#• o \
ifil
% ,,01^°
U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF INSPECTOR GENERAL
Materials Relating to
Resolution of Audit Report No.
11-R-0700 Concerning
Agency's Compliance With
"Buy American" Requirements
April 25, 2013

-------
Table of Contents
PDF Page
OIG Audit Resolution Memorandum to Deputy Administrator,
March 21, 2013 	 3
Determining Whether "Substantial Transformation" of Components Into
a Manufactured Good" Has Occurred in the U.S.: Analysis, Roles, and
Responsibilities, October 22, 2009, Exhibit 1 	 8
At a Glance Summary of Report 11 -R-0700, September 23, 2011, Exhibit 2	 18
Agency Proposed Management Decision, January 27, 2012, Exhibit 3	 20
OIG Legal Memorandum in Response to Region 5's Proposed
Management Decision, March 15, 2012, Exhibit 4	 27
Agency Legal Opinion Regarding EPA's Guidance on the Buy American
Provisions of ARRA, August 7, 2012, Exhibit 5 	 34
Agency Response to OIG Memorandum Entitled, "Response to
Region 5's Proposed Management Decision on OIG Report
No. 11-R-0700," August 15, 2012, Exhibit 6	 41
OIG Legal Memorandum in Response to Office of Water's
Aug 15, 2012 Memorandum in Connection with OIG Report
No. 11-R-0700," September 28, 2012, Exhibit 7 	 43
OIG Memorandum Regarding Resolution of OIG Report
No. 11-R-0700, October 17, 2012, Exhibit 8	 56
OIG Memorandum Regarding Resolution of OIG Report
No. 11-R-0700, January 17, 2013, Exhibit 9	 59
EPA Audit Resolution Submission Form, January 29, 2013, Exhibit 10	 63
Federal Acquisition Regulation Final Rule for ARRA "Buy American
Requirements for Construction Material," August 30, 2010, Exhibit 11 	 69
Correspondence Letter from Deputy Comptroller of the United States to
Congressman Gerry E. Studds, November 3, 1975, Exhibit 12 	 71

-------
L'M'TO r?TA '• >, ? ENVJRON^rNTAL PRC~~^~!ON A^nr?
WAS! .tNGTUM, D.C. 20460
MAR 11 att.3
THE WSPECTORQENERAL
MIMOM .1
SI H.li'.CT; Resolution of Offte c of Inspector Geneiul Report Mo. I I-R-U700, American Rcc'twry
ittnl Rt'iiiveMmcnt Act Site fiwt %>j WiMewahr TnHttmcni Plant -/Vw.w//
improvements I'rojecr, (7,'t af(	11 knots. September 23. 2011
In. .H'cortkmce with jHiidelmes scl out in flu* Fnvirunnieutal Protection -Xirency Manual the
Oiliee ofinspcclor General and agency representatives met with the f'*.PA Chief Financial Officer on
February 28, 2013, in an effort to resolve the above-referenced audit mailer, (Sir bxhibit 2, OtG Report
i! -K-07tKJ; and s:\hibit 3, Reyson 5's response to the final report I The meet in r did not result in an audit
resoitithm, mi we .»*•<» prehciitnii; the depute to you ;is the Fri'.W Deputy Adininihtiatar and fin.si ayuicy
arhtte; of audit resolution cases, Office of Water Deputy Assistant Administrator Michael Shapiro
agreed via email that this next step is wan anted.
The i HO is askme for a prompt resolution of Ihis malic?, yjven the	and sometimes inexplicable,
delays tu date in moving towards an outcome.1 The Ol'ftce ol"Management and Budget Circular A-50,
.Unlit Follownp, .specifies a IXU-dav pciiod for the resolution of audits, and it t:? now approximately t
yeas past this tune period,
A series of meetings between the agenev and the OKI refilling to the subject audit report haw yielded
no	i'he OK) therefore respect Sully requests thai you maf e a decision for the ayency based on
the written record, follow, my; ss a concise summary ol the highlights of the dispute. The summary
meludcN references to the attached, relevant material*. In particular, we direct your attention to OK i
leual memoranda dated March ! 5, 2012 t f-xhtbit 4) and September 2K, 2«l] 2 ^I-xhibit 7K and to the " V,\
Office of Genera! Counsel leyul opinion dated August 7, 2u!2 iiixlnbn 5i, {'hesc documents pmvide the
muiority of relevant information.
1 I'm tw.imple, one imexjvainod >ivLiv twcurrei' dunn>; (lie time jkhuJ Item Oct'ihej 201 ? ami Jantiar> XH 'i ht- Olt r
Mihtti«w»S ,i u o(uo •>! i.» tin- {>»'» K>t .i-)1 >viana* m iiv." >mht icw'tomm rfit t Mobc: ! ?, HH Jt i.Si»r i.xhiint v 5 1 lie
jttv*!!. v,	Jul an! pruvkk* auictiiiis icqtmc.t by hPA \S;m»ui 2730, and tlk-u' v.-as rui tc\ponsc of am -ant Slum the
0|'lt> t" of flic ( Inri l-matnul t Mrit cr Tlu* Oil > vwk <.iitii|H*t!cd tu i t-j rat thr fci|ueit cat lantuiiy 11HH * \Stv I'aIuImI l> > A
iiKTltiis,' was finally hdti with ihe ft (> and apci* v representatives «.»n 1-Vbrtai y 1?H, _*;H „1
Arthur A. l-'lkms jr. ,¦ /
I ROM
K):
Robert Pea tasepe
Deputy Administrator
' "\ i • «*» m tm®> >*wt cr--•»
» mm «5JJ% neytSec! fgmi

-------
SUMMARY
flic subject C'itv of Ottawa audit, and three related Region 5 audits, were initiated by QIC? hotline
complaints The complaint related to the Otuwu City project alleged nat certain products In-mg used m
die FP/Vs American Reinvestment and Recovery Aet of 2009 project were not to compliance with
Section lbO> of die Recovery Aet -the Buy American provisions. Those provisions require (hat
products used in Recovers \et projects must he "produced" sit die I anted Slates Congressional intent
behind these pro v. biorts ts clear in she puipose statement., Congress stated that the first goal uf the
Recovery Aet was "ft Jo preserve and create jobs and promote economic recovery," A mujoi step in
achieving tluit purpose was supposed to be the Buy American provisions. Agencies had an obligation to
figorcmsh monitor use of foreign components in Recovery Ac. projects su as to eliminate ttn ports thai
would negatively ulfivt Ameiicunjobs ant! Use American economy.
1 he 010 concluded that Region 5 had wrongfully determined '.hat certain equipment used nt the Ottawa
City projcii (and three similar piojcets resulting in tbrW guidance
in question in included a', i:\liibit I.) We s»tate "mostly the result," because Region 5 played a role in the
outcome when tt faded to follow certain guidelines m the t >\V guidance The I Mii March „?tH2
memorandum at Hxhibit 4 includes defalk about the region's actions.
in an etlon to ensure compliance v\uh the Buy American provisions, the OW determined that substantial
Hansfotmation jutalvwh should be employed when components ofpnniiuls used in Recovery Act
projects are manufactured overseas. (See Exhibit !.) Generally, the question is whether those
component are transformed enough within (he United Stales so as to be able to conclude thai they are
aciuidK ptodueed in the tuned Stales.. 1 he hPA generally required i. Recovery Ac! contractor with a
product dial was partially composed of a foreign components) to evidence thai the component had been
substantially transformed in the United States.
I he established test fur determining substantial transformation is the change in character or use test
Tins test for substantial ttansfomialion is based in statute <191 OS.C. § 25 f 8(4KB}), regulation
119 C.F.R. £ 177.22(a)), and is employed in virtually all case law cited hy OGC and OW 1 he test was
te ferine eel in Recovcrv Act related OMB rectihit tort.-,, which in turn arc cited its die OW inmLmce. 'I He
essence of the rigorous established test is that in order for a foreign component !o be considered
manufactured in the United States, it must be substantially transformed into a new and different article
of commerce with a character or use distinct from the article or articles from which it was transformed
fiiii. test is discussed in detad m the attached OIO legal memoranda. (.Vo. bxhibits 4 and 7.)
h>r its Recovery \c< • related guidance, OW created a questionnaire with three questions to be used for
assessing substantial ttansformatiun. (5tt hxhibit ! S haeh question is a stand-alone test '! Ik- second
question hi the questionnaire is the established change in character oi use test, The third question,
however, is a new, alternative test created by OW. The OW alternative test simply requires evidence of
such facto is as time or money spent on the domestic pieces* to show substantial transformation,
hnportanth. there is no ultimate evidentiary requirement in the alternam e test that the foreign
component was transformed into a "new and different article." 1 he OW alternative test was widely used
by the agency (including Region 5). in part because il does not require a rigorous assessment of change
m use o; diameter Because of the lack ol rigor in the a!tenniti\e test, there is a very high u.sk that there
can be a lack of compliance with the idler and intent of the Buy American provisions. We believe that
2

-------
(his was in htU the result fur the acquisition that was the subject ofthis audi! report, as well ;is ("or
acquisitions- referenced in the three related reports, hi short, it strongly appears thai certain Recovery Act
funds were spent m violation of the requirements of the Act.
The OCX' asserted m its legal opinion that there is legal supped for the attcmahu- test, t.SVr hxhibit 5 )
t iowvwr, despite the tact that there are many hundreds efSeeal eases thai focus on ;t substantial
tmnsfornnitiwn test, the OGC only cited to two eases in suppor: of the alternative lest, One is a fedentl
ease, which actually .supported the OIG position that the established test •mist be used to assess
substantia! transformation , he second ra>e is a IJ S. Customs Service Notice; it dealt with a fact patient
that is entirely unrelated to the fact patients reviewed by the OKI 'I hese two cases do not constitute
Ici'al support fur the OW alternative test,
AGENCY A1U»1JMKNTS
! iurinu the course of the last year, OW has generated seven aruimients to justify iu alternative test,
Many of these arguments have been addtessed in OKi legal memoranda. (AVe hxhihits 4 ami 7 )
Summaries of the arguments and OIG responses aie presented below
First argument. OW contends that it would be imprudent to address a problem related to Recovery Aet
guidance at tins kite date because the stimulus funds have mostly been spent, (AW' h'xhibi! 6.) But with
regard to the subject audit, and the three related Region 5 audits, OW itoted at the February meeting that
Recovery Aet funds related to the audiifsj have not ye! been spent, I hus, there is slill a chance here to
apply correct guidance in at least a few instances, Final!}, the stgtiifieaniSy flawed OW* alternative test
sits prominently in the public domain (if one inputs "substantial transformation test" into Google, the
second entry is the OVV alternative test guidance), and so the test may be used going forward by the FPA
or other agencies in wrongly asses* substantial transtormatfon at other instances involving federal funds,
especially if additional stimulus monies are appropriated.
Sfaimt argument. OW argues that it did not ha\e much time to prepare the guidance and so any eiror
tlv.it may have slipped through is justifiable. This is not persuash e. One of the eases cited in OW's own
substantia! transformation guidance is Customs Ruling HQ 734097 (November 25, W1). This ease
iiictnded a test that is an effective Wend of the established test and the alternative test. The referenced
'est required evidence of hot!) complex manufacture and thai the components "(lost] then identity and
| became | an integral part of a new article," Application of this test, that was known by OW when
preparing its guidance, would have been simple and appropriate,
Third	OW proposed a possible solution to the OH ] concerns by suggesting that the words
'"change in charades or use" fine established test) he added to the question component of the alternative
test Unfortunately, (lie sin»i*,esjed change would not require the user of the test to show evidence of
actual ehanee in character or use, Put another way. the propose ^otud not add a new criterion about
chuuee in use or character to the lest, I fence, the propoNed modification woitid not result in an>
improvement and no reduction in the risk that the agency was violating the Act,
Fourth	OW raised a concern that it would be unworkable to rev isit thousands ol past
Recovery Act decisions to assess whctlici mistakes were made iv^atdicy foreign components because ot
Hawed guidance. However, at the February 28, 2013, meeting, the OW agreed that a waiver might he a
feasible option to addtess the mistakes without 1mme to revisit each previous payment Ultimately U ;$
for the agency to decide how best lo remedy the concerns raised here, but difficulty m correcting an
error is not .» defense to a conclusion that there is an error,
•3
J

