B-166613, MAY 26, 1969

B-166613, MAY 26, 1969

TO DR. PAINE:

WE REFER TO A LETTER DATED APRIL 4, 1969, FILE REFERENCE: KDI, FROM YOUR DIRECTOR OF PROCUREMENT, REQUESTING A DECISION OF THIS OFFICE AS TO WHETHER THE USE OF CERTAIN STEEL TUBES IN A HEAT EXCHANGER AS PROPOSED BY THE PITTSBURGH-DES MOINES STEEL COMPANY (PDM) UNDER ITS CONTRACT (NAS 3- 11933) FOR EXPANSION OF THE PROPULSION SYSTEMS LABORATORY FOR SUPERSONIC RESEARCH, NASA LEWIS RESEARCH CENTER, CLEVELAND, OHIO, WOULD BE IN VIOLATION OF THE BUY AMERICAN PROVISIONS OF THE CONTRACT AS SET OUT IN CLAUSE 19, STANDARD FORM 23-A, JUNE 1964 EDITION.

IT IS STATED IN THE LETTER OF APRIL 4 THAT ADVICE HAS BEEN RECEIVED FROM THE LEWIS RESEARCH CENTER THAT THE FOLLOWING SCHEDULE IS APPLICABLE TO THE TUBING:

"PRODUCTION STARTED IN GERMANY 2/11/69

PRODUCTION WILL BE COMPLETE 3/31/69

SHIPMENTS TO U.S. WILL BEGIN APRIL 1969

MATERIAL WILL BE PROCESSED IN THE U.S. APRIL - MAY 1969

DELIVERY TO THE JOB SITE WILL BE PERIODIC JUNE 1 - SEPT. 1, 1969"

THE SUBJECT CLAUSE, WHICH WAS MADE A PART OF THE CONTRACT PURSUANT TO THE REQUIREMENTS OF PARAGRAPH 10B OF THE BUY AMERICAN ACT, 41 U.S.C. 10A-D, PROVIDES AS FOLLOWS:

" (A) AGREEMENT. IN ACCORDANCE WITH THE BUY AMERICAN ACT (41 U.S.C. 10A- 10D) AND EXECUTIVE ORDER 10582, DECEMBER 17, 1954 (3 CFR SUPP.) , THE CONTRACTOR AGREES THAT ONLY DOMESTIC CONSTRUCTION MATERIAL WILL BE USED (BY THE CONTRACTOR, SUBCONTRACTORS, MATERIALMEN, AND SUPPLIERS) IN THE PERFORMANCE OF THIS CONTRACT, EXCEPT FOR NONDOMESTIC MATERIAL LISTED IN THE CONTRACT.

" (B) DOMESTIC CONSTRUCTION MATERIAL. -CONSTRUCTION MATERIAL- MEANS ANY ARTICLE, MATERIAL, OR SUPPLY BROUGHT TO THE CONSTRUCTION SITE FOR INCORPORATION IN THE BUILDING OR WORK. AN UNMANUFACTURED CONSTRUCTION MATERIAL IS A -DOMESTIC CONSTRUCTION MATERIAL- IF IT HAS BEEN MINED OR PRODUCED IN THE UNITED STATES. A MANUFACTURED CONSTRUCTION MATERIAL IS A -DOMESTIC CONSTRUCTION MATERIAL- IF IT HAS BEEN MANUFACTURED IN THE UNITED STATES AND IF THE COST OF ITS COMPONENTS WHICH HAVE BEEN MINED, PRODUCED, OR MANUFACTURED IN THE UNITED STATES EXCEEDS 50 PERCENT OF THE COST OF ALL ITS COMPONENTS. COMPONENT- MEANS ANY ARTICLE, MATERIAL, OR SUPPLY DIRECTLY INCORPORATED IN A CONSTRUCTION MATERIAL. * * * " IN PERTINENT PART, 41 U.S.C. 10B (A) PROVIDES:

