B-166008, MAY 9, 1969, 48 COMP. GEN. 727

B-166008, MAY 9, 1969, 48 COMP. GEN. 727

BIDS--BUY AMERICAN ACT--FOREIGN PRODUCT DETERMINATION--COMPARISON OF FOREIGN AND DOMESTIC COMPONENT COSTS IN DETERMINING WHETHER CYLINDER LINERS TO BE MANUFACTURED IN THE UNITED STATES FROM BASIC LINER FORGING PURCHASED IN JAPAN CONSTITUTE A FOREIGN OR DOMESTIC SOURCE END PRODUCT UNDER EXECUTIVE ORDER NO. 10582, THE COST OF THE UNITED STATES OPERATIONS MAY NOT INCLUDE THE COST OF TESTING, PRODUCTION QUALIFICATION EVALUATION, AND PACKAGING AS THESE PROCESSES ARE NOT CONSIDERED "MANUFACTURING" OR COMPONENTS OF THE END ITEM WITHIN THE CONTEMPLATION OF THE BUY AMERICAN ACT. THE DOMESTIC OPERATIONS ON THE FORGING--- HONE BORING, CHROME PLATING, AND MACHINING -- NEITHER EXCEEDING THE COST OF THE FOREIGN FORGING AS REQUIRED BY PARAGRAPH 6-101 (A) OF THE ARMED SERVICES PROCEUREMENT REGULATION, NOR CREATING A DIFFERENT ARTICLE OR EFFECTING A FUNDAMENTAL CHANGE IN THE FORGING, THE CYLINDER LINER END PRODUCT IS CONSIDERED A FOREIGN SOURCE END PRODUCT.

TO MATZKIN & DAY, MAY 9, 1969:

REFERENCE IS MADE TO YOUR LETTERS OF FEBRUARY 7 AND MARCH 10, 1969, PROTESTING ON BEHALF OF A. G. SCHOONMAKER COMPANY, INC; THE DETERMINATION BY THE DEFENSE SUPPLY AGENCY THAT THE CYLINDER LINERS OFFERED BY YOUR CLIENT UNDER REQUEST FOR PROPOSALS (RFP) NO. DSA-700-69 R-0782, AS AMENDED, SHOULD BE EVALUATED AS A FOREIGN SOURCE END PRODUCT UNDER THE BUY AMERICAN ACT, 41 U.S.C. 10A-D, AS IMPLEMENTED BY EXECUTIVE ORDER NO. 10582, AND BY SECTION VI OF THE ARMED SERVICES PROCUREMENT REGULATION (ASPR).

INSOFAR AS IT CONCERNS THE SUBJECT PROCUREMENT THE PERTINENT PROVISION OF THE BUY AMERICAN ACT (41 U.S.C. 10A) REQUIRES THAT 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 IN THE UNITED STATES SHALL BE ACQUIRED FOR PUBLIC USE UNLESS IT IS DETERMINED THAT THE COST IS UNREASONABLE OR THAT IT IS INCONSISTENT WITH THE PUBLIC INTEREST. EXECUTIVE ORDER NO. 10582 PROVIDES THAT THE MATERIALS TO BE ACQUIRED BY THE GOVERNMENT SHALL BE CONSIDERED TO BE OF FOREIGN ORIGIN IF THE COST OF THE FOREIGN PRODUCTS USED IN SUCH MATERIALS CONSTITUTES 50 PERCENT OR MORE OF THE COST OF ALL THE PRODUCTS USED IN THOSE MATERIALS. TO ASSIST IN DETERMINING WHETHER ARTICLES, MATERIALS, AND SUPPLIES TO BE ACQUIRED BY THE GOVERNMENT FOR PUBLIC USE (END PRODUCTS) ARE TO BE REGARDED AS BEING OF A FOREIGN OR A DOMESTIC SOURCE, THE IMPLEMENTING REGULATION ASPR 6-102.1 PROVIDES THAT ONLY THE END PRODUCT AND ITS COMPONENTS SHALL BE CONSIDERED. COMPONENTS ARE DEFINED BY ASPR 6-001 (B) AS THOSE ARTICLES, MATERIALS, AND SUPPLIES WHICH ARE DIRECTLY INCORPORATED INTO END PRODUCTS; AND FINALLY ASPR 6-101 (A) DEFINES A DOMESTIC SOURCE END PRODUCT AS AN END PRODUCT 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.