-------
Fifth argument. \t the ichriutrv l\s, 2t»l3» meetme, will? the (TO, the * K d' tailed the argument lb,it
OW mlt-nded to ensure !ha! the alternative test required evidence of1 a change in character of use, but the
wording was a hit "inartful " Because of the "inarifulness," howeves, the established test was not
employed ir, the subject audited project, nor m the three related uudned projects, and probably nut used
in many other substantial transformation decisions in LPA Recovery Act projects. This mii'lil be an
acceptable argument when large amounts of Recovery Act funds are no: at stake, but heie the size aw!
importance of the nuihihilUen-dolhr stakes demanded «md id ill demands artfulness and aeeuiae>.
Sixth urgamenL In the requisite 3750 form that was submitted to the CFt»in February 2o n
l Exhibit 101, ()\V asserted for !he first tunc m w tiling tiiat the federal Acquisition Regulation m 20Ht
"applied .a test that essentially looked to the last place oi assembly to determine die location of
manufacture " The section of the FAR in question is located at ~?5 fed, Reg. 53,1.53, 53 J 56
(Aui'.trU 30,	iSvc F.xhihsi 1 1 ) OW mxtun to he arguing that {he FAR "tod" h\ similar to lite OW
alternative test, so there is no risk of having violated the Buy American provisions. 'This is the OKTs
first opportunity to respond in writing to this argument, f Ws novel argument about the FAR fails lor a
few reasons. Firs.!, the FAR merely stated that there is a record of interpreting "manufacture" in
connection with the Buy American Act (which is significantly di Iferent than the Buy American
pro\ ihioiis of the Recovery Act), and then elaborated on the simple assertion by referencitur, a General
Accounting Office opinion letter «!<- i "h75 i lOhtbi* 12)), The C'tAO case
discussed an Army regulation that required in its two-part Buy American Act test that at least 50 percent
of the value of the end product must he of domestic origin Hint n» significantly more rigorous titan the
OW .\oie four* on "assembly " Thus, contrary to QW's assertion, the two tests are not comparable.
Second, the other pari of the Army test focused on the las! place ot manufacture - not last place ol
assembly. {The FAR also discussed hit".! place of manufacture and not las' place of assemblwt In the
< ?AC > opinion, Onamdactute" included a number of steps in addition to assembly. More importantly, the
GAD was left unsure about whether those manufacturing steps were sufficient to satisfy the intent
behind the Bu\ American Aci requirement regarding manufacture in die United States, so < iAO
leeomiiiended thai the Secretary of Defence better define and clarity the meaning oP'maimlaetureii in
the United States." („Vtr Hxhifait 1 2 ut 4.) The FAR and the referenced GA() ease simply do not apply an
established test about the last place of assembly thai is somehow sirniki to UW's alternative tot. I'he
recent FAR argument does not save OW's alternative test
Seventh argument. The agency stated at the February meeting with the (TO that it was not required to
use the tiUhsnnitiai tjv.nsfbriiuUoji concept lo assess- whether loreiim components were in compliance
with the Buy American provisions. Apparently, this means that the agency should not now he held
responsible for applying a methodology that ii did not have to use in the fust place, We agree that OW
was not required to employ the concept of substantial transformation. However, it did «»o, and it justified
that decision in its guidance by stating that the concept is "well-established" and thai "EPA is not aware
of an alternative standard " that could be »%ed in the context of the Bu> American provision? to
determine whether or not a manufactured good in' U.S.-produced, \Sve Lwhibtt I at 2.) We believe OW
made the correct choice to focus on substantia! transformation; but havim1 selected substantial
transloinuition .is the operative for determining whether Recover, Act lunds were he.-tig propelly
spent. (>W was then required to apply the correct substantial transfotmation test, OW faded to do so and
thus the intent behind the Buy American provisions was not satisfied and Recovery Act funds were
hkeiv Kpent in violation of the Act.

-------
conclusion
Based or, i!:e usseits.^on above «mi the attached suppotiin:.! doeatr.enutuor, we request that the »tvyne> s
laud audit resolution dcci&ien require appropriate modification of OW substantia! transformation
guidance and application of the icvised guidance to the pmposed management decisions referenced in
the subject audit, as well as in the three related Region 5 audits. Also, if the agency chooses i« further
mi t mate the *isk of violation of (he Recover) Act. it should addie.ss prior relevant decisions thai are
pewwibly incorrect, as well as make appreciate changes to the guttfimcc in question so that K will not he
impiuperly used in the future,
I! v<»u have any question* ;egai'diiie tlus. mcimirutulum. please contact Melissa I tersu assistant inspeetoi
^eneia! for the Office of Audit, ui (202) 56
-------
Exhibit 1

-------
DETERMINING WHETHER "SI BSTANTIAi. TR A !S SFO R M All ON" Of
COMPONENTS INTO A "%M AN is FACTURED GOOD* HAS OCCURRED
IN THE I .S.: ANALYSIS, ROI,KS. AND RESPONSIBILITIES
Section t()05 of ihc American Recover}-' and Reinvestment Act of 2009 (ARK A) requires
that of the alt imn» suvl. and manufactured gotxls used in ARK A (united projects to
construct public building* or public works be produced in the t> S. f his is the expected
means of compliance- OMB published Guidance for Federal agencies subject to this
provision on April 23. 2001) {at 74 hR 18452. found at
htlp:.Vedoekct.aeccss gpo.gov 200^'piil'I	f pdf}, elaborating on this ARRA
requirement, including the provisions of Section 1 f>05(b) and (e) for a waiver of this
requirement under specified circumstances, ami of Section l(i05(dh that litis requirement
must be implemented ""consistent with U.S. obligations under international agreements."
! hat Guidance includes al § i 76.140 the definition of'a "rr.anufacturcd good" as "fa] good
brought lo the contract son site for incorporation into the budding or work that has been
processed into a specific form and shape, or combined with other raw material to create a
materia; thai has different properties than the properties of the individual raw materials."
§176.?()|a){2>< i11 of the Guidance further states that "[fjhore is no a\juirement with
regard to the origin of components or subcomponents in manufactured goods used in the
project, as long as the manufacturing occurs in the United States."
I'hus. recipient's of assistance from the Clean or Drinking Water State Revolving Funds
(SRi't provided under ARRA must determine, have the goods to he used in this project
been '"manufactured" in the IS7 This may he relative!) simple to determine for many
goods used in a water infrastructure project. Huh ever, many other manufactured goods
used in ARRA SRF projects are brought together in the IhS. through a widely varying
spectrin of activities, When such goods are comprised of am components produced in
countries other than the U.S.. SRI assistance recipients can use substantias transformation
analysis to detennine whether the activities in the U.S. by which a particular good is
brought together do or do not enable it to be considered "manufactured" in the I '.S. under
§1605 ami the t iuidunce.
The Concept of Sufamntial Transformation
fo assess whether these varied activities do or do no*, enable the assistance recipient to
consider u good as "produced in the thSf. OMR included in a section of their Guidance
on international agreements the concept of ""substantial transformation". £176.160
provides that recipients need to inquire whether, k,[ijn the ease of a manulaetured good
that consists jr whole or in part of materials from another country, [the good J lias been
substantially trans loaned sn the United States into a new and different manufactured
good distinct Iron) the materials from which it was transformed " "Fhis OMB Guidance
tenn itself directly applies to and is binding on few if any sRf recipients, because it
appears only in a term tor international agreements. However, f.f'A believes the
October 22, 200<->
1

-------
substantial tnmslormafiori concept provides necessary guidance on this issue, I he origins
and applications o! she term are rooted in w-eli-established Federal interpretation;.,
particularly b\ the Customs Department and she Federal courts, and 1 PA is not aware uf
any alternative standard particular!}, any alternative appropriate rbr application under
§ 1605 - to determine whether or not a manufactured good is I IS,-produced
Applying Substantial Transformation Analysis - Mtth'% ami Ri-sptwibilitiis
fk'tbre exploring the principles and means to interpret urni apply the substantial
transformation concept. it is important to clarify the roles of ARRA assistance recipients.
F.PA. ami the States in the process of applying this concept, These r»lcs are. of necessity,
a combination of the traditional responsibilities among these partners in the SRF
programs, and the specilie. new mandates imposed by §1605,
Asbistmtv Reciph'Ms'' Hole; SRF assistance recipients bear the timi responsibility to
eontpi) with the Buy American requirement of ^1605. because that section applies the
requirement to each "project", The statutory expectation i% thai recipients win comply by-
te} ing l;.S.-produced iron, steel, and manufactured goods. I his expectation ss illustrated
by the characterization in the 0MB Guidance (at § 176.80) of \\ai\cr\ as ''exceptions" to
the general rule of Buy American, Recipients, in conjunction with consultants,
contractors, suppliers/distributors, anil others, thus are responsible to decide if products
are U.S.-made, by applying the substantial transformation analysis .specilied by OMB,
Assistance recipients will make this determination for a finished good by obtaining
information about the processes used and apph ing the questions set forth in the Section
below. ",-!««/$ a/v fn Determine Whether Sukstawhtl Transformation fhis Occurred in the
I •'S." To decide in unclear ! marginal) eases, recipients s.hou5ou can ask Mich competitors, to
frame an\ concerns hi ihe form of specific responses to these questions, both as to their
product and that of {mother competing company, I h;s* information can equip recipients to
ask further questions of their intended manufacturers. to better inform the recipient's
decision, and to preemptively address the subject of potential bid protects later on that
might otherwise complicate an ARR A project's time!) contracting, hi other words, if a
competitor stales a complaint - that its goods are 1 fS -produced, but the other company's
claim that their p>ods comply with §1605 is false then the assistance recipient should
request this response be framed in the format ol appropriately detailed answers b> the
competitor to the substantial transformation questions, both as to their product .ind that of
another competing company.
I-pen applying a substantial transformation analysis through these questions, mam
assistance recipients will determine thai a pood to be used in their project is substantially
October 22, 200
-------
transformed in the U.S. Because it is thus manufactured in the U.S., such recipients can
comply with §1605 by using the good in their projects and retaining appropriate
documentation in their flics. This documentation will include (I) appropriately detailed
answers from the manufacturer to the substantial transformation questions, as described
in the "Analysis' to Determine Whether Substantial TnimfmrtmUkm lias Occurred in the
U.S." section c>Fthis paper, below; (2) any additional material the recipient may have
from the manufacturer that provides detail supporting the answers: and. (3) upon
procurement of the good, documentation from the manufacturer verifying thai the product
originated in a U.S. plant where substantial transformation occurred as demonstrated by
the answers above. This information and documentation will lie such assistance
recipients' basis for demonstrating compliance with the Buy American requirement
of §1605(a).
After receiving information to answer the substantial transformation questions as to an
intended manufacturer's product, an assistance recipient may have continuing, reasonable
doubt as to the adequacy of the answers to establish the U.S. origins of thai product. By
requesting and analyzing substantial transformation information, a .ecipient will also be
better equipped to understand other potential options. This analysis may provide a basts
to see whether a competing manufacturer's U.S.-made product does meet, or can be
timely adapted to meet the recipient's justified specifications. If the U.S.-made product
does not meet those specifications, and other U.S.-made goods that do meet them are not
available, then the recipient should have sufficient information to app'y for a waiver from
I PA. While assistance recipients assisted by the engineering community and others will
use best professional judgment in making determinations as to substantial transformation,
such determinations must be supported by appropriately detailed information from
manufacturers describing the specific operations in their manufacturing process that
warrant a determination that substantial transformation has occurred in the U.S.
EPA Role- EPA does not and will not make determinations as to substantial
transformation or the U.S. or foreign origin of manufactured goods. HPA's role under
§ 1 WIS is to review waiver requests when an assistance recipient believes it cannot
comply by buying U.S.-made goods, and to undertake compliance oversight, The
limitations on HPA's rote in this issue are driven by responsibilities assigned by ARRA.
ARRA's SRI"" appropriations, heading requires that if ail funds allotted to each Stale are
not under contract or construction within 12 months of enactment (February 17, 2010),
f PA must reaiiocate such uivcontracicdTor funds to States that have placed all their
funds under contract by that date. OMB's Guidance fat § 178J20), reflected also in
UI'A s April 28, 2009 Memorandum on the "Implementation of Section 1605" (found at
http://www.cpa.gov/water/cparceovery''docs/04-29-2009 BA _ wai ver process flnaS.pd f.
"Application by Assistance Recipient" section!, stresses the importance of ascertaining
the U.S.-prod need origins of goods or securing any necessary waivers before signing
construction contracts. In Sight of these requirements and SRFs-spccifie time constraints,
EPA must view the role assigned to Federal agencies by §1605 itself - to decide on
requests for waivers • as the A genes "s central focus in implementing §1605.
October 22, 2009
3

