods and technology.