"EVERY CONTRACT FOR THE CONSTRUCTION, ALTERATION, OR REPAIR OF ANY PUBLIC BUILDING OR PUBLIC WORK IN THE UNITED STATES GROWING OUT OF AN APPROPRIATION HERETOFORE MADE OR HEREAFTER TO BE MADE SHALL CONTAIN A PROVISION THAT IN THE PERFORMANCE OF THE WORK THE CONTRACTOR, SUBCONTRACTORS, MATERIAL MEN, OR SUPPLIERS, SHALL USE ONLY SUCH UNMANUFACTURED ARTICLES, MATERIALS, AND SUPPLIES AS HAVE BEEN MINED OR PRODUCED IN THE UNITED STATES, AND ONLY SUCH MANUFACTURED ARTICLES, MATERIALS, AND SUPPLIES AS HAVE BEEN MANUFACTURED IN THE UNITED STATES SUBSTANTIALLY ALL FROM ARTICLES,MATERIALS, OR SUPPLIES MINED, PRODUCED, OR MANUFACTURED, AS THE CASE MAY BE, IN THE UNITED STATES * * * .'

DURING THE NEGOTIATION OF THE CONTRACT, BY LETTER DATED AUGUST 9, 1968, PDM SUBMITTED TO THE PROCUREMENT OFFICIALS A "REVISED SUMMARY ESTIMATE" MODIFYING ITS ORIGINAL ESTIMATE, TOGETHER WITH STATEMENT INTENDED TO CLARIFY THE PRICING OF CERTAIN ITEMS "AND TO MAKE OUR INTENTIONS REGARDING THEM KNOWN DURING THIS NEGOTIATION.'

THE STATEMENT SUBMITTED INDICATED THAT PDM'S SUPPLIER FOR THE TUBES INVOLVED HAD DISCOVERED CERTAIN ERRORS IN ITS ORIGINAL PRICE PROPOSAL THE EFFECT OF WHICH WAS TO INCREASE THE COST BY SOME $40,000 OR MORE; THAT AFTER DISCUSSION A FINAL QUOTATION HAD BEEN MADE IN AN AMOUNT $29,400 HIGHER THAN THE ORIGINAL. THE STATEMENT CONTINUED AS FOLLOWS:

"PDM HAS NOT INCREASED PRICE FOR THIS ITEM, BUT UNDER THE CIRCUMSTANCES WILL REQUEST APPROVAL * * * FOR USE OF FOREIGN TUBING MATERIALS WHERE THE VALUE OF MAT-L TO THE FABRICATOR IS LESS THAN HALF OF THE VALUE OF FINISHED TUBES DELIVERED TO THE SITE. WE UNDERSTAND SUCH TUBES ARE CONSIDERED AS DOMESTIC.'

THE CONTRACT WAS AWARDED UNDER DATE OF AUGUST 20, 1968, WITH NO EXCEPTION STATED TO THE BUY AMERICAN PROVISIONS QUOTED ABOVE.

ON OCTOBER 21, 1968, THE CONTRACTING OFFICER'S REPRESENTATIVE ADVISED PDM THAT HIS OFFICE WAS IN BASIC AGREEMENT WITH PDM'S DEFINITION OF DOMESTIC PRODUCTS, AND IN HIS REPORT TO NASA HEADQUARTERS OF JANUARY 24, 1969, THE PROCUREMENT OFFICER STATED:

"OUR CONCLUSION THAT THERE WAS NO APPARENT VIOLATION OF THE -BUY AMERICAN ACT- WAS BASED ON THE FACT THAT THE VALUE OF THE STEEL PURCHASED ABROAD REPRESENTS LESS THAN 50 PERCENT OF THE VALUE OF THE PRODUCT TO BE DELIVERED TO THE JOB SITE.'

