Government Contracts Monitor

Does Prefab Manufacturing Pass the “Substantial Transformation” Test ?

March 2, 2015

By: Eric Whytsell

With or without legal advice, many contractors develop manufacturing processes to produce products they are confident certifying as Trade Agreement Act (TAA) compliant. Procuring agencies accept the certification and make the purchase. The Government Accountability Office (GAO) decision in Sea Box, Inc., B-409963.3 (February 4, 2015), suggests, however, that contractors should leaven their confidence with an appreciation of the limits of certain types of manufacturing processes.

The procurement in question involved a Defense Logistics Agency (DLA) purchase of shipping containers known as Tricon Type I. Among other things, the solicitation incorporated DFARS 252.225-7021, Trade Agreements, which requires contractors to deliver only “U.S.-made, qualifying country, or designated country end products” unless such end products are not received or are insufficient to fill the government’s requirements.” Of the three companies that submitted proposals, the one with the lowest price offered containers manufactured in China and the other two (including the protester, Sea Box) offered containers assembled in the U.S. using Chinese component kits specifically designed to create Tricon Type I containers.

Faced with these offers, DLA determined that no TAA-compliant products were offered and awarded the contract to the low offeror (whose products were manufactured in China). In response, Sea Box filed an initial protest challenging DLA’s TAA evaluation, then followed that up with a second protest attacking the adequacy of the corrective action DLA took in response to the first protest. Along the way, DLA collected additional information concerning protester’s assembly process and the sourcing of components used. In the end, after reviewing the offerors’ trade agreements certifications and various documents provided, DLA again concluded that none of the three had offered TAA-compliant containers and again awarded the contract to the lowest-priced offeror.

Not surprisingly, Sea Box protested a third time, arguing that: (i) DLA should have accepted its TAA certification because it had no reason to doubt Sea Box’s claims; (ii) DLA used the wrong standard and should have relied on previous TAA decisions by the Small Business Administration (SBA) and Defense Contract Management Agency (DCMA); and (iii) DLA’s determination was unreasonable because it did not apply the “totality of the circumstances” standard used by Customs and Border Patrol (CBP) to analyze TAA compliance.

GAO made short work of these arguments. First, it pointed out that DLA did indeed have reason to doubt Sea Box’s certification, since Sea Box had informed DLA during the earlier corrective action and reevaluation process that the components it assembled into the subject containers were manufactured in China. Second, GAO noted the distinction between SBA and DCMA determinations (and the standards on which they are based) and a proper review of TAA compliance. The SBA’s test for size determinations, its resulting conclusions, and DCMA’s pre-award surveys do not determine the country of origin of an end product. It is CBP, not SBA or DCMA, that has authority to make country of origin determinations relating to the TAA. Finally, the standard it uses is the substantial transformation test, “i.e. whether an article is transformed into a new and different article of commerce, with a name, character, or use distinct from the original article.” Neither the solicitation, nor the FAR and the DFARS, require the use of the “totality of the circumstances” approach.

Furthermore, DLA based its determination on a CBP decision addressing when assembly of parts or materials constitutes substantial transformation. In that decision, CBP “concluded that the imported components of a steel split sleeve repair clamp were not substantially transformed as a result of U.S. operations such as finishing, assembly, and painting, because the foreign items had a predetermined use at the time of importation and the U.S. operations did not change the character of the item.”

Here, from the beginning, DLA’s basis for finding a lack of TAA compliance was that the Chinese components (the containers’ front and side walls, doors, floor and roof) were specifically designed to create a Tricon Type I container and had no other use. GAO agreed with the agency that, while the various aspects of the assembly process added value to those Chinese components, they did not substantially transform them into something new. For these reasons, the protest was denied.

A key takeaway here is that “prefab” manufacturing processes -- those involving the manufacture of custom parts for assembly in the U.S. -- run a high risk of being found noncompliant with the TAA if the issue comes up. Prudent contractors will take this into account when deciding whether they can sign a TAA certification.

Attorneys