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Biden wants review of IT exemption in Buy American law

Commercial IT products including hardware and software systems could soon fall under the purview of the Buy American Act if their exemption is removed.

Commercial IT vendors may soon have to assess how much of their product is made in the U.S. if they want to continue doing business with the federal government.

On Jan. 25, President Joe Biden signed an executive order bolstering Buy American Act law, which requires that federal agencies try to buy products at least partially made in the U.S. IT products such as PCs, software and servers -- what the government calls commercial-off-the-shelf (COTS) products -- have historically been immune to the Buy American Act, but Biden's EO could change that.

One part of the executive order calls for its chief procurement authority, the Federal Acquisition Regulatory (FAR) council, to review the commercial IT product exemption and make recommendations on whether and how it should be lifted.

If the IT exemption is lifted, IT vendors may have to shift work that is now done overseas to the U.S., which could increase the cost of some IT products purchased by the government, according to experts. But they also believe doing so may create jobs and alleviate some cybersecurity concerns that arise with foreign-produced technology.

Removing the IT exemption

A lot of U.S. software development occurs overseas, which will create problems for some IT firms if Biden removes the IT exemption, said Peter Bendor-Samuel, founder and CEO of Everest Group, an outsourcing research firm and consultancy in Dallas.

"It's not going to be an easy thing for the industry to adjust to because they've been moving those jobs over there consistently for some time," Bendor-Samuel said.

Biden's Buy American revisions may affect IT labor costs, Bendor-Samuel said. If some software development has to return to the U.S., the cost of some work could double. The change will also increase demand for certain skills and could translate into an IT labor shortage for some critical skillsets by midyear, he said.

Joe Biden
On Jan. 25, President Joe Biden signed an executive order, calling for a review of IT product exemptions in the Buy American Act.

For a non-exempt product, the U.S. examines how much of it is "domestic" to determine its compliance with the Buy American law. The product undergoes what's called a component test, where each component is considered individually. The law requires that at least 55% of the product be domestic under its component test.

If the Biden administration does away with the commercial IT exemption, as well the component test waiver for commercial items, then every item has to meet the component test, said Brent Connor, senior counsel at Thompson Hine LLP.

Biden's Buy American EO also changes how domestic content is calculated, from an analysis of where each component is made to "the value added to the product through U.S.-based production or U.S. job-supporting economic activity," according to the order. How the change in calculation is applied won't be known until FAR completes its review.

If commercial IT products lose their exemption, the Buy American component test for domestic production may apply to hardware and software packages, which could be challenging to calculate in commercial software, Connor said.

With a software product, "what constitutes manufacturing and where does that take place -- is enough happening in the United States to constitute manufacturing in the United States such that it qualifies as a U.S. [domestic] item?" Connor asked.

It's not going to be an easy thing for the industry to adjust to because they've been moving those jobs over there consistently for some time.
Peter Bendor-SamuelFounder and CEO, Everest Group

Angie Petty, principal research analyst at software and information services provider Deltek, said the Biden administration is trying to shore up legal loopholes for companies supplying goods and services for federal procurement.

Indeed, Biden's order establishes a special White House "Made in America" office within the Office of Management and Budget to review requests for Buy American waivers, a process hardware and software companies with offshore manufacturing will have to go through if the IT exemption is lifted. 

Buy American waivers

Putting the Made in America office within the OMB will keep the federal Buy American requirement in the public eye, according to Elizabeth Moeller, a public policy lawyer at Pillsbury Winthrop Shaw Pittman LLP, based in New York City.

If the exemption for commercial IT products is lifted, companies will have an additional layer of review to go through to attain waivers. Under the executive order, all waiver requests currently considered by individual federal agencies would be funneled through the Made in America office for final consideration. It also means IT companies would have to be transparent about how their products are built and where their parts are manufactured.  

Apart from the Biden administration, U.S. Sen. Chris Murphy (D-Conn.) will be pushing for passage of legislation to strengthen U.S. Buy American policies. He said his bill, the 21st Century Buy American Act, will close loopholes in the existing laws that exempt many products from the law's requirements.

Murphy, who introduced his bill in 2015 and is reintroducing it this year, cited an Economic Policy Institute study claiming that closing loopholes in the law will create 60,000 to 100,000 jobs.

Deltek's Petty believes there is another significant factor at play for the federal government's hyper-focus on procuring domestic IT products -- cybersecurity.

Cybersecurity concerns prompt focus on IT products

The federal government already keeps foreign IT procurement spending relatively low, according to contract numbers, Petty said.

In financial year 2020, the federal government's total IT contract spending was $115 billion. Of that total, the amount spent on foreign-owned U.S. businesses, foreign-owned non-U.S. businesses and foreign governments totaled $3.5 billion.

Petty said she believes part of the motivation behind Biden's Buy American EO may be about reducing U.S. cybersecurity risk and strengthening the domestic supply chain.

"What we're seeing in the market is that the federal government is holding contractors liable for protecting the IT cybersecurity supply chain, making sure that products are either domestically sourced or that they can ensure the security of those products or services," Petty said. 

Job creation potential questioned

Biden's Buy American order is on some IT vendors' radars, such as Epicor Software Corp., an ERP vendor in Austin, Texas.

"We're just starting to learn about it ourselves," said Lee An Schommer, senior vice president of global product management at Epicor. But she does have an initial take on the order.

One positive aspect, Schommer said, is the order's requirement for more transparency into government contracting, which may help small and midsize firms compete for government work, she said.

However, she questioned assertions that revising Buy American rules will create jobs.

"The belief that this is going to suddenly create this quick return of jobs, I think is perhaps an overstatement," she said.

Firms are automating more and more of their processes because of a tight labor market, and the COVID-19 pandemic has accelerated these efforts, Schommer said.

Indeed, the pandemic is prompting firms to automate workflows and move more processes to the cloud to, in part, make it easier for people work remotely. It's also accelerating adoption of technologies that make social distancing easier to accomplish, such as Microsoft HoloLens, a virtual reality/augmented reality headset that can be used for training and service work, she said.

Epicor uses a global team for software development, but the firm also makes certain that it has developers and business analysts close to its customer base -- the majority of which are in the U.S., Schommer said.

They may already meet any new government threshold on U.S.-based development, but if the order will require some shifting of where work is done, it's a pivot Epicor can make, she said.

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