The recent case highlights the importance of complying with domestic preference requirements in government contracts.
The US Department of Justice (DOJ) recently announced that Novum Structures LLC (Novum) will pay $3 million to settle allegations that it used foreign materials on federally funded construction projects in violation of its contractual requirements. Significantly, this settlement includes a $2.5 million civil settlement, a guilty plea and accompanying $500,000 criminal fine, and a statement that Novum will not “contest debarment from federally funded projects.” This settlement highlights contractors’ need to pay close attention to the domestic sourcing requirements in their contracts, ensure that they have adequate compliance systems to identify and update country-of-origin information as appropriate, and ensure that they deliver compliant materials to the government and higher-tier contractors that comply with these provisions when applicable.
The Buy American Act (BAA), 41 U.S.C. § 8302, generally requires that, for US government supply orders of more than $3,500, contractors must provide “domestic end products.” Under the BAA, a domestic end product is manufactured in the United States and either (1) at least 50% of the cost of its components must be attributable to US components or (2) the item is a commercially available off-the-shelf item (COTS). In construction contracts, the BAA mandates that contractors use only “domestic construction materials” in the construction, alteration, or repair of any public building or public work in the United States (applying the same US manufacture plus more than 50% component cost or a COTS test to the construction material).
The Federal Transit Administration’s similarly named Buy America Act, 49 U.S.C. § 5323(j), is one of five similar Department of Transportation “Buy America” provisions that requires procurements related to mass transit and valued at more than $100,000 to use only iron, steel, and manufactured products that are produced in the United States. Finally, section 1605 of the American Recovery and Reinvestment Act of 2009 (ARRA), P.L. 111-5, requires that all iron, steel, and manufactured goods used as construction material in work on any public building or public work funded by the ARRA be produced or manufactured in the United States.
These domestic preference statutes are implemented through standard contract clauses identified in government contracts. Contractors and subcontractors that perform construction services or provide material to government agencies must adhere to the requirements of any domestic preference clauses in their contracts. Failure to do so can result in criminal and civil liability under the False Claims Act, as well as contractual remedies, such as contract termination, required rework of a construction project to replace noncompliant materials with compliant ones, suspension, and debarment (ineligibility to conduct future business with the federal government).
Novum, a Wisconsin-based architectural firm, produces and constructs glass space frames for roofs and atriums. It often supplies materials for public works projects that receive federal funding. According to the DOJ press release, during Novum’s work on these projects, it allegedly repackaged materials and falsified documents to disguise its use of materials from China, Germany, and Italy. These actions violated the applicable domestic preference requirements in its contracts.
Novum agreed to plead guilty and pay $500,000 in criminal fines, as well as $2.5 million to settle related civil False Claims Act allegations. In an unusual development, Novum also agreed not to challenge its debarment from all federally funded projects.
The Novum case demonstrates that federal contractors must understand and be able to comply with the domestic preference requirements in their government contracts. Contractors should have policies and procedures in place to identify domestic preference requirements in invitations for bids and solicitations and to make informed determinations regarding the characterization of supplies and construction materials at the time such materials are proposed for inclusion in a bid or proposal, for both compliance and cost-related reasons. Contractors also should have policies and procedures in place to address any changes in the supply chain that may affect their ability to satisfy these requirements (such as requiring periodic updates or certifications from vendors regarding countries of origin for components) and to notify those within the company who are tasked with compliance with domestic sourcing provisions when sourcing changes.
The consequences of violating domestic preference requirements, including “Buy America” and BAA requirements, can be severe. Contractors should take the necessary compliance steps now to ensure that they do not risk sanctions.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Sheila A. Armstrong
 For purchases that exceed certain thresholds, the BAA is waived and the Trade Agreements Act, 19 U.S.C. §§ 2501–2581, applies. Effective January 1, 2016, these thresholds ranged from $25,000 to $191,000 for supplies and $7,358,000 to $10,079,000 for construction. See FAR 25.402(b).
 The Department of Defense has a public interest exception that allows supplies from “Qualifying Countries” to be treated the same as products manufactured in the United States for purposes of the BAA. See DFARS 225.103(a)(1)(A). “Qualifying Countries” include Australia, Austria, Belgium, the Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. See DFARS 225.872.
 On September 30, 2015, all undisbursed ARRA funds were returned to the US Department of the Treasury.