-------
However, KPA clocr> rccogm/e that, for assistance recipients tbe*e issues ma\ be as
novel, complex, and demanding as they are for HPA, and that prior to contracting, they
arc at risk of losing ARRA funding provided to them by their Slate if it is not under
contract by l;ebruar\ 17, 20! 0. Thus, at the discretion of the EPA Region and upon
tie direct request of u» assistance recipient only, EPA may undertake informal
"anticipatory*" oversight
As per the preceding paragraph. EPA will not itself make any substantial uansformasion
determination*. However, where an assistance recipient has watte .it leasta tentative
determination thai substantial transformation of a specific good has occurred in the U.S..
I PA may review detailed information about substantial transformation that the assistance
recipient believes is or may be sufficient to support its determination, and wit! in such
cases, as a matter of "anticipatory" oversight, advise the recipient as to whether in OPA's
judgment the supporting information is sufficient
In this effort I HA will review only information provided by the recipient, or on its behalf
h\ another party (e.jr,, a manufacturer orconMiftirts engineer) with the recipient \ express
consent. This will ensure that any HPA review i»f a recipient's substantial transformation
determination ami Mipporting information k undertaken because flu assistance recipient
considers it to he genuinely in its own interest, and is not primarily ior the benefit or
convenience of any other party.
Si aw Btty Atm'nmti Hnlv § 1605 does not authorize or provide it role for Suites in the
consideration or granting of waivers. However, as with the typical situation pertaining to
oversight of SHf- assistance, Slates do have a lead oversight role • pttrttcnhtiiy through
their conduct of oversight audits - in ensuring assistance recipients comply v\ ith ait
applicable requirement*. ! his, induces § I W)5, as the terms and condition* in the SRF
capitalization grant agreements for ARRA require that applicable provisions he placed in
all assistance agreements, Applying Bu> American information posted on
"¦ 'K.': >, _ J •, States can advise assistance recipients to help ensure
that the documentation in recipients* project files is appropriate for review of any
applicable means of compliance with § 1605.
« For the procurement of i'.S.-madc iron, steel, and manufactured goods (the
preferred approach), this would include verification of U.S. production (as suited
in sample eertilkatiot: point 2 In \ppendix 5 oiTPA's April ?X. Buy
American memo, cited above, and as referred to in point <3 J of "Assistance
Recipients' Role", above), in conjunction with, where necessary. the information
provided and determination made that substantial transformation occurred in the
U.S., as indicated in this paper,
• For items coveted h\ a categorical te.j*., nationwide> waiver, the documentation
must me!ude all elements specified in and required »y the waiver for an item or
project to be eosered. for am md»\ kfual project component that has been granted
a waiver, documentation will include a copy of the Federal Register notice of the
project specific waiver.
October 22. 2009
4

-------
• for items subject to an interna; ion a! agreement the recipient documentation v\ iil
mclode d communication from the applicable state or municipal puny to the
agreement that the recipient and any specific components are covered, d
substantiated estimate thai the value at'the pnycct is $7,44 5,1)00 or more, and
verification of the components' origin from a eourttrv covered by the agreement.
Substantial Transformation Concerns far States ami BPA
Both 1 .i'A and Stales should recognize thai, if they wish to provide technical assistance in
areas of Buy American activities beyond the scope of the above responsibilities, there is a
tension between the Slate or EPA role for compliance oversight on tin; one hand, and the
discretionary provision of technical assistance with respect to that compliance on the
other. Both Fl'A and States, should be cautious regarding iccipiertt requests to consul! on
substantial transformation, keeping in mind their primary responsibility for ensuring
compliance
Hov.eser, like H'A. Slates can provide their own ""anticipator}' oversight" to their
4*si$tatH'e recipients. States can choose to review detailed information and analysis
pro\ ided bv or on behalf of the recipient that presents a y>ive about the potential
substantia! transformation of a product the recipient wishes to procure for an ARRA
ptojeei. While this review by the State is purely discretionary and, like ail) {• FA mav do
in this regard, is not a formal decision-making process under ARRA. such review also
would reeogni/e the reality faced by ARRA's SKI* assistance recipients: of eompfving
with new, unfamiliar, and complex Buy American requirements prior to a light deadline
for signing contracts. Both I PA and States, in undertaking this role, should inform
recipients seeking such review of those recipients" obligation to scrutinize and analyze to
the best of their ability the information proffered by nianidaclurets asserting I hS.
production of their goods, and to consider informal ion put forward by competing
manufacturers who may be contesting such assertions, I huier these circumstances,
neither KPA nor States are compelled to provide an "anticipator)'" oversight review, and
should concur in such requests only if the State or I .PA believes the) have a sufficient
basis jo be able to determine whether substantial transformation had occurred if they
were undertaking a direct oversight audit.
Some Hasic Primifth's of Substantial Transformation Analysis
With the widely diverse conditions of production in the water infrastructure industry,
circumstances of creating a finished good may range troni production tines that are nearly
or entirely integrated vertically, to {he bringing together of components from dispersed
sources. '1 he challenge for substantial transformation analysis is to determine whether -
on the spectrum from ^'minima* assembb required" in a simple ksf tsuch as an 1KF.A
box) to heavy machining involving high value labot and sophisticated equipment - the
t fS.-bused production process for each specific finished good reached a point where one
October 22, 2009

-------
could Fairly say that substantial transformation has occurred. The simple assembly case
is clearly not substantial transformation, she heavy machining clearly is. The focus of"
substantial transformation analysis is on the many, individualized, more complex cases in
between these two, obvious poles.
An oversimplified summary of this analysis is to ask whether the activities in the U.S.
substantially transform the components that go into the completed item, 1 PA has relied
on long-articulated federal legal interpretations to provide more useful detail. Some
basic principles in "substantial transformation" analysis include the following.
•	i-'irst. the determination of whether "substantial transformation" has occurred is
always case-by case, using questions and criteria well-established in
administrative and judicial ease law. |SDI Techw!f*xki> v, (/.&, 977 P.Supp
1235 (C'.l.T. J997)* a! 1239 n. 2. C'usioms Ruling IIQ 560427 (August 2!, I997)|
•	Second, no good "satisfies the substantial transformation test by .., having merely
undergone "fsij simple combining or packaging operation." j f 9 (JSC Sec,
2463(b)(2)(A). cited in Unkkm America Corp. v. U.S., C.S.T. Slip Op. 00-139,
Court No. 98-05-01 3 I 1 at 8, n. 4.J
•	Third, "|a]ssemb!y operations which are minimal or simple, as opposed to
complex or meaningful, will generally not result in a substantial transformation."
li'uskitm Rutin)* HQ 734097 (November 25, 1991) (and Customs Cases cited
therein)]
These principles are helpful in offering a basic framework and sideboards for more
searching substantial transformation analysis, as described herein.
Analysis to Determine Whether Substantial Transformation Has Occurred in the U.S.
EPA has developed several questions for assistance recipients to ask when determining
whether substantia! transifonnatum has occurred in the 1I.8. As HPA entered the work of
ARRA implementation without current experience in the Office of Water with Buy
American programs, these questions were derived directly from numerous federal court
cases. Customs Department administrative rulings, and interpretive rules for U.S. trade
agreements.
In applying these questions to individual cases, "yes" answers must In uil cases be
documented by meaningful, informative, and specific technical descriptions of the
activities in the actual process asked about in each question. These descriptions need
not be of great length, hut must be sufficiently detailed and clearly written to inform
assistance recipients and agency reviewers about the activities that have occurred in the
process(es), enough to understand their nature and purpose. They should not simply
assert a conclusion, describe an end state, or essentially repeat the words of the question
October 22, 2009

-------
as a statement. Simple "yes" answers are always entirely insufficient to make a ease
that ae item feas been substantially transformed in the U.S.
These questions all focus on processing work on and assembly/integration of the
components intu a finished good. Design, planning, procurement, component production,
or any other step prior lo the process of physically working on arid bringing together the
components into the item used in and incorporated into the project cannot constitute or he
a pari of substantia: transformation.
Substantial Transformation has occurred in the U.S. if answer is "yes" to either Question
1, 2. or 3 he low,
1,	Were all of the components of the manufactured good manufactured in the
United States, and were all of the components assembled into the final product in
the U.S.? (If the answer is yes. then this is. clearly manufactured in the U.S., and
the inquiry is complete)
Question 2 addresses primarily the situations where important processing work is done on
components of the complete item. While assembly is typically also involved, the focus of
the question 2 steps is generally on that work prior to final assembly. Because each of
the subquestioiut of 2 call for relatively significant and demanding sieps. the answer to
question 2 is "ves1" if answer to any of 2a, 2b, or 2c is "yes."
2.	Was there a change in character or use of the good or the components in
America? (These questions are asked about the finished good as a whole, not
about each individual component)
a. Was there a change in the physical and/or chemical properties or characteristics
designed to alter the functionality of the good?
h. Did the manufacturing or processing operation result in u change of a
produci(s) with one use into a product with a different use?
c, Did the manufacturing or processing operation result in the narrowing of the
range of possible uses of a multi-use product?
Question 3 generally addresses situations where the most significant of the potentially
transformative work is assembly. Because assembly is in most eases further down the
spectrum towards non-transformative work, a more demanding standard is appropriate.
Thus, if the answer to at least two of 3a, 3b, 3c, 3d, or 3e is "yes", then the answer to
Question 3 is "yes". Manufacturers who wish lo establish beyond a doubt ihat their
product has been substantially transformed in the U.S. via answers to Question 3 will
want to provide descriptions of their processes) thai support affirmative answers to as
many of the subquestions as are applicable, to increase the likelihood that the answers to
ai least two of the questions arc sufficient.
October 22. 2009

-------
.1 Wast/were) the processes) performed in the U.S. (including bus run limited to
assembly) complex and meaningful?
a.	Did the process! es) take a substantial amount of time?
b,	Was(/were) the process(es) costly?
e. Did the processlcs) require particular high level skills?
d.	Did {he proccss(es) require a number of different operations?
e.	Was substantial value added in the process(es)?
Some Actions Are Not Substantia! Transformation under Any/ Circumstances
Work that makes simply cosmetic of surface changes only in a component, e.g., painting,
lacquering, or cleaning, cannot amount or contribute to a finding of substantial
transformation. (One example of this: Rules of Origin tmtkr the VX-Jortlmt Free Trade
Agreement, Final Report, at 4.9 (at http://www.jordanusfta.com/documents/chap4.pdf).]
Similarly, .simply cutting a materia! !o length or width, e.g., cutting steel pipe to particular
length, is considered a minor change that is not and does not advance the case for
substantial transformation (Rules of Origin above, at 4.11,21.
Can Substantial Transformation Occur Onsite?
The OMB Guidance definition of "manufactured good" as a "good brought to the
construction site" suggests a few general operating presumptions: < 1) what occurs onsite
is construction; (2) "'manufacturing14 occurs prior to the point at which a "good [is]
brought to the construction site," and (3) the substantial transformation lesf is applied to
determine the U.S. or non-U .S, origin of goods at that point, as they arrive onsite. On the
other hand, the OMB Guidance also provided for "substantial transformation" analysis to
determine where manufacturing has occurred. In such analysis, the principle is inherent
and weil-esiablishcd that a good is manufactured at any site where substantial
transformation occurs, (Sec, e.g., Torringfon v, U.S. 764 F»2d 1563 0()K5). at 1568: "a
substantial transformation occurs when an article emerges from a manufacturing process
(having met the applicable criteria for transformation]", cited at SDJ Technologies, Inc. v.
(LS. {977 F.Supp. 1235 (Of W7), ai 1239.) l lius, substantial transformation can
encompass onsite manufacturing. Because the OMB Guidance was signed April 6, 2009,
less than seven weeks after enactment of AKRA, this did not allow time to coordinate or
integrate the "manufactured goods" definition with the "substantial transformation" term.
interpretation of these two terms can be coordinated by maintaining the distinctions made
in each term. Under the "manufactured goods" definition, what occurs at the project site-
is presumed to be construction; under the "substantial transformation" analysis,
October 22. 2009
8

-------
manufacturing may occur at the project site, hut only if the process there is both
substantial transformation and it occurs under conditions ordinarily and customarily
associated with manufacturing at a conventional plant,
In other words, for an activity ai the project site to be considered "manufacturing," the
manufacturer must, first, bring all components of the good to the site and must always do
so in normal course of business. This ensures that the U,S company is not changing the
terms of its customary operations in an attempt to game the Buy American requirements.
In addition, the manufacturer does all the work onsiie with its own personnel and may
use a subcontractor for this only if the manufacturer does so already in the norma! course
of business. Thus, by ensuring the manufacturer maintains essentially full custody and
control at She project site to the point where the good is finished, this condition requires
thai the manufacturer customarily engages in work, ai project sites as the functional
equivalent of a manufacturing plant for that particular good.
if the U.S. company that meets these "customary operation" conditions does retain
custody through the onsite completion of the good and its installation into the project, the
final issue is whether that onsite work amounts to substantial transformation under the
Questions 1, 2. or 3 above. The U.S. company's ease will be strongest if the
transformative work must be done onsite. for example, the U.S. manufacturer may
provide thai onsite assembly and installation include sophisticated adjustments,
calibration, etc., by the U.S. company or its authorized and customary subcontractors,
which must necessarily be done onsite lo meet project performance specifications and
establish warranty conditions.
This discussion also explains why, in a "kit" situation, where ail pieces are shipped by
one company with the intent of providing a!! components necessary to be assembled into
a functional good (e.g.. pump station), their assembly by a contractor or third party is
properly considered as "construction" and not substantial transformation,
October 22. 20CW
9