WHILE YOU SAY THAT THE BASIC STEEL CYLINDER LINER FORGING IS PURCHASED FROM A SOURCE IN JAPAN AND DELIVERED IN THE UNITED STATES AT A COST OF $135, ALL OF THE SUBSEQUENT OPERATIONS PERFORMED ON THAT FORGING TO MAKE IT INTO THE PRODUCT SPECIFIED IN THE SOLICITATION ARE PERFORMED BY A SUBCONTRACTOR OF SCHOONMAKER IN THE UNITED STATES AT A COST OF $153.55. YOU DESCRIBE SUCH OPERATIONS AS MANUFACTURING STEPS OR PHASES AND STATE THAT PRINCIPALLY THEY CONSIST OF HONE BORING ($6), CHROME PLATING ($56), MACHINING ($70.48), TESTING AND EVALUATION ($12.20), AND PACKAGING ($8.87).

YOU STATE THAT THE FIRST STEP IN THE MANUFACTURE OF THE END PRODUCT IS THE PURCHASE OF THE FOREIGN FORGING, AND THAT THE SUBSEQUENT MANUFACTURING OPERATIONS MATERIALLY ALTER THE FORM AND CONTENT OF THE FORGING. YOU NOTE THAT SUCH OPERATIONS ARE NECESSARY BEFORE THE FORGING BECOMES A USEABLE ARTICLE, AND INVOLVE NOT ONLY LABOR BUT THE USE OF MACHINE TOOLS, MACHINE TOOL EQUIPMENT, AND CERTAIN MANUFACTURING MATERIALS WHICH DO NOT NECESSARILY FORM A PART OF THE END PRODUCT BUT ARE NECESSARY TO CREATE OR MANUFACTURE THE END PRODUCT. YOU THEREFORE REASON THAT IN THE OVERALL MANUFACTURING PROCESS EACH MANUFACTURING OPERATION CONSTITUTES A COMPONENT PART TO MAKE UP THE END PRODUCT, WITH ITS ATTENDANT COST, BECOMING A DOMESTIC COMPONENT COST FOR CONSIDERATION IN DETERMINING WHETHER THE END ITEM IS FOREIGN OR DOMESTIC. WHILE YOU OBSERVE THAT LABOR COSTS INVOLVED IN COMBINING PREVIOUSLY MANUFACTURED COMPONENTS TO FORM THE END PRODUCT MAY NOT BE CONSIDERED IN DETERMINING WHETHER THE END PRODUCT IS OF A DOMESTIC OR A FOREIGN SOURCE, 35 COMP. GEN. 7, YOU CONTEND THAT THE SUBJECT END PRODUCT INVOLVES NO OPERATIONS TO COMBINE FOREIGN COMPONENTS WITH DOMESTIC COMPONENTS SINCE SUCH PRODUCT IS MANUFACTURED BY MEANS OF SEVERAL CONSECUTIVE, SEQUENTIAL MANUFACTURING OPERATIONS, ALL OF WHICH ARE PERFORMED TO AN ITEM THAT ENTERED THE UNITED STATES AS AN UNFINISHED ARTICLE, AND ARE NECESSARY TO MAKE THAT UNFINISHED ARTICLE INTO THE FINISHED MANUFACTURED ARTICLE SPECIFIED IN THE SOLICITATION.