WE ARE AWARE OF NO BASIS IN EITHER THE STATUTE, EXECUTIVE ORDER, REGULATIONS, OR DECISIONS OF THIS OFFICE FOR THE THEORY THAT THE FOREIGN OR DOMESTIC NATURE OF A MANUFACTURED CONSTRUCTION MATERIAL OR SUPPLY IS TO BE DETERMINED BY COMPARISON OF THE COST OR VALUE OF FOREIGN ELEMENTS WITH THE PRICE OR VALUE OF THE FINISHED MATERIAL. THE STATUTE REQUIRES THE USE OF "SUCH MANUFACTURED ARTICLES, MATERIALS, AND SUPPLIES AS HAVE BEEN MANUFACTURED IN THE UNITED STATES SUBSTANTIALLY ALL FROM ARTICLES, MATERIALS, OR SUPPLIES MINED, PRODUCED, OR MANUFACTURED, AS THE CASE MAY BE, IN THE UNITED STATES.' EXECUTIVE ORDER NO. 10582 REQUIRES THAT MATERIALS "SHALL BE CONSIDERED TO BE OF FOREIGN ORGIN IF THE COST OF THE FOREIGN PRODUCTS USED IN SUCH MATERIALS CONSTITUTES FIFTY PERCENTUM OR MORE OF THE COST OF ALL PRODUCTS USED IN SUCH MATERIALS.' THE PERTINENT REGULATION OF YOUR AGENCY, NASA PROCUREMENT REGULATION 6.201-5, DEFINES DOMESTIC CONSTRUCTION MATERIAL AS "A MANUFACTURED CONSTRUCTION MATERIAL WHICH HAS BEEN MANUFACTURED IN THE UNITED STATES IF THE COST OF ITS COMPONENTS WHICH ARE MINED, PRODUCED, OR MANUFACTURED IN THE UNITED STATES EXCEEDS 50 PERCENT OF THE COST OF ALL ITS COMPONENTS.' SECTION 6.201-2 DEFINES CONSTRUCTION MATERIALS AS ARTICLES, MATERIALS, AND SUPPLIES WHICH ARE BROUGHT TO THE CONSTRUCTION SITE FOR INCORPORATION IN THE BUILDING OR WORK, AND 6.201-3 STATES THAT COMPONENTS MEANS THOSE ARTICLES, MATERIALS, AND SUPPLIES WHICH ARE DIRECTLY INCORPORATED IN CONSTRUCTION MATERIALS.

OUR DECISION OF JULY 12, 1955, IN 35 COMP. GEN. 7, APPEARS TO COME CLOSEST TO SUPPORTING THE USE OF THE BID PRICE AS A BASIS FOR COMPARISON WITH THE COST OF FOREIGN COMPONENTS, BUT IT WAS CLEARLY AND SPECIFICALLY HELD THEREIN THAT IN MAKING SUCH COMPARISON THE BID PRICE MUST BE REDUCED BY COSTS OF TRANSPORTATION FROM THE DOMESTIC FACTORY TO THE SITE OF INSTALLATION; COSTS OF ,COMBINING OF THE FOREIGN COMPONENTS WITH THE DOMESTIC COMPONENTS OR THE TESTING OF ANY COMBINATION THEREOF"; PROFITS, COMMISSIONS, AND OVERHEAD. THE EFFECT OF SUCH REDUCTIONS WOULD LEAVE FOR CONSIDERATION ESSENTIALLY ONLY THE COST OF THE COMPONENTS INCORPORATED IN THE FINAL PRODUCT, AND THAT DECISION THEREFORE DOES NOT SUPPORT THE THEORY OF THE CONTRACTOR OR THE PROCUREMENT OFFICER AT THE CENTER.