-------
Exhibit 2

-------
nffiro r»f Incnortnr ^onoral	September 23, 2011
x-^eD sT/\f.
U.S. Environmental Protection Agency	11-R-0700
* o %	- —
Ua&j
V PRO^
Office of Inspector General
At a Glance
Catalyst for Improving the Environment
Why We Did This Review
The U.S. Environmental
Protection Agency, Office of
Inspector General, conducts
site visits of American
Recovery and Reinvestment
Act of 2009 (Recovery Act)
clean water and drinking water
projects. The purpose of the
visits is to confirm compliance
with selected Recovery Act
requirements. We selected the
wastewater treatment plant
project in the City of Ottawa,
Illinois, for review.
Background
The city received a $7,720,293
loan from the State of Illinois
under the Water Pollution
Control Loan Program. The
loan included $3,860,147 in
Recovery Act funds. The city
will use these funds to
rehabilitate and improve the
city's wastewater treatment
plant.
For further information,
contact our Office of
Congressional, Public Affairs
and Management at
(202) 566-2391.
The full report is at:
www.epa.qov/oiq/reports/2011/
20110923-11 -R-0700.pdf
American Recovery and Reinvestment Act Site
Visit of Wastewater Treatment Piant—Phase II
Improvements Project, City of Ottawa, Illinois
What We Found
We conducted an unannounced site visit of the wastewater treatment plant project
in the City of Ottawa, Illinois. As part of our site visit, we toured the project,
interviewed city representatives and engineering and contractor personnel, and
reviewed documentation related to Recovery Act requirements.
The city could not provide sufficient documentation to support that some
manufactured goods used on the project met the Buy American requirements of
Section 1605 of the Recovery Act. In these instances, the documentation did not
demonstrate clearly that items were either manufactured in the United States or
substantially transformed in the United States. As a result, the state's use of over
$3.8 million of Recovery Act funds on the Ottawa project is prohibited by
Section 1605 of the Recovery Act, unless a regulatory option is exercised.
What We Recommend
We recommend the Regional Administrator, Region 5, employ the procedures set
out in Title 2 of the Code of Federal Regulations (CFR) to resolve the
noncompliance on the Ottawa project. In the event that the region decides to retain
foreign-manufactured goods in the Ottawa project under 2 CFR § 176.130 (c)(3),
the region should either "reduce the amount of the award by the cost of the steel,
iron, or manufactured goods that are used in the project or . . . take enforcement or
termination action in accordance with the agency's grants management
regulations/'
Neither the region nor the city agreed with our conclusion that the documentation
was not sufficient to support Buy American compliance for some items. Based on
additional documentation provided by the city, we agree that some items are now
sufficiently supported, and we have revised the report accordingly. However,
documentation is still insufficient in four instances.

-------
Exhibit 3

-------
>
UNITED STATES ENVIRONMENTAL PROTECHOfi AGENCY
* ** '	REGION 5
77 yyfcin' jAi-KSC-N BOULEVARD
•„ HiCAGO, !L H0604-3590

JAN 2 7 2012
MEMORANDUM
SUBJECT; Proposed Management Decision
American Recovery and Reinvestment Act Site Visit of Wastewater Treatment
Plant - Phase li Improvements Project, City of Ottawa, Illinois
Project Number; OA-fYI 1 -A-UQO
FROM: Sussan ITedman	—
Regional Adinimstraloi
TO:	Arthur A. Klkins, Jr.
Inspector General
Wc have reviewed the final report titled American Recovery and Reinvestment Act Site Visit of
If .rsfi'waivr Treatment Plant - Phase II improvements Projects. City of Ottawa, Illinoisl and we
continue to disagree with the Office of Inspector General's (UJfi) position 'Jiat Buy American
documentation is insufficient for the four items listed in the report. We affinn our prior
determination that the Buy American documentation for the ivacser blowers and the i IT Flygt
pumps {two diflbmit models) is su'^ciem to prove compliance with Recover)' Act requirements,
further, as promised in our July 29, 2011 response, we monitored the status of the K-Turbo
blowers that were being manufactured at the time the final OIG report was issued. We received
an inspection report and Buy American documentation from the City of Ottawa; the OIG has
received the same information. Based on this information, we have concluded that the K-Turbo
Buy American documentation also demonstrates compliance with Recovery Act requirements
The attached table summarizes the basis and rationale for our determinations for all four items.
Central to our disagreement with the report's conclusions is the amount and meaning of technical
information piesented in the submitted documents. Id introducing the concept of substantial
transformation, HP A provided a means for Recovery Act assistance recipients to analyze and
determine whether manufactured goods meet Buy American requirements. Such determinations
must be supported by detailed documentation from manufacturers. EPA also anticipated that
Recovery Act assistance recipients would be assisted by the engineering community using thcii
best professional judgment in reviewing and analyzing manufacturing information. City of
Ottawa engineers evaluated and reviewed Buy American documentation and using their best
engineering professional judgment found it s'.f^eient to prove substantial transformation. Kl'A
engineers have affirmed ttie City of Ottawa's determination and Had the documentation
sufficient as well.
Kf'Cvtl!s.iff«(;«iyiis&irti- • Sf„~i<*,n w	K>«mi ii«.» »» K'W" ai <• •• r	r* ,i •&>*

-------
bPA hi® :m*t ju> nbhgattosib., under 'J CfK Section ! 7t», 1 *o, to revhrv* liic 010 •. aflegaiiuas of
Recoverv Act noncompliance. We have reviewed and evaluated Buy American documentation,
resulting in ik* imdiup ot'itonajmphanl items. I'hmtbav I have concluded. that Recover.' Act
funding lo the Cnv of Ottawa should not be reduced for tins pru-pc; arid that lift corrective action
is retiuired.
4tTAchrnetst
cc; Geoff Andres, Manager, Infrastructure financial Assistance Section, Illinois EPA
Arnold Banclstra, Assistant City Engineer, City of Ottawa, HUhoh
Melissa Heist, Assistant Inspector General for Audit
Robert Acludu, Director of Forensic Audits
John Manibusan. EPA DIG O^ee of Congressional. Public Affairs and Management

-------
tPA Region 5 Proposed fvian.igirment Decision Summary Table?
January 17, 2012
r-i-i*-,: r>•¦•*,!! ¦;
iir, %\',v H'-it:
Sabnit-rafale PunpS
tSection Number
11310)
.TiPufacturcr
lTT-Flygt
Concur or
Non-concur
Nonconcur. No
farther actien will
be taker.
Basts & Kationaie for Determination
ITT rlygt Buy American certification documentation includes letters dated Febni.iry 24, 2CU0, ;peafk and inc ,• ' vleo narrat've answers to a comp'etecl
Sobstanfjpll'rtjr - . hhst. Specific mod»»i and seriaS numbe* *,( the pumps provided in the
Ottawa project are also (!(£ (aciiiiy k/t-tKc-u >i> tii't: Jjh kvku d.' ° ! , 1 - '<• i	'j •' .i familiar with the
manufactured goods. This *.. - of skill is comm. -	-rr	c. ¦ "¦ J manufacturing procesiOi
Photograph* were included with the June 2011 documentation that showed the facility and various
manufacturing areas within the facility. One of foui nwrmfactufwig pods is pictured, The mdnufacturing
pod dppears consistent with the manufacturing processes described ir the June 2011 documentation.
J

-------
rPA Region 5 Proposed Management Decision Sumimarv Table
January 17, 2012
Equipment
Description &
S Number
Submersib'e
Chopper r'unpi.
(Section Number
113J1)
Manufacturer
Concur or
Won-coat ur
iTT Flygt j Non-ccncui No
i further acl.en wt|
r be taken
Basis & Rationale for Determination
•	I'fT-Flygt Guy American certification aocumentation includes tetters dated February 24, 2010, ana nine 1,
2011. Letters reference pumps provided In trie Ottawa project.
•	The febiuary *14, 2010 fetter is prospective ir, nature and lists the general ITT-Flygt Brand mode's to be
provided »i the Ottawa project. Tin's tetter was no! used tot EPA's evakiatier of Buv American
documentation,
•	The jwwi, 2011 teUet/documentafcon is specific and includes cetaiied narrative answers to a completed
'-v.!.. i-"! Transformation checklist Specific rm < (and f-numbers of the pumps provided :o (he
Ottawa project " ¦_ .i!, • .sled sn the letter
» The June 7.011 documentation indicates that the manufacturing facility is located in Pewaufcpo, Wisconsin.
<* The June 2011 documentation provides narrative answers to all five elements of Question t/3 in the
Substantial Transformation checklist, Question (13 addresses the ,•1 .'C >.¦, hether . he processes
¦ >"¦" • ..! the USA are complex and meaningful. Affirmative and detailed answers tc ooty two
elements ol Question M are needed to yie«d a result that the processes are complex and meaningful; two
.;•••	: it "'it document substantial transformation
•	On page 3 of the June 2011 documentation, the response to element 3(a) of Question W3 -states that
mechanical manufacturing including motor stator Installation, rotor unit manufacture, mechanical seal
assembly. impeller assembly, and pump housing assembly takes an average of 85 minutes per p.jmp unit
Further, electrical manufacturing including installation and connection of electric sensor components, and
power cable instaflatton takes an average of 25 minutes per pump un>'t, The total relevant manufacturing
r .<	.» '¦>	;-p unit. This total manufacturing time can be considered
substantial di«J cummensurate foi thp type of pump (jitwided, Addttwrwl iiiuitnatiufi picwidod tu
eiement 3ja) was not considered or evaluated.
« On page 5 of the June 2011 documentation, the response to element 3(d) of Question 113 states that
highly skWcd manufacturing employees are required tc build the equipment ir. the (TT owned
manufacturing facility located in the USA v. ho are factory a dined, certified and familiai wih thi5
manufactured goods Tf'is level of skill is commensurate with the performed manufactuung processes.
•	Photographs were included with the June 2011 documentation that showed the facility and various
manufacturing areas within the facility. One of four manufacturing pods is pictured. The many factoring
	pod appears consistent win the roanufattunnp, processes described in the June 2011 documentation _

-------
EPA Fepion 5	iv".inaf*."tier.i In'-f h-ion Sun-,ma-y Table
January lt\ "''It.
Equipment
Manufacturer
P-jail !**;«!% ftl.l iMii-tl-t- —lai*
section mumper
Non-concur
PotffVC
Displacement
Blowot
'.Section Nu;nt'c«
1.1370!
Kacser
Nan-nnnr
fuiti-c-s actio
5 jkt'i
No
Will
Basis & Rationale for Determination
•	Kwhh fc„j A«nr"iCi»n (itiT.tirn cirrjimrrtatK'tr include; a 'etter daied 0< t»,•!,»»- r ?Q3^ *.o s.iJi?
'•c-piescrtaiiv^ v.ho stMr the-	pout vok*!ng ccr'-"*spon"i:>iuv w tvv-fr hi r.i'd f f'A
Hfdaqiiof if'f:: uflKe i I W t:« i taVV,- '-"UtH t,-i>gt4iea> lejprotng v.Jvetr.C" tn«;
ifjr>k---vva" nt\>j actually m.»iu.ttK:M»xl n me USA
*	H e Of.u; Wr» 2'jlil dor i»itcnidi.t ¦»"- rriicaivi that the items are	M ti" fw faci}!» •> in
Frcdo'«*K :• !>uig, idrglMu
•	flit October ?0!0 docurrspiitation ptovictfn narrat've answers • it five ple^ents rf ({urtiwii 113  Ihe L-mo> ot wh «r»rl mi*a»iitviM.
Attnmat«ve and dptatled .irLsnw^ to only two elements of Question #3 an> nefded to yieid a rcsuil th.*t
the,.-" -t • ' - •• - i - ¦ I mf'smngfjl; iwo doswers are listed fat^.'nw Ihfil w«H dofument'.ubstanti.'ii
irartsfDtHwdon
*	Or page 2 of ?f*e October .'010 docutnenUfion, tnc* response to clement 3(3j of Oufe^tU'Ci S3 states that
the .'"anvfacturwig |ii<» *>ss 'uquiif; ,aito(i piowded io eiemi *tj 5v3i wai tot considered o« equated.
» Ots p.ir.e ? of tbxr C\"ict>r .70SO tJor'imwnt juon, Iht 'espouse tc etericrt 3{b> nf Qu«'sttr>n #3 itaV". ttsat
. , 	 I tvmpctentvand do»W5.tic ihcor i,3n	l«f 55 fc ">0
percent of Ihe ;,\-odiict's vj!j<- T'k? '..injr-e -J this deper»cs open ~he rf->dim hiiv o: she unit \Unv
ccmf!ti:x o to the cui!V-,!,'',n*-' t-t»in£	.to ar the co'iip!ex4i yf 11<>	•„ jpccinct-'.iO)?:
Th»s response i; saffitK-ot t'n. vi?ridi',	' •• i'idf to ihf
di3:umf*nT3tit • « , . " r- _-i 1	' '•	¦ i, • * 2C.VH SectHui i?fi 130
~	EPA OW staff mt'mc'iC'ti opitn-ti that suijr-U-tnHal tiansfor,Ti stAft engirn'i-rmg »t*vt»»w of tf»e Kdesc Buy Amencari information afnirn: ti'.A OW la^ft
engineering opinion th.it M.b"-.i:«nli3i transformation is occurring at Kd»5er'!> F ""-.dwkiburg, Vltgi^ia
fac^fty, and ttw; the pjoducts flft therefore made in the l'SA

-------
5 PA Region 5 Proposed Management Decision Summary Table
January 17,2012
pment
Manufacturer !
pfion &
<
- Section Number