YOUR POSITION IN THIS MATTER APPEARS TO BE TWOFOLD--- (1) THAT INASMUCH AS THE COST OF THE SEQUENTIAL MANUFACTURING OPERATIONS, INCLUDING PACKAGING, WHICH YOU CONTEND ARE COMPONENTS OF THE END PRODUCT, EXCEEDS THE COST OF THE FOREIGN FORGING, THE FINISHED CYLINDER LINER OFFERED BY SCHOONMAKER IS A DOMESTIC ARTICLE UNDER THE 50 PERCENT CRITERION IN THE DEFINITION OF DOMESTIC SOURCE END PRODUCT SET OUT IN ASPR 6-101 (A); AND (2) THAT THE FOREIGN FORGING UNDERGOES SUBSTANTIAL CHANGES IN PHYSICAL CHARACTER DURING EACH OF THE MANUFACTURING OPERATIONS, AND THAT THE PENULTIMATE OPERATION SHOULD BE CONSIDERED AS THE MANUFACTURE OF THE SOLE COMPONENT OF THE END PRODUCT, AND THE ULTIMATE OPERATION AS THE MANUFACTURING OF THE END PRODUCT FROM THAT COMPONENT. SINCE BOTH OF THOSE OPERATIONS WOULD BE PERFORMED IN THE UNITED STATES YOU SUGGEST THAT THE FINISHED CYLINDER LINER, HAVING BEEN MANUFACTURED IN THE UNITED STATES FROM A COMPONENT WHICH WAS MANUFACTURED IN THE UNITED STATES, SHOULD BE REGARDED AS A DOMESTIC SOURCE END PRODUCT UNDER THE RATIONALE OF OUR DECISION, 45 COMP. GEN. 658.

EVEN IF WE WERE TO AGREE WITH YOUR THEORY, WE COULD NOT ACCEPT YOUR CONCLUSION THAT THE END PRODUCT IS DOMESTIC. IN THE FIRST PLACE, IT IS NOTED FROM THE COST DATA INCLUDED IN YOUR PROPOSAL THAT THE ENTIRE PROCESSING COST OF $141.35 REPRESENTS THE PRICE TO BE PAID BY YOU UNDER ONE OR MORE SUBCONTRACTS, AND IT SEEMS OBVIOUS THAT A SUBSTANTIAL PART THEREOF MUST REPRESENT LABOR COSTS, WHICH ARE CLEARLY EXCLUDED FROM CONSIDERATION BY 35 COMP. GEN. 7. IN ADDITION, YOU ALLOCATE $8.87 TO PACKAGING, WHICH WE DO NOT CONSIDER TO BE MANUFACTURING, AND DEDUCTION OF THAT AMOUNT FROM THE $141.35 WOULD LEAVE ONLY $132.48 AS THE COST OF THE ALLEGED "DOMESTIC COMPONENTS," EXCLUSIVE OF TESTING AND EVALUATION.