IT SEEMS OBVIOUS THAT NEITHER PDM NOR THE PROCURING ACTIVITY GAVE ADEQUATE CONSIDERATION TO OUR PUBLISHED DECISION OF MAY 9, 1967, 46 COMP. GEN. 784, OR TO THE OTHER PUBLISHED DECISIONS CITED THEREIN, WHICH CLEARLY SHOW (IN THE APPLICATION OF SIMILAR BUY AMERICAN REQUIREMENTS FOR SUPPLY CONTRACTS) THAT IT IS THE COST OF THE COMPONENTS OF THE CONSTRUCTION MATERIAL, RATHER THAN THE FINAL COMPLETED COST OF SUCH CONSTRUCTION MATERIAL, WHICH MUST BE CONSIDERED IN APPLYING THE 50 PERCENT RULE. FURTHER, SUCH FACTOR IS ALSO CLEARLY SET FORTH IN THE BUY AMERICAN CLAUSE OF THE CONTRACT WHEREIN IT IS STATED THAT A MANUFACTURED CONSTRUCTION MATERIAL IS A DOMESTIC CONSTRUCTION MATERIAL IF IT HAS BEEN MANUFACTURED IN THE UNITED STATES AND IF THE "COST OF ITS COMPONENTS" WHICH HAVE BEEN MINED, PRODUCED, OR MANUFACTURED IN THE UNITED STATES EXCEEDS 50 PERCENT OF THE "COST OF ALL ITS COMPONENTS.' A COMPONENT IS DEFINED THEREIN AS MEANING ANY ,ARTICLE, MATERIAL, OR SUPPLY" DIRECTLY INCORPORATED INTO A CONSTRUCTION MATERIAL.

IT IS FURTHER NOTED THAT IN SUBMITTING THE MATTER FOR OUR CONSIDERATION YOUR DIRECTOR OF PROCUREMENT DID NOT ATTEMPT TO JUSTIFY THIS BASIS OF COMPARISON, BUT RELIES ON THE THEORY THAT THE SEVERAL STEPS OF PROCESSING OF THE FOREIGN TUBING FURNISH A REASONABLE BASIS FOR THE CONCLUSION ,THAT AT LEAST TWO OR MORE DOMESTIC MANUFACTURING PROCESSES WILL BE INVOLVED PRIOR TO THE FINAL DELIVERY OF ALL THE TUBES TO THE JOB SITE," AND CITES OUR DECISION 45 COMP. GEN. 658 AS HOLDING THAT THE END PRODUCT IN SUCH A CASE WOULD BE DOMESTIC.

THE PROCESSING OF THE FOREIGN TUBING IS DESCRIBED BY YOUR DIRECTOR OF PROCUREMENT AS FOLLOWS:

"WE ARE ADVISED THAT THE DOMESTIC PROCESSING OF THE FOREIGN PRODUCED TUBES WILL CONSIST OF WASHING AND RINSING, CUTTING INTO LENGTHS, WELDING, BENDING, RADIOGRAPHING, HYDROSTATIC TESTING, CHECKING AND ASSEMBLY INTO SETS. "THREE CATEGORIES OF TUBING ARE INVOLVED. THESE ARE 3-INCH BARE TUBES, 2-INCH BARE TUBES AND 2-INCH FINNED TUBES. THESE TUBES ARE TO BE USED IN A HEAT EXCHANGER AND WILL SERVE TO COOL HOT GASES TO BE PASSED OVER THEM. ALL OF THE TUBES IN QUESTION GO THROUGH THE WASHING AND RINSING PROCESSES. ALSO, ALL OF THE TUBES ARE CUT TO REQUIRED LENGTHS AND BENT IN AT LEAST ONE PLANE. IN THE CASE OF THE 3-INCH BARE TUBES, BENT SECTIONS ARE THEN WELDED TOGETHER IN ORDER TO FORM ONE CONTINUOUS TUBE BENT IN 3 PLANES. WELDING OF TUBE SEGMENTS IS ALSO NECESSARY IN THE CASE OF THE OTHER TUBE CATEGORIES. "THE 2-INCH FINNED TUBES, IN ADDITION TO THE ABOVE PROCESSES, GO THROUGH FURTHER MANUFACTURING STEPS. THESE TUBES HAVE THE FINNING APPLIED IN A CONTINUOUS PROCESS BY A MACHINE THAT WELDS THE FIN TO THE TUBE. THE FIN IS MADE OF EITHER CARBON STEEL OR STAINLESS STEEL AND ITS APPLICATION RESULTS IN A CONTINUOUS HELICAL FIN. THE TUBES THAT ARE FINNED WITH CARBON STEEL (8 ROWS OUT OF 10) MUST ALSO BE GALVANIZED. THE FINNING IS APPLIED TO APPROXIMATELY 50 PERCENT OF ALL OF THE TUBES. "WITHOUT DISCUSSING IN FURTHER DETAIL THESE VARIOUS MANUFACTURING PROCESSES, WE BELIEVE THAT A REASONABLE BASIS EXISTS FOR A CONCLUSION THAT AT LEAST TWO OR MORE DOMESTIC MANUFACTURING PROCESSES WILL BE INVOLVED PRIOR TO THE FINAL DELIVERY OF ALL OF THE TUBES TO THE JOB SITE. "PDM HAS FURNISHED PURCHASE ORDERS SHOWING THAT THE MATERIAL PURCHASED BY ITS SUPPLIER (KENTUBE) FROM A FOREIGN SOURCE WILL COST APPROXIMATELY $45,000, WHEREAS, THE VALUE OF THE MATERIAL DELIVERED TO THE JOB SITE, AFTER DOMESTIC PROCESSING, WILL BE $235,000. THUS, THE COST OF THE DOMESTIC PROCESSING WILL FAR EXCEED 50 PERCENT OF THE COST OF THE MATERIAL ITSELF.'