¦ Centrifugal Blower
K-Turbo '
(Section Numb*?'
13 375)
Concur or
Non concur
Non concur
further action
be :. 1 •• fffay t"I-!Aar;d the
OiG on November 4, 2011.
The City of Ottawa Assistant City Engineer monitored and documented the manufacture of theii three K-
Turbo blowers in the site visit inspection report dated October II, 2011. The unit serial numbers for the
three K-Turbo bowers are 3100-100, 3100-101, and 3100-102.
- ,	¦ ,r i.v.i	: ¦ „i.c ¦ ".lily in 8atavi3. ¦; l) May 16,2011; 2} July
;¦ j',;; _,i '.f. v:: VI; and 4) September I, 2011. With the f—nt'C' -he May visit, the site visit
inspections documented the various manufacturing processes. Photographs and other documentation
(such as parts IMs) are included in the report.
Based or; the site visit inspections, Ottawa's Assistant City Engineer concluded that their three K-Turbo
blowers are made in thu USA by applying a standard of substantial transformation. Specifically, the
Assistant City Engineer focused his attention on Question #3 of the Substantias Transformation checklist
which addresses the issue of whether the processes performed in the USA are complex and meaningful.
The November 2011 documentation indicates that the three blowers (serial numbers 3100-100, 3100-l01j
and 3100-302) are manufactured at the K-Turbo facility in Batavia, Illinois.
The November 2011 documentation provides narrative answers to all five elements of Question f#3 in fhe
Substantial Transformation checklist (a copy of the completed checklist was not provided); Question #3
addresses the tsfue of whether the processes performed in the USA arc complex and meaningful.
Affirmative and detailed answers to only two elements of Quest'on #3 are needed to yield a result that
the processes are complex and meaningful; two answers are listed be'ow that will document substantial
ifdiiifofmrfiion.
Or Dage 2 of the November 2011 documentation, the response to element 3|a) of Question #3 states that
• .• r i i'. -•» 1	• s.i r.rv " hours of construction. This construction or
manufacturing time can be considered substantial and commensurate for the type of blower package
provided. Additional information regarding time scent on a blower was not considered & evaluated.
Beginning on page 3 of the November 2011 documentation, the response to element 3(d) of Question 113
chronicles the vanous mechanical and electrical operations performed during the manufacture of a
blower Pictures were provided to illustrate the numerous operations. Additional information pertaining
to resting operations was not considered or evaluated,
EPA Region S staff engines! mg review of me K-Turbo Buy American information affirms the City of
Ottawa'*- opinion that substantial transformation accurred at K-Turbo's Batavia, Illinois facility, and that
the blowers are made in the USA,

-------
Exhibit 4

-------
/-* rt1 * (-<¦*' I
" appropriate test, and
we request that the region apply the modified lest to the Kaeser Blower product. We believe that
1 The resolution of the substantial transformation issue that is the subject of this memorandum will affect other OIG
audits and investigations of Recovery Act projects throughout the country.


-------
the likely result will be that the region will determine that the Kaeser Blower is not in.
compliance with the Buy American provisions of the Recovery Act.
'Hie region and any QW strd'f who opined on the issue most certainly relied on the OW
guidance document, DETERMINING WHETHER SUBSTANTIAL TRANSFORM.* TION" OF
COM? ONE! "S INTO A "MANUFAC ; ¦ 'RED GOOD" IMS OCCURRED IN THE U S.:
ANALYSIS, ROLES, AND RESPONSIBILITIES, dated October 22, 2009. The purpose of this
document was to help assistance recipients fulfill their responsibilities to use iron, steel, and
manufactured goods produced in the United States as required by Section 1605 of the Recover)'
Act. Specifically, the guidance notes that when "'goods are comprised of arty components
produced in countries other than the U.S., SRF [State Revolving fund] assistance recipients can
use substantial transformation analysis to determine whether the activities in the U.S. by which a
particular good is brought together do or do not enable ii to be considered 'manufactured'" in the
U.S. under Section 1605 and the Guidance;' The term "Guidance,,r as found ra the OW
document, refers to related Office of Management and Budget (Cft^) regulation? dated
April 23.2009.
In its 2009 substantial transformation document, OW r Teienced the OMB Guidance -
wfiich in turn had quoted 2 C.F.R. § 176-160 - as requiring that u[i]n '..he case of a manufactured
good that consists in whole or in part of* materials from another country, Ltlic good] has been
substantially transf ormed in the United States into a new and different manufactured good
distinct from the materials from which it was transformed," OW's focus on the idea of a new and
different final product as being a key aspect of substantial transformation was reinforced by art
additional cited definition - taken from 2 C.F.R, § J 76.140 - of a "manv^'ctured good'" as "[a]
good brought to the construction site for incorporation into the building or work that has been
processed into a specific form and shape, or combined with other raw material to create a
material that has different properties than the properties of the individual raw materials." By
including these definitions of substantial transformation front and center, OW clearly established
that foreign-made components - to satisfy a substantial transformation test - must be combined
in such a way or modified in such a way within the United States so that the components are
actually transformed into new and diffc^nt items that are obviously different from those which
were imported.
Case law referenced in the OW document reinforces the idea that, to have substantial
transformation, there must be actual, significant change to the foreign component. In SDI
Technologies v. United States. 21 Ct. Int'l Trade 895, 897 (1997), the cour; began by adopting
the concept from another case that "[substantial transformation occurs what an article emerges
train a manufacturing process with a name, character, or use which differs from those of the
original material subjected to the process." In this matter, an electronic stereo chassis and other
stereo system components, including speakers, were imported. The chassis was then encased and
the speakers were attached in the receiving country. The court considered whether the character
and use of the imported components had been changed, first, the court found that because the
"essence" of the chassis and speakers remained the same, their character had not been
substantially transformed by the addition of a shell and the assembly of the components. Second,
the court, among other things, concluded that the addition of speakers did not result in a new use
because it involved a simple combining of components, hence, there was no evidence of

-------
substantial transformation, t he court also noted that it is important to assess which country is the
source of the most complex part ul lite manufacturing; if the country that is exporting the
component is responsible for creatine the complex item then it is unlikely the country that is
importing the component will w seen a» a >*nm* ^'substantial tfiutsfonmitiou. In slioit, the
character and use of the chassis and speakers had not significantly changed during the prodixtior
process, so thetc was no substantias transformation.
A second case tiled in die UW guidance, Customs Ruling HQ 734097 (November 25.
19911 set out a jvvicuforly relevant definition of substantial transformation. I* stated- "[i]n
determining whether the combining at'parts or materials constitute;, a substantia! transioraauor.,
the issue is the extent of operations performed and whether the parts lose Their identity and
become an integral pan of the new article" {'emphasis added). The case r.o^d thai, in assessing
substantia! transformation, one should look to the complexity of the process to help make that
determination But, in the end, a complex manufacturing process alone is not suffic'fpt to
evidence substantial transformation, me component from overseas must also lost its original
identity. The case oliered the following substantia! transformation test. 11) were the pare
physically transformed, (2) did She assembly process squire laitte amounts of skilled labor ur
specialized equipment, (3) was, the cost of manutacture high, and {A) did the components lose
their identity by becoming an integral part of a now article. This test combines inqu;"".s into
straightforward manufacturing issues like labor and cost with the traditional criteria of physical
Transformation and integration into a new identity,
l o help assistance recipients determine whether a product has hcon substtcntially
transformed. UW developed a questionnaire with three questions. The first question asked
whether nil components had been manufactured in the United States The second question asked
whether there had been a change in character or u>sc of a component in the United Stales. The
third question focused on whether the United State* manufacturing process wa*. complex and
meaningful. OW determined that only one of the questions must be answered in the aiYineaove
to conclude thit! substantial transformation occurred Indeed, there is no need to apply a
substantial translonnation test if the answer to question one is in the affirmative. Question two
poses the standard substantial transformation test that is identified in the definitions .uid case law
found in the OW guidance; it requires a change hi character or use of the original component.
Our conc<*i •• hc~c lies with the use of question three - standing ALONE - to determine
whether substantial transformation occurred. That question ha.\ for subparts'
a,	Did lhe process take a substantial amount of time?
b.	Was the process costly?
c	Did the process requite particular liiuh level -skills?
d	Did the process require a. number of di fferent operations.'.'
e	Was substantial value added in the process''
According to the guidance, two of the five subparts must be answ^r»d in the afti: Mative for there
to be an overall "ves" for the question. This is the question that the region applied when
concluding whether the Kaeser Blower chassis; had been substantially transformed. However, the
major flaw is that while each of the subparts may well be satisfied with whatever calculable (and


-------
hopefully supportable) mamifacturina data is provided by the contractor, there is no additional
necessary determination ot whr1- -.t the components in question tnay, m fact, have "[lost] their
identity and become an integral part of the new article " This lest is missing half of the analysts
required hv the Customs Ruling above.
OW repeatedly noted - through case law and regulations - that substernal transformation
must involve actual transformation of a component into a new and different good that is distinct
from the original component Proof of cosily, complex, value-enhancing processes may well be
established via question three, hut all of that does not also evidence whether ultimately, the
component was significantly modified
The problem identified above with regard to question three of the OW questionnaire is
apparent in the decision making about the Kaeser Blower that was referenced in the audit report.
The "base chassis" core of the Kaeser Blower - the key component of the final product - was
imported from Germany, It is n complex, large unit, American-made components (motor, valves)
were added in the United Stales. The region concluded that because time had been spent adding
the component1, and because ilie value of the chassis had been increased by the components,
question three was satisfied and substantial transformation had been established, However, if one
were to apply the definitions of substantial transformation as set out in the OW guidance, one
would most likely conclude that substantial *—^formation had not occurred. For one, the United
States manufacturing process admittedly involved the addition o:" American compor-T.n to the
core German chassis, but lite complex manufacturing of the chassis had occurred in Germany.
Second, the 1 fS. manufacttmng process did not result in a ""new arid different m»mu!actured
good distinct from the materials from which it was transformed " Althouea the German chassis
was not fully Junctional when it was imported - unlike the stereo system in SDl the chassis
which was the essence of the blower remained essentially the same after the addition of
American components. The complex, large German chassis did not lose its identity in the United
States.
The critical flaw in Ac OW substantial transformation questionnaire is that in accepting
responses to question three ALONE as sufficient evidence of substantial transformation, OW has
ultimately not fully satisfied the test set out in the Customs Ruling {.which it cited) discussed
above There it was noted that substantial transformation is the ies>ult of complex processes
(question three,! AND e\ idcrrH by z loss of identity and physical transformation of the original
component because of the w a component is fully integrated into the final product (question
two). OW's guidance fails because it allows a contractor to establish substantial transformation
by showing only one part (question three) of a critical two-part test (questions two and three). If
both critical parts of the substantial transformation test had been applied to the Kaeser Blower,
the region would seemingly have concluded thai substantial Transformation had not oi.cuned and
there was not compliance with the Buy American provisions of the Recovery Act.
For the reasons set out above, we believe that OW must modify the substantial
transformation questionnaire employed in its guidance so that some combination ol boih
questions two and three arc employed as the appropriate test for substantial transformation. We
further expect thai this new test • u combination of questions two and three • - v\ ill he applied to
the Kaeser Blowei chassis from Germans

-------
We have twu additional concerns about the region's proposed management decision,
first, the region relied on vague and unsupported statements included in a letter from Kaeser
dated October 29, 20JO. For example, the region relied on Kaeser \s claim laat the combination of
domestically sourced components and domestic labor "can" account for 35 to 50 percent of the
product's value. The range of this value depended on the relative size of the unit when compared
to the components being installed, as well as the complexity of the customer's specifications.
The region also relied on 'h-i claim that each unit would require aa estimated 16-24 hours of
build time. Neither of these statements was supported by viable evidence to dot—nine
credibility, accuracy, and usefulness. These statements were seemingly prospective estimates
and not specifically tailored to the Ottrvi blowers, as required by Environmental Protection
Agency (EPA) guidance. Additionally, these statements were addressed in the report and
determined to be insufficient to support substantial transformation. The region has not provided
any reason why the report's determination was incorrect or any new evidence for consideration,
as required by EPA Manual 2750
Second, the region also relied on a November 1. 2010, e-mail message from OW to
Kaeser in which it advised the company that "substantial transformation is oecumna in the U.S.
at your Fredericksburg, VA facility," Hov ver. the OW substantial transformation guidance
states that vi£PA does not and will not make determinations as to substantial transformations."
EPA limits its role under Section 1605 to reviewing waiver requests, Hence, the e-mail appears
to not be in keeping with the limitations se! out in the OW guidance. Also, the region did not
provide the justification or precedence for why O W's decision is determinative in this matter, as
required by EPA Manual 2750.
The Buy American provisions of the Recover)' Act state, in part, thai monies are only to
be used for projects where the manufactured goods are produced in the United States. The
provisions were included so as to help achieve the first stated goal of the Recovery Act:
"To preserve and create jobs and promote economic recovery." OW adopted a substantial
transformation test so as to eliminate those components thai were made overseas and not
ultimately manufactured in this country. However, the OW questionnaire that is used to assess
substantial transformation seems to be designed to fall short of achieving the Buy American goal
with regard to at least some foreivr- made components. We believe that the questionnaire is
flawed because it allows for a determination that a component has been transformed even though
the component has in fact not been shaped into a new form or combined with other components
to create a new item that has different properties («?«• 2 C.F.R. § 176.140). r he result in our
opinion, is that not all conponcnis from overseas are being rigorously ^.rmtinized to ensure they
are transformed within the United States, as is required under the spirit and letter of the Buy
American provisions of the Recovery Act, In addition to problems highlighted with regard to the
OW questionnaire- we also noted above two examples where the process for assessing
substantial transformation was seeminalv less than rigorous.