THE PROCESS OF PACKAGING, OR PACKING, PREVIOUSLY MANUFACTURED END ITEMS THAT ARE TO BE ACQUIRED BY THE GOVERNMENT, TOGETHER WITH THE MATERIALS USED IN THAT PROCESS, WERE FULLY CONSIDERED BY THIS OFFICE IN 46 COMP. GEN. 784, WHEREIN WE HELD THAT SUCH PROCESS MAY NOT BE REGARDED AS AN ADDITIONAL "MANUFACTURING" PROCESS WITHIN THE CONTEMPLATION OF THE BUY AMERICAN ACT, AND THAT THE PACKAGING MATERIALS LIKEWISE MAY NOT BE CONSIDERED AS "COMPONENTS" IN THE APPLICATION OF THAT ACT AND ITS IMPLEMENTING REGULATIONS. IT WAS POINTED OUT IN THAT DECISION THAT THE LEGISLATIVE HISTORY OF THE ACT AFFORDED NO BASIS FOR CONCLUDING THAT IN THE PROCUREMENT OF A MANUFACTURED ARTICLE THE TERM "MANUFACTURED" WAS INTENDED TO EXTEND BEYOND THE COMPLETION OF THE ARTICLE IN THE FORM REQUIRED FOR ITS USE BY THE UNITED STATES, OR THAT THE ACT WAS INTENDED TO PROTECT ANY AMERICAN INDUSTRY OR MATERIALS NOT THERETOFORE INVOLVED IN THE PRODUCTION OF THE REQUIRED ARTICLE OR ITS COMPONENTS. WHILE THAT DECISION CLEARLY PRECLUDES CONSIDERATION OF THE PACKAGING OPERATION MENTIONED IN YOUR PROTEST, WE BELIEVE THE RATIONALE OF SUCH DECISION ALSO HAS APPLICATION TO THE TESTING AND EVALUATION OPERATION WHICH WOULD BE PERFORMED ON EIGHT LINERS FOR PRODUCTION QUALIFICATION, AND THAT NEITHER SUCH OPERATION OR ITS COST MAY BE CONSIDERED IN DETERMINING WHETHER THE ITEM OFFERED BY YOUR CLIENT IS A DOMESTIC OR FOREIGN SOURCE END PRODUCT. AS IN THE CASE OF PACKAGING, THE TESTING AND EVALUATION WOULD BE PERFORMED ON COMPLETED ARTICLES, AND IT IS NOTED THAT THE PURPOSE OF THE TESTING AND EVALUATION IS NOT TO CONSTRUCT OR MAKE THE LINERS BUT IS, INSTEAD, MERELY TO DETERMINE WHETHER THOSE PREVIOUSLY PRODUCED LINERS MEET THE SPECIFICATION REQUIREMENTS SO THAT PRODUCTION RUNS OF THE ARTICLES COULD COMMENCE.

ACCORDINGLY, SINCE THE COST OF THE PACKAGING ($8.87) AND THE COST OF THE TESTING AND EVALUATION ($12.20) MAY NOT BE CONSIDERED, THE COST($132.48) OF THE REMAINDER OF THE OPERATIONS PERFORMED ON THE FOREIGN FORGING DOES NOT EXCEED THE COST OF THE FORGING ($135), EVEN IF THE LABOR ELEMENT IS NOT EXCLUDED. CONSEQUENTLY THE FINISHED LINER MAY NOT BE CONSIDERED AS A DOMESTIC SOURCE END PRODUCT UNDER THE 50 PERCENT RULE.

NEITHER CAN WE AGREE WITH YOUR CONTENTION THAT THE FINISHED CYLINDER LINER SHOULD BE REGARDED AS HAVING BEEN MANUFACTURED IN THE UNITED STATES FROM A SINGLE COMPONENT WHICH WAS MANUFACTURED IN THE UNITED STATES, AND IS THEREFORE A DOMESTIC SOURCE END PRODUCT UNDER THE DEFINITION SET OUT IN ASPR 6-101 (A). WHILE, AS STATED IN 46 COMP. GEN. 784, THE BUY AMERICAN ACT DOES NOT DEFINE THE TERM "MANUFACTURED" AND IS SILENT AS TO THE STEPS IN THE PRODUCTION OR MANUFACTURING PROCESS AT WHICH AN END ARTICLE MAY BE REGARDED AS HAVING BEEN MANUFACTURED, THE ACT IS SPECIFIC, NEVERTHELESS, CONCERNING THE REQUIREMENT THAT ARTICLES MANUFACTURED IN THE UNITED STATES BE MANUFACTURED SUBSTANTIALLY ALL FROM ARTICLES, MATERIALS, OR SUPPLIES MINED, PRODUCED, OR MANUFACTURED, AS THE CASE MAY BE, IN THE UNITED STATES. ALTHOUGH IT APPEARS THAT THE BORING, PLATING, AND MACHINING OPERATIONS MAY PROPERLY BE CLASSIFIED AS MANUFACTURING OPERATIONS, AND WE BELIEVE THAT SUCH MANUFACTURING OPERATIONS, TAKEN AS A WHOLE, WHICH WERE NECESSARY TO MAKE THE UNFINISHED CYLINDER LINER FORGING INTO THE FINISHED LINER REQUIRED BY THE GOVERNMENT, MAY REASONABLY BE REGARDED AS ADEQUATE TO ESTABLISH THAT END PRODUCT AS AN ARTICLE MANUFACTURED IN THE UNITED STATES, IT IS CLEAR THAT THE ARTICLES, MATERIALS, OR SUPPLIES WHICH WERE INCORPORATED INTO THE END PRODUCT DURING THE OVERALL MANUFACTURING OPERATION WERE SUBSTANTIALLY ALL FOREIGN ARTICLES, MATERIALS OR SUPPLIES RATHER THAN DOMESTIC ARTICLES, MATERIALS, OR SUPPLIES AS REQUIRED BY THE ACT.