THE RECORD DOES NOT SHOW THE COST OF THE WELDING, GALVANIZING, AND FINNING MATERIALS THAT WILL BE INCORPORATED BY KENTUBE INTO THE TUBES (CONSTRUCTION MATERIAL) WHICH IT INTENDS TO DELIVER TO THE JOB SITE; HOWEVER, INASMUCH AS NO MENTION IS MADE THEREOF, WE ASSUME IT IS LESS THAN THE COST OF THE FOREIGN TUBING, AND THEREFORE DOES NOT SATISFY THE REQUIREMENTS FOR A DOMESTIC CONSTRUCTION MATERIAL AS SET OUT IN THE BUY AMERICAN CLAUSE OF THE CONTRACT.

CONCERNING THE CONTENTION THAT INASMUCH AS TWO MANUFACTURING PROCESSES WILL TAKE PLACE IN THE UNITED STATES THE FINISHED TUBES SHOULD BE REGARDED AS DOMESTIC CONSTRUCTION MATERIAL UNDER THE RATIONALE OF 45 COMP. GEN. 658, THE NUMBER OF MANUFACTURING PROCESSES INVOLVED IN THAT DECISION WAS MATERIAL ONLY BY VIRTUE OF THE RESULTS OF EACH OF THOSE PROCESSES. IN THE SITUATION THERE INVOLVED FOREIGN INGOTS WERE USED WITHIN THE UNITED STATES TO MANUFACTURE BILLETS, A BASICALLY NEW AND DIFFERENT MATERIAL, AND THE BILLETS WERE THEREAFTER USED TO MANUFACTURE ANOTHER NEW ITEM, REINFORCING BARS. IN THE MANUFACTURE OF AN ITEM, MANY SEPARATE PROCESSES OR OPERATIONS MAY BE USED BUT EACH OF SUCH MANUFACTURING OPERATIONS DOES NOT NECESSARILY PRODUCE OR MANUFACTURE A BASICALLY NEW OR DIFFERENT ARTICLE, MATERIAL, OR SUPPLY. WHILE WE AGREED IN THAT DECISION THAT THE BILLET SHOULD BE CONSIDERED AS THE COMPONENT OF THE END PRODUCT, THE DECISION WAS BASED ON THE DETERMINATION THAT THE BILLET WAS A GREATLY DIFFERENT PRODUCT RESULTING FROM A MANUFACTURING PROCESS PERFORMED WITHIN THE UNITED STATES ON THE FOREIGN INGOT, AND THAT THE STANDARD PRACTICE IN THE INDUSTRY WAS TO MANUFACTURE REINFORCING BARS FROM BILLETS. SUCH A RESULT DOES NOT APPEAR TO BE ACCOMPLISHED BY THE INDIVIDUAL CUTTING, BENDING, WELDING, AND FINNING OPERATIONS TO BE PERFORMED ON THE TUBING IN THE CASE AT HAND. ALTHOUGH THOSE OPERATIONS MAY BE CLASSIFIED AS MANUFACTURING PROCESSES OR OPERATIONS, NO SUGGESTION OR CONTENTION HAS BEEN PRESENTED THAT AT ANY PARTICULAR POINT IN