-------
If >oy have any questions regarding this memorandum, please contact Melissa Heist,
Assistant inspector General tor Audit, at (202) 566-0899; w Robert AJachi, Product Line
Director, at <415) V47-4537,
/ • -
Arthut A Klkms, Jr.
*.c I'liiidj'ta! Deputy Mstetam	Oftke of Wuuv
Agency Follow-Up Ow-cia! ;ihe CFO)
Agency follow-Up Coordinator
General Counsel
Director, Office of Ground Water and Drinking Water, n'^.e of Water
Director, Office of Wastewater Management. Office of Water
Deputy Regional Administrator, Region 5
Audit Follow-Up Coordinator, Region 5
Dirtxior, Water Division. Region 5
Chief, State and Tribal Programs Branch, Region 5

-------
I xhibit 5

-------
UNITED STATES F.NVfKONMENTAL PRWCI'ION ACBNCY
\-
' .... '
AUG 0 ? 2012
Office of
General Counsel
MEMORANDUM
SUBJhC I HP As Guidance cm the Buy American Provisions of the ARliA
FROM
TO;
Kenneth Redden " , ,	^
Deputy Associate General Counsel
CWI Rights and Finance Law Office
Office of General Counsel
Michael Shapiro
Deputy Assistant Administrator
Office of Water
\l/UciikAv> ~1m» a  2~^V ' ' ® w i&ljjg^ ^6»8wW ® R ^8» W' ®*®** ™ »¦»» ferf" W Wlf 1	U3W	-- -1 " -w ')/*?	*#f« «	Vuft ^a?P	3B*ii#RV8# 'Pp^J	hm0"^- ^ ITfc»P» ^	*flu*gs Vf» ffe ® # ¦terfRiWWl «Mns$ weP »
cofnplvlni with the Bav Antaicss w. sjons of the Americas Recover? and Rc^v. *'»r~etji Act
of2009 (ARRA or Ac!} is consistent with the reqwrentenis of the AURA,
Short Answer
Yes, Substantial tnu&fonnation is a kplly snpportcd means of complying with the
Buy Amencan provisions of the ARRA, The Acffxucy's gmdsncc provides tests for anslvziog
sutelaittijii nwiraailori that arc consistent with letevanc legal authority.
Bfcdjgnraad
Section 1605 of the ARRA states tint, with some \kmtod exceptions, none of the finds
awarded under che Act "may I* used for a proj« for the consttuctMm. aiwAo, maintenance,
or repair of a public WWitw or public wwk unless all of**,.- . - *	.jwwfe "W in dm
project an produced in ike Unim^Smms:" (EwfltMis adtted|. QMS clnbmmei m M&
requifemeiit in gtridanee specific to assistenee apeaiiails, puHisfctd en April 23.2009, which
has been codified at 2 CPK § 176 ei seq, Thti guidance r^oiiw Afltencies to ntdude the
fcltewiif deftmtkm of manufeiurad goods to (he mm ct' mm!'*: m ©f my pmt: t!)

-------
bwldlag or work that las been (i) processed into a specific foim ae# shape; or <10 combined with
otter raw material to create a material thai has different, properties than the properties of the
i Fitf4hi t si I ¥' si \ u fY^tisfr'iM^r^'3 I*? *r*
tltU«Viv|I <* tt Us&liwfIdtlSj1*
The OMB terms and conditions did not fully address the concept of substantia]
trmfematton, nor did any OMB guidance require Agencies to elaborate on the definition of
"oiamifiKSMed good.'" Nonetheless, in order to provide mom level of clarity and easc-of-«» to
reciptaxts who were going to wife determinations regarding the ©rip® of a myriad and diverse
set of manufactured goods, EPA issued a guidance docuntstf 'TDetemuirnc: Whether
"Substantia! Transfomutticwf of Con^wmnts into a "Manufactured Good" has ©eetww! in the
U.S.: Analysis, Roles, an# Responsibilities'', October 22,2QQS>, (Sutelaaial Transformation
Guidance). The Substantial Transformation Guidance describes the concent of substantia!
transformation as a means of complying with the lay American provisions of tie ARRA. As
noted in the Substantial Transformation Guidance, "EPA believes the substantial transformation
concept provides necessary guidance on this issue {of whether a manufactured good Is produced
in the United Stales]/' Ssg Substantial Transformation Guidance, pg 1-2.
£PA>iSi|bf|8p||g|,lijattsfgr»afi#B^||Man£g
Tie Substantial Tiansfanxuition Guidance sets forth three principles that would apply to
"These principle? are helpful in offering • basic imiewoik and stiebeswis for [a] more
searching substantial muisfcniiation analysis, as described herein." fggg IktMU
Transformation Guidance at 54, The few princes are;
• First, the detenniftatian of wMber "soboaatial tmmfemmmm" hiss occuned is ab*«ys
case tew, SB1 Teebnohgtos v. t/.S..*977 F.Supp 1235 (C.l.T. 1997), at 1239 n. 2.
Customs Ruling HQ 560427 (August 21, 1997).
o Second, no good "satisfies the substantial transformation test by ... having merely
undereone *[aj simple combining or tttckaging operation."' 19 USC Sec. 2463(b)(2)(A),
cited in Untdm America Corp. v. IIS., C.l.T. Slip Op. 00-139, Co No. 98-05-01311 at
8, n. A.
<* Third, "[ajssembly operations which are minimal or simple, as opposed to complex or
raeaningftil, will geneuUy not resale in a substantial transformation," Customs Ruling HQ
714097 (November 25, 1991) (and Customs Cases cited}.
See Substantial Transformation Guidance at 6,
To further aid recipients, the-Substantial Transforation Guidance provides thaw
questions for assistance recipients to aafc wken determining	sub»i»mli3 transformation
111, i-n I- „	IV	1 fM	€&*•'¦?«¦*-sSfc.s«	ifWjB rite**#.* mm f g»	wt M*!*,**.#1)-**	fsf'f «*.«*«	mk, &*..***, ¦tmmtxS'irv lttMaAflf IrtPSfa-jflljS!
ft® GKXftJSTGQ IE tn© unitea SftSiSS.	1 BGffmSS&z gwCKi Wicic ml wllip®aCT!> wuv mmsac
tit the United Stfttes* Qticvftoit 2 is designed to aid in the analysis of goods when the
i

-------
transferaialion is process-focused. And question 3 i# fccused on goods whew the ttausfotuwtive
work is assembly, §$f SuibsiBitial Tiaa^urr?n(Hi Guidance at ?~$ The iffMs9itkx& wcsic: denvtd
ditectly t«x» numerous FeM court or**, United Slate-; Customs .wtmiwsinat;"- rulings, and
utteiprctive rotes for United Stiles code agreements.
la May 20! I, EPA's Office ©f Inspeetw Gr\r vil (010) issued a tft report
H». JLi.jwA'fcii. ffa-g	*¦' ¦ ¦ • ¦ —--pZ	T*| iT^HLsSiilSW®,	€?1Sw»#Mk T* — ¦ ¦_1| Si^. .J* nm
iWilCiilyT ICflallt lit ?. ,-> WS6Q KQ «1 UlvaWI^ il-f ViCoH WgUCT 5w*C j liVOiVing rUHC
(CWSRF) ARRA project were made ~fher than in the Urv»~i States and tbis melk'Hr for
ARRA tailing, EPA Region 5, woianig witfv EIWs Office of Water, responHH to tie repent on
July 29,2011, and llsapeetl with some of the fading*. In Septemk-? 2011, GIG tuned a Sml
report indiig that three manufactured goods were not compliant with the ARRA because they
had not been substantially tattsfonarf in the United- Stales, EPA Region 5 disagreed with these
findings, but was required to issue a proposed management ptasi within 120 days of tite report.
During the 120 period. EPA Region 5 staff met with OiG $:;"frbut was unttrcrnfo! in resohrinp
diffiniiea. Dcsisile continued cfisaereement with dw OIG findnuHL in J&nuarv 2012. EPA
Ftc^iioit 5 issued is	roans gement pisn for the three OIG findtii{}i$ si issue. In Mffltch
f'' t '1' ffffii .a^u ¦—— m, -L ir.ii r j| M i -| ni -a-	. 'W^- W-M Pk	_ .¦ ^	- gf - |"j| -7 m.	Heifer	j-. ¦#¦ niiii'i iii... || n (iiij ,ii , > ..-f,
*»Kfs 4) vW i^iilJC^y m	lU UK' C-i /%	«?' I#3wlA^C«*#wBli pi«M* i,P 1.RSI	VIU
agrees that EPA Region S properi> used Ef A HQ guidance in dctc.r«iinmg^ whether or noi items
not te'B^Bwfccoiwtf in lite United States Smsusc si believes ttun" ^	-iar" ' incorroctly
imeiprw the statutory rmimwmmm of the A11.A,
OiG believe* thai the r^rtioo of tie guidance fdative to qwttaa 3 Is not eoiwcl, in reievaat
pan. quest km 3 provides the following:
3.^ Wm(/wwc) the	petfcffnicd in i»e U .S, (including b» aot iiiiiitei to
a Did the processes) lake a stdetantial amount of time?
b.	Was{/were) the p»cesiC«} costly?
c.	Dii the p»cess|es) require paalculw high level skills?
d.	Dii the pweessCes) requite a number of different oporatKms?
e.	Was substantial value added in the process(es)?
Sec Substantial Tnesforrasfkm Otadanoe at 7-8. 11* Siiiwrniiai Tmsfomsatkm OuSdbam
jak'Wbl«swiMtw«	"ii ir r- nn-ti	*¦-*-v - J t* 1M	/^ras-JS.iP'	IW	l*V^ C	t
explains tflii ftsscrnwy is in piosi c«sc$ iwui©* sqws cue spsjciruiB iow»ros
wock. Therefore, ai least wo of 3a, 3b, 3c, 34 ©r 3c w; si be satisfied to establish ^Astantiai
only mmtAettared goods produced in the Utnted S»»,
3