FURTHER, WE DO NOT BELIEVE THAT EACH OF THE SEVERAL BORING, PLATING, OR MACHINING OPERATIONS PERFORMED ON THE LINER DURING THE OVERALL MANUFACTURING PROCESS MAY BE PROPERLY REGARDED AS PRODUCING A BASICALLY NEW MANUFACTURED ARTICLE OR MATERIAL AT THE END OF ANY PARTICULAR OPERATION, WHICH COULD BE CONSIDERED AS A COMPONENT MANUFACTURED IN THE UNITED STATES, THEREBY CIRCUMVENTING THE PLAIN REQUIREMENT OF THE ACT--- THAT THE END PRODUCT BE MANUFACTURED SUBSTANTIALLY ALL FROM DOMESTIC ARTICLES, MATERIALS OR SUPPLIES--- THROUGH A STRAINED APPLICATION OF THE IMPLEMENTING REGULATIONS AND DEFINITIONS.

REGARDING YOUR SUGGESTION THAT THE FINISHED CYLINDER LINER SHOULD BE CONSIDERED A DOMESTIC SOURCE END PRODUCT ON THE BASIS OF OUR HOLDING IN 45 COMP. GEN. 658, WE BELIEVE THE CIRCUMSTANCES OF THE TWO CASES TO BE READILY DISTINGUISHABLE. IN 45 COMP. GEN. 658, THE FOREIGN MATERIAL (INGOT) WAS CONVERTED BY THE FIRST MANUFACTURING PROCESS PERFORMED WITHIN THE UNITED STATES INTO A BASICALLY NEW MATERIAL (BILLET) HAVING A DIFFERENT GRANULAR STRUCTURE, GREATER TENSILE STRENGTH, AND INCREASED DUCTILITY, WHEREAS IN THE CASE AT HAND IT IS OUR OPINION THAT NONE OF THE INDIVIDUAL BORING, PLATING, OR MACHINING OPERATIONS CREATES A BASICALLY DIFFERENT ARTICLE, OR RESULTS IN SUCH A FUNDAMENTAL CHANGE IN THE FOREIGN ARTICLE INVOLVED. IN ADDITION, IT APPEARED IN THAT CASE THAT NORMAL PRACTICE IN THE INDUSTRY WAS THAT THE END PRODUCT WAS MANUFACTURED FROM THE BILLET RATHER THAN FROM THE INGOT.

IN VIEW OF THE FOREGOING, WE MUST CONCLUDE THAT THE CYLINDER LINER OFFERED BY A. G. SCHOONMAKER COMPANY, INC; WAS CORRECTLY EVALUATED BY THE DEFENSE SUPPLY AGENCY AS A FOREIGN SOURCE END PRODUCT UNDER THE PROVISIONS OF THE BUY AMERICAN ACT AND IMPLEMENTING REGULATIONS. CF. 48 COMP. GEN. 504.