THESE OPERATIONS THE BASIC TUBING HAS BEEN TRANSFORMED INTO A DISTINCTLY NEW AND ESSENTIALLY DIFFERENT ITEM WHICH COULD BE CONSIDERED AS A DOMESTIC COMPONENT OF THE FINISHED ARTICLES. THEREFORE, WHILE THE TOTAL PROCESSING INVOLVED IN MAKING THE UNFINISHED TUBING INTO THE FINISHED TUBES REQUIRED BY THE GOVERNMENT MAY BE REGARDED AS ADEQUATE TO ESTABLISH THE FINISHED TUBES AS ARTICLES MANUFACTURED IN THE UNITED STATES, WE FIND NO REASONABLE BASIS FOR CONSIDERING THEM TO BE MANUFACTURED FROM ANY COMPONENTS OTHER THAN THE FOREIGN TUBING, AND SUCH MINOR AMOUNTS OF WELDING, PLATING, AND FINNING MATERIALS AS ARE ADDED IN THE PROCESSING. COMPARE B-166008, MAY 9, 1969. IN THE EVENT WE DETERMINED, AS ABOVE, THAT THE FINISHED TUBES WERE NOT DOMESTIC CONSTRUCTION MATERIAL SO AS TO BE ACCEPTABLE UNDER THE BUY AMERICAN ACT, YOUR DIRECTOR OF PROCUREMENT MADE THE FOLLOWING REQUEST: "IN VIEW OF THE FACT THAT PRODUCTION IN GERMANY IS COMPLETE AND THE FACT THAT THE TRANSACTIONS IN QUESTION AS THEY RELATE TO THE BUY AMERICAN ACT WERE BASED ON GOOD FAITH AND REASONABLE JUDGMENTS OF THE CONTRACTING PARTIES, IF NASA TERMINATED THE CONTRACT OR DEMANDED USE OF DOMESTIC MATERIALS AND LITIGATION ENSUED, THE LIKELIHOOD OF SUCCESS BY THE GOVERNMENT IN THE CONDUCT OF SUCH LITIGATION IS AT LEAST OPEN TO VERY REAL DOUBT. IN VIEW OF THE CIRCUMSTANCES WE DO NOT PLAN TO DISTURB THE ACTION TAKEN UNLESS THIS CONTRACT IS DETERMINED BY YOUR OFFICE TO BE CLEARLY ILLEGAL AND PAYMENT PROHIBITED. BECAUSE OF THE DIFFICULT AREAS OF INTERPRETATION IN THIS CASE WE RESPECTFULLY REQUEST YOUR RULING ON THE MATTER. IF, AFTER REVIEW, YOUR CONCLUSIONS DIFFER FROM THOSE EXPRESSED ABOVE, WE REQUEST THAT YOUR DECISION LIMIT ITS APPLICABILITY TO FUTURE ES.'

IN VIEW OF THE FACTS OF THIS PARTICULAR CASE WE DO NOT BELIEVE THAT THE BEST INTERESTS OF THE GOVERNMENT WOULD REQUIRE THIS OFFICE TO QUESTION PAYMENT TO THE CONTRACTOR SHOULD THE NONDOMESTIC TUBES BE INCORPORATED IN THE WORK AT THE PROPULSION SYSTEMS LABORATORY.