-------
substantial transformation in pit because if was refetenced in OMB guidance with respect io
prior to the ARR A, OMi's regulation at 2 CI- R §176.160 provides that weipleals need to
Inquire whether, "[ijn flic case of a tnanu&ctiiied good that consists In wttole or in pait of
from another cotMtty*
States into a i
transfoimed.n
As explained in the guidarv.-, "fijise origins aid applications of the
term arc rooted in wc&HBStabUahedl Fwtwsl interpretations) pssticulfliiy by the Customs
Department and the Federal courts." Sec Sabsiantid Tiansformation Guidance at 1.
Generally, substantia! transformation means a chioge in the name, character, or use of
a manufactured good,	Brmng Mm yJJnNi 2011! Am (1*^1
There are thousands of United States Customs cases and rqwrtei Federal court cases concerning
substantial transfoimatioa, many of which interpret statutory language that Is not relevant to the
analysis wider the ARRA, and many of which involve innufiMMral goods that would not iteiy
beuscd ina
distill slplficaiit concepts from relevant cam m that an entity itttfinailiar with. the concept of
substantia! transforoiation would taw© some tools to make a fsasowsd detexmmstbn as to
whether a manufactured good was produced in the United States.
The inquiries that were included in question 3 haw a basis in Pedenij coon caw and
United Stales Customs decisions. For example, Ac concept of "vstae w&dodT is explored in
SaBfiBflr Wire V. yrif ^ISjatc;: U.ClTiWtfftttlTigfr IK!-, The importance of ihe
amount of lime taken to pcrfonB the sssci^tfely * the use of skilled workers, the number of
components, and the -:wt of the .<$**nMy were ail discusTr' in Not,' off P^'r,'?*1'
Mmrt ^3,2903, tommfrt rrt w :r® n* ?tt?I *fek*»	r^er cms rm
det«nin*i«j involved a So^vf§-iU'|j|	assembly case	aslccsd for & ruling
that its pinsetter be cnns»dered an American-made product. that in many of the eases cited,
the concept of substantia! timsformtion was applied tsmgh intematioiHd trade laws to
detenmne cowiiry of aright for favorable uade reasons,, not to determine Aether an item was
manufactured in the United States. Nonetheless, the rationale with respect to wbstnatiai
trausfewaation is liveable in c&her scenario. The Baaswiet. case staiwi in relevant pant: If the
manufacturing or combining process Is a minor one which leaves the idepi it\ of the imported
CSI220,542 f, Supp. 1016 (CIT1982), Assembly operations which aw minimal or simple, as
opposed to complex or ro
-------
in finding thai substantial tFansfomtattatt had occurred in the United Suite*, the
In this case, the complex assembly of the central block from throe sibonMmtbHes,
t	t - - ^ U CUT! #>lks.ftS: T ;a-- -I r-Jl'L.-'LJ	iPHttC f-U timi-il n ¦"t"	fa>r» WDW*	~f»K»W III t*"-1i fr^-hi n r- 1" rt i—t.%iii ^i'r ri ^n-«i--#irY <#£¦».*«.
iisciucHiig; sue iiiwfpwwvG 01 uisc ummm FfCiiii mc m * z uwte ,»o8Sv ^loty luiQ IK
^,.i r, - I ^	a*	-J; \ J	^ ^ mn I	f ---	ijiriu ii'tii npihl' r'^ ,---i	^j-lfi l^u ^ 1f --,, 		 ^j.,. ^ . 	,J| #^i- r, Sib-. — ... n * ...	„.
wis 3CCvici3ior, &nu u.a. origin	i»osxro*^t sssscDOiy tmi ¦• aiidooci ot toe
sntatwtiaf tsRn«t«"—*.tit- of the^for^vrr nrfin wh"-"! il>I«-i invoK-H, pr?-t-7>Tg
fereian' oriftin subassemblies ggwj Btrts clia*:;"" as a result of die oro .wins and other
w w	««Fr ww	«i w a&wr-w ft*® *»«>¦»'«"» jfpB MZjfy	wr» «nifs	'^'l'-«W'' w* »	w» ® «we' w &&' w*&i ftsft "IK «?	*%/p */>&§:
&ssdnjbly operations perfefsxicd in the (Jftilcdl Steles* HusfeftwCgt pu&nieiit to 19 U »S.C»
2518(4XBX tnd If CFR177.22(&X we fed ilia! the co»ty of tripii of die bewllig
It $? uiiwMi «G. • !* nil	I *w>«,a
twlC tSSf1* COfltpraC
the questions can be answered In
or use of the product
The analysis provided in j
8 	 > 3L. «*« JIM I ««. !!*,«« «S-'L„ Jla.	jMsmS .... »•- v^-lfrTf, Y 'iln-i rMTTf M™«. J«S « afcj»S#« iMtt.-M MmS"' AIul — B	UK 1 ^WeStfmWaBS-^W-aWaBtS,	J'^''!'¦ IIL J t It. ¦». ,f-|' l*|-
l€gal oasis tor tnc	conning in qntfiicm j 01 tnc duosiainxiai i nnisivnMiioii umospec*
We are not aware of any Federal court cases or United Stales Cwsioms decisions thai ovetrtie the
Bmmmisk aradyais.
Finally, a dewaawat meant to give an overview of rules of origin analysis exfdains
subsitaiial ttansfomilioa in a stank* way I© fcow f;P A did in the Subsnmki'
Gttiiaace. in lifenwtjj^-LXl Bl'tf tf.Origlr,, Vivian C.
1 —. ... . ^ .. £". *M\1 **%	¦* ,¦*..-»¦¦ i-.-i nri- ¦%.- ¦-" -H -I- -I I-I f'	ULd'K^K 't'* «k mur *i. -»¦ «LHk. J*>1k	~1n,«2fc	t*.4F YZ ID1 A '
J y £v 1 &} v^Ol^^fC ®	rt	^VO'TCin p'OSv*,€lc* KS Qcrv^l^/|?si®!?$$i. Ol l*i»» »• s
Substantial T»sfi>m«li#ii 0«liaa«, a®fc»owI-">fi«F ihat in Hie U«
there arc several f*i#rs li*i are1
OvCmT\Q- I IwS (|UiOlC IS ifvii* p«I^V «? <
ifi
criterion known as substantial frmsfrnwatim is i
(he origin of the good is detmniiirf to be the last piece in -which it was subsmmiaify
transformed into a new omlSsiMei article'#/commerce based oil a enrage in same,
character, or use, Making the determination abo« what coiBtiwics a S-njie sufTHaen
for a procbct to be constdeted substantially transformed m tie juncture at wiieh an
origin ruling can prove to be quite complex.
on« or more of the Jbttowing feci'on {empliisis a
-------
»the chareetCHr/name/iise of tin article;
used 10 make
product:
the value
ft jmk.	e«i»«*•¦(*%e^r%
to is* processes
make fee
to the value
f**fm Wwi5b#,iftSP^' S® laCi
vl lH®!'wPl-ISiSi«
interpretations of these facts,
Taken as a whole, the Substantial Transformation Outdance issued by EPA on October
22,2009, is consistent with the Buy American provisions of tie ARRA. AdditionaHy, CPA's
interpretation of the substantial t»«.s&»uiai«n is wiasisteBt with relevant legal authority and is
ami!®? lo it* published mama! ftom the Congressional Research Service.
Cmataaian
The Substantial Tmafyma&so Outdanoe provides a framework for ttdpieots to
If you have any questions, please contact Weniel Askew at 2©2~5€4-3987 or Joanne
Horai at 202-564-5463.
Cc: Sheila frace. OW
Wiilaai Ami&mm, OW
ShaHa Piatt, OW
\F j Mil; I #¦ n ¦ ¦ A JL1| s9jXkrjXt~
i>iTSi6Tt Anaercr, v w
y j - .r ^ . f\Wk$
joraait	vw

-------
Exhibit 6

-------
A	UNITED SI A1F5 ENVIRONMENTAL PROTECTION AGENCY
^¦97	VvASrt'f.J'^TON C L 2C4SG
AUG 1 5 201?
j) t i€fc u» iVJ, 1 i »->
MEMORANDUM
.SUBJECT; Response 10 OSG memo enuti«d, "Response to Region 5's Proposed Management
Decision on OiCj Report No 1S-R 07C0, American Recovery and Reinvestment
Act Sire Visit of Wastewater Treatment Planr-Pltase H Improvements Project,
City of Ottawa, Illinois, September 23, 2011"
f-'ROM: Nanc> K. Sterner
¦Vctinii -Issis'uiH Administrator
TCJ:	Arthur \ Elkmix if
inspector Genera!
Fhiim; you lor :he opportunity tc» tcspond to your memo entitles, "Response 10 Region 5's
Proposed Management Decision on OIG Report No. ! 1 -R.-07U0. American Recovery and
Reinvestment Act Silt* Visit 0!" Wastewafei Treatment Plant-Phase 11 Improvements Project, < hiy
«*1" Ottawa, Illinois, September 23, 20! Jin which *»„»« note you; disagreement with ihe
proposed management decision provided by Region V, wet! your '*ceommendaiion to the
Office of Water to amend existing Buy American guidance. Alter numerous conversations with
>our counsel and staJf, the Office uf Water disagree, with your 1 ejection 0 the Region's
proposed management decision ami your suggestion to amend existing Buy American guidance.
Based on legal analysis provided by the Office of General Counsel, the guidance provided to
States and recipients three years ago establishes tests for analyzing substantia] transit- "Vition
that are consistent with relevant legal authority. Further, as a matter of policy, the Office of
Wafer believes it would be imptiiUcm to amend existing guidaiv more than twi< years after ibe
February 12010 ARRA statutory deadline for projects 10 be under to be under "contract or
construction A At this time, the vast majorit\ of the over 3,200 projects funded by the Clean
Water State Revolving Fund and the Drinking Water Stale Revolving Fund have beets completed
and more than 95 peiccnt of ARRA. funds have already been expended. The Office o! V> ater
believes the guidance therefore requires no amendment and continues to support Region V's
proposed management plan, l! yuu ha\e an\ questions, please contact Randolph \ . Htll. Aciins.'
Director, Office nf Wastewater Management, at (2G2) 564-0748, or Pamela S Ban;. Acting
Director. Ofike of 'Jtound Water and Drinking Water, at (202) '><>4-37"3D
Attachment
!(«%•>»»! Mtm.k >um 1 * http //WWW t*f)i vie*
R»cSSClftl
-------
Exhibit 7

-------


...V- #«4-
£*tk

\	UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
SEP 2 8 111?
SLBJECf t Response to Otfiee a I Water s August 15. 2012. Memcianduni in Connection
with 'JIG Report No. I! - R 0700, American Recovery and Reinvestment Act Site
Hsu vf'Wmtewah'r JWatrntw Want ¦ Phase il Imprwtwtnts project Cuv <•;•/'
(Jtt'iwa, !!iihai.\, September 23, L'011
i{5	N;mcy K. St oner
Acting Assistant Administrator
Office of Water
fnssnn tleuiTiaii
Regional Administrator, Region 5
A series of hotline complaint raised questions (hat ultimately led the Office of inspector
General (DIG! to focus on Office uf Wales (OW) guidance regarding 'lie proper assessment of
products used in American Recovery and Reinvestment Act f'ARKA) projects to determine
whether they comply with the ARKA Buy American ptovi$ion, In. a u&RKttandcm dated ivhtrcii
t \ 20!?. (MauJi 20! 2 memorandum), we notified EPA Region 5 and OW that we disagreed
with the proposed management conclusion that certain equipment which we questioned in the
ic! etc need audit report tumrlied with the >catutury Buy American requirements. Specifica'Iv,
we aucstiuned lire use of an OW likemative test for "substantial iransibnuatioiV' that is
seemingly not based in statutory. rcgukt«,»r>. and case law definitions - and that resulted, « our
iew, in a different conclusion regarding compliance than would havt* oeen rcacht-.il using an
m:! ah lis bed M(h:;tantial uanslbrmntinn test.
'She OIU then met with representatives from OW, Region 5, and the F.PA Office of
Genera! Counsel (OGC), At the meeting, OW arid OGC maintained the legitimacy of the
guidance, and < DG requested k-g,al support for OWs position." On March 30. 2012„ OGC
provided an 'Informal legal discussion" (OGC informal opinion) in support of the OW
alternative lest. GIG responded to tin- OGC informal opinion ott Apr.i 5, 2012, and noted • with
explanation - our judgment thai the OGC cases and analysis failed to provide sufficient legal
support lor the alternative, test.
Or, August ! 5. J012 OW forvouded t «C's August ?. 2U12, legal opinion t«X»C legal
opinion1! on the subject The legal opinion did not provide any auditioned legal support for iiic
OW a'ternauvc test a.> *,• .uurarcd with the March 'iO OOC informal upiniwi OIG therefore
••onUnaes io question the iep«l basis for OW% substantial transformation test.
u - nf*f Mf.-'L.-.i. i'	% \Y\i -v ~•fe j -
p.	9 "* ' " A'-" -vtrvo1: * C ; ssiSvKt "'^s .O-i - wc. • .vy-iv r^;. nn» ' ^	k

-------
Substantial Tiaiis formation Tests
OW:s AKRA guidance, "DETERMINING WHETHER 'SUBSTANTIAI
TRANSFORMATION' OF COMPONENTS INTO A 'MANUFACTURED GOOD* HAS
i CCURKED IN 1 UK V 5,; ANALYSIS, ROLES, AND RESPONSIBILITIES" (Substantial
1 ransfortttaitoo Guidance], w designed to assist recipients/contractors in tulfillme. their
responsibilities to use iron, steel and manufactured goods produced in the United States as
required by the Buy American provision fSettioiu 1605) of AREA In the case where a foreijm
component is modified during a manufacturing process in the United Stales, the essential
ijuostion posed by the OW guidance is whether that component was "substantially transformed'"
during the manufacturing process and thus considered a product manufactured in the United
Stales The OW guidance includes two tests for substantial transformation from which a
;ecipient/eontractor is allowed to choose; the "established tesl" and the "0 W alternative less/*
Substantial Trw.^lbi matton. Guidance at 7-8
I he eauhlhhei! test focuses on whether a toieign c-omponem has been subslantiailv
changed as to eharaowr or use (the lest initially also included change *u name but that
characteristic is now typically considered not to be dispositive). 'litis test for substantial
transformation is based in statute {I? U.S.C. § 2*>18(4j(BT), regulation f 19 C.F.R, § 177,22(a)),
mid is employed in case law discussed by OGC and OW. To be a product of the United States,
the statute requires that "in the ease of an article which consists m whole or in part of materials
from another country or instrumentality, it has been substantially transformed into a new and
different article of commerce with a name, character, ur use distinct f->m that of the article or
articles from which it was. transformed "" U1 U.S.C. •§ 25i8(4j(B)i'ii). Use language in this test
requires a true change iti the use or character of the 1'oreign component such that a new product
results. As the Supreme Court wn one of OCiC's cited cases) declared over a hundred years ago:
"Manufacture implies a change, but every change is not manufacture, and yet every change in an
article is the result of treatment, labor, and manipulation, But something more is necessary..
j PJhere must be transformation; a stow and different article must emerge, 'having a distinctive
name, character, or use.'" Anheuser-Busch Brewing Assoc. v. United States, 207 U.S. 556. 562
(1908 j (Emphasis added, 1
The- terms AhaiaeicU and "use" have been operationally defined through a multitude of
cas.es since the Supreme Court applied the established test in 1908. In one case referenced in
t )OC1 s informal opjmcm, Iheciaioa Specialty Metals, Inc. v United States, 2 4 C .IT lOlot Ci
intl Trade 2000), the court ytnted that substantial transformation may he found ' where there is a
definite and distinct point at which the identifying characteristic;. of the staittiw materials is {sic j
lost and an identifiable new and d.fforent product can be ascertained." lef at 1029. The Precision
court applied the established test. Id. at 1036. In another case referenced in fKJCs informal
opinion. Umrovannc^v, United States, 3 C.l.T. 220 (Ct. Int'l Trade 1982) (court found that
attachment of outsolc in the United States to the forcigioroade upper part ot the shoe did no:
result in substantial trai^fomistion), the court determined that if the manufacturing or combine rig
process is a minor one which leaves the identity of the imported article "intact.'' a substantial
transformation has not occurred, fd, ai 224, This court also looked to whether the imported

-------
ummmtm represented the -essence" >
-------
distinct from that of the article or articles from which it was transformed"; the OW test does not
require that result,
OGC, m its legal opinion, discussed in some detail three sources: a conn case, a Customs
Service notice, and an article - ail offered to support a conclusion that the OW alternative lest
could be used, standing alone, to effectively assess substantial transformation. The court case,
Superior Wire v. United States. 11 C.1T. 608 (Ct. IntT Trade 1987), according to OGC. supports
the position that "value added" is a characteristic that - standing alone and as a subpart of the
OW test - is an adequate test for substantial transformation. However, the Superior Wire court
recognized that the established test for assessing substantial transformation involves an
examination of change of use or character (not required by the OW alternative test), and that a
subsidiary test - like significant added value (the OW alternative test) - might be used only as a
"cross-check or additional factor" when assessing change in use or character. Id. at 614, Thus,
the factor of "value added" is simply one character;, Cc of the manufacturing process that can,
depending on the situation, be used to help check on a result achieved by using the established
test, but it is no* a stand-alone test. We will discuss the significance of this below,
OGC cited the federal Register Notice of Issuance of Final pew-mination Conceminy
Bowling Pinsetters. 68 Fed. Reg. 7407 (Customs Serv, Feb. 13,2003), as support for the
proposition that complex manufacturing processes alone can be used to evidence that substantial
transformation has occurred and, therefore, that the OW7 alternative test has a sufficient legal
foundation. This Customs Service notice involved a tnJy corrplex manufacturing process in the
United States that included thousands of components from other countries. The notice concluded
that character and use of the foreign-origin seven subassemblies and the thousands of foreign
parts clearly changed'as a result of the sophisticated processing and other assembly operations
performed in the United States. Id. ai 7409, The assembly processes were so demonstrably
complex that it was clear on its face that there was a change in use or character.
However, the fact pattern set out in the Customs Service notice involving thousands of
foreign-made components is extreme when compared with the import situations that we have
examined in the Ottawa, Illinois matter - and in other similar audits. The examples of assembly
we have encountered (as will be detailed below) typically involve one or two foreign-made
components that are modified in the United States. f"ie processes in the United States take some
time, perhaps require some skill, and may increase the value of the imported components. But
the application of those sort of factors (time, value, skill and other factors set out in the OW test)
to our fact situations, as required by the O W test, does not result in a clear determination of a
true change in use or character. In short, the unique facts in thf1 Customs Service notice involving
thousands of components are entirely inapposite to Ottawa's facts; and the established test - not
an alternative, stand-alone test - was in fact applied in the notice.
finally, OGC referenced a Congressional Research Service article 'International Trade;
Rules of Origin/' dared January 2012. OGC seems to suggest that the article supports the
position that the established test is merely one of many separate tests/factors that may be used to
assess substantial transformation The information in the 2012 article cited by OGC is derived
from a 1996 United States international Trade Commission publication. See United States
International Trade Commission cUSITCL Country of Origin Marking: Esyi??w.€>ltes,

-------
Regulations, and Practices. I 'SCIC Publication 2975 (July 1996). The original 1996 publication.
in a section entitled "'the Ilk Approach to Origin," stales : "Custc.f.s considers a variety of
factors vvner. determining whether a manufacturing process lias, changed the name, character, or
use of an imported article," id. at ?-4. The original source, contrary to OGC's inference about a
variety of stand-alone tests/factors, is clear thai the ultimate test is the established test, and that
Customs may turn to a variety of factors when applying the establish""1 test
Application tc City of Ottawa, Illinois Audit Report
in our March 2012 memorandum, we detailed a situation where a German component
had been modi tied in the United States. The contractor - m line with requirements of OV\
alternative test represented, among Mber things, that build t'-r v had b*vu spent adding part* to
the blower component, that value "can" increase due to processes m the United States - this
includes upgrades to the contractor's factory in the United States, and that skill is required to
build and test the units. As we noted in the March 2012 memorandum, the claims by the
contractor were nt»\ documented by "Vein ingf til, informative, and specific technical
descriptions'' that could be verified; hence, the representations seemingly did not comply with
the acquirements. An OW staff engineer made a determination about substantia! trans formation
(something that OW guidance express')' prohibits!, and communicated directly to the contractor
that this component met the requirements of"the OW alternative test.
The alternative test is an easier test to meet than the established test. In keeping with its
alternative test. OW did not assess whether the central Ciennan component that was identified in
our audit report had been changed in use or character. Abo, OW did not apply the ARRA-rcIated
regulatory language that required that the transformed component mui>\ among otiter things, he a
''new and different manufactured good distinct from the materials from which it was
transformed."
Ar. illustration of the final blower product from the contractor's ; nerat ute is included m
Attachment 1. The core, complex, foreign-made blower component (!i«ht colored item) and the
enclosure for the product were manufactured in Germany, Herns numbered 2,4, and perhaps 6
(the darker colored items) - essentially the motor, a valve and pulleys - were attached in the
United States. With regard to the fores en-made blower component, the contractor"* Itteratuie
states that the German state-of-the-art heavy manufacturing process had resulted m a '"durable
design that includes rigid casings, cast hearing supports, and one-piece rotors" - with ''precision
machined, case-hardened, spur-type timing geais and oversized cylindrical roller bearings" along
with "piston-ring seals."" The literature also discusM.** the sophisticated instrumentation, control?
and sensors that are part of the device,
Applying the established test and the AKRA-related regulations to the blower component,
leads to a conclusion that there has not been, a true ehamte m use oi character. First, the
identifying characteristics of the blower component were not "tost" so that "an identifiable new
and different product" emerged. The heavily manufactured German blower component was
never manufactured into something new during the assembly process in the United States; the
"essence" of the final blower product remained "intact" alter assembly. Second, the "use" or
"character" of :be complex component did not change because the assembly process in the

-------
United State* was not a complex enough process to have created a new product with a new use
or character,5 Third, from the standpoint of the rigorous ARK A-related regulations, there was no
evidence that the German blower component had been "substantially transformed in the United
States info a new and different manufactured good distinct from the materials from which it was
transformed'" or created into "a materia! thai has different, properties than the properties of the
individual raw materials. In short, the use or character of the lorcign-tBadtr blower component
was not substantially modified in the United States. The identity of the complex German
component which was the "•essence" of the final product was left '"intact:' Therefore, we are
concerned that there is non-compliance with the Buy American provision of ARRA. In addition
to our report regarding the City of Ottawa, we discussed almost identical concents about the
same or similar products in three other audit reports issued to Region 5. Details related to the
audit reports are in Attachment 2.
Conclusion,
In its August I \ .kOLI' memorandum, OW stated that it would ixi "hnpiudent" to chanye
its guidance at this late date We do not acree. As long as the e.ndance Li question is available
for use bv other divisions of I:PA or other agencies, the potential for additional incorrect
decisions exists. The prudent step, we believe, is to modify die guidance so as to mitigate furlhei
potential i isk to the Agency.
Beyond our position regarding the specific German blower component as discussed in the
City of Ottawa audit report, this is more fundamentally a question of whether the OW test is a
legally sufficient, stand-alone method for accurately assessing substantial transformation. Our
position is that an assessment of such factors as increased value or time used • the focus of the
OW test - does not, without ntuie, ensure that the foreign component was transformed into "a
new find different article of commerce wjih a name, character, or use distinct from that of the
article or articles from which it was transformed " Nor does the OW alternative test, in line with
4KKA~relafed regulations, ensure that a foreign-made pood ha* been "substonriully transformed
: Ot r; dt our Maili meeting and in «s informal opinion - (hough not is its legal opinion - seemed t© suggest tot the addition of
* motor to the German component caused the component to become tally functional and thus would have constituted a
substantial damp In use or character - the established test, (A change in function is net part of the OW attentat ive test) OGC
cited to a case involving an extruder. Ctostoms letter, HQ 558919 (Mar. 20, Iff S). Aa extruder is i machine tee!. which forms
metal or plastic eorapoBmts by "extruding" - its is by pushing the materials throug* a. die with fori*. la ills case, an extruder
sub&*wmblv wis tfticle abroad and then combined with what	to be the mime of fitiu&r corftnonents fa the I liuted
Stales; the added components incitticd a drive unit, an electrical control psael tad the extruder screw. Customs determined that
the foreign-made extruder subassembly was substantially tnutsformcd In the United States. Custom, in tusking its decision,
applied the established lost. It determined that fee assembly ptoemm involving the addition and total integration of a number of
major components to the master subassemblies in. the United Elites resulted in a substantial change in use, or character because
of tic "Hie extent of operations performed" tail fee Its that Ate imported component llostj its identity and {became] m tatogml
pert or the new article." Specifically, Customs stated "the DC mam, power unit sail belt drive: tic electrical conirot akiwt 01
panel which incorporates solid-state temperature controllers, screw-$pccd indicator, drive ammeter, pilot light en-ofT controls,
and wiring necessary to opeme the earwler, end fee extruder screw wWcli taiws md mmcs tlic maierial to be eKfiraMI tlwogli
the die" we all critical aid complex additions to the foreigjn-made assembly.
The facts, here stand in contrast to the Ottawa Mower situation where the sole, major component of the final blower product we
imported and the assembly to the United States was not m complex m to cause the tasjer foreign component to lose its itemity
and beeeme m i#isgml part oft new prwtost, Hw Seimta fef< »wcr component rawslital "intact," and ma the *mmm" oftN
final product afta the assembly process in As United Stales,


-------
m ihe United States into a new and different manufactured gooc distinct from the materials from
which it was transformed." As a consequence, the OW alternative test may have led to and can
continue to iead to wrong decisions. These unjustified detenruttatwns may serve to undercut the
eual of ARK A.
In accordance with EPA's Audit Management Process Manual, 2750 CHG 2 (Dec. 3.
IW8 j, we will forward this niemorandum and related materials t» the Agency Follow-Up
Official, If you have any questions regarding this memorandum, please contact Melissa Heist,
Assistant Inspector General for Audit, at (202) 566-0891* (Heist.Meiissai^epa,gov); or Robert
Ada*.hi. Ftochwt Line Director, at (415) 947-4537 CAdacMJ
-------
Attachment 1

-------
Com-Pak Plus" Features
J shown wftfaraft standard ene?ofrjro5

°S-ysar warranty on the Omega Plus trHobe blowers sold as a part of Com-psK plus packages.
Sight GBasses and Drain
Ports
High visibility sight
gsasses elKwthe
M levels to is
diected si a glance
tram the front ol
the pscteoe. Drain
veJvss with Basketed
caps simplify fluid
etenges.
Superior Enclosure
Alt Com-paK Plus
models feature a
standard enclo-
sure Btiilt for
exceptioraJ no-is#
reduction and easy
access to main-
tenance points. The process air and cooling
air are separated for batter efficiency. Heavy
gauge construction and powdw coal finish
maSce It suitabt® for both indoor and outdoor
installation. For esse of handling, a sub-base
is Included on mods is up through HB 95CC.
Effective Cooling
The combination
of air ducts In the
sound enclosure
aid powerful tans
create s highly
efficient cool-
ing system that
ensures effective cooilng even for frequency-
controlled units.
Pro-mounted Valves
Check and relief valves am
standard. Unioaded start
valve is optional. Ait come
pre-mounted to save on
installation costs.
Vibration Isolators
Heavy duty dampers
absorb vibrations before
they reach the base of
the unit or sound
enclosure.
Instrumentation
Standard
instrumsntation
includes, pres-
sure or vacuum
gauges, discharge temperature gauge with
stiut-down switch and inlet fSter differential
pressure gauge or vacuum switch.

-------
iffip T*T^ it"f~ 'TTti' TTTi TT.Tfi nlin iiTii r	 it
Aitacnment 2

-------
Prepared August 21. 20! 2
List of Reports with But American Substantial Transformation Issue
1.	Report No. 11 -R-0700, American Recovery and Reinvestment Act Site Visit of Wastewater
Treatment Plan?—Phase 1! improvements Project City of Ottawa, Illinois
•	Report issued September 23,201!.
•	Based on hotline complaint,
° SRF - S3.8 million; AKKA - $3,8 million
« Questioned ihree Flygt submersible pmnpis (Sweden), two fCaeser positive
displacement Mowers (Germany), and three KTurbo eentr^.gal blowers (Korea).
•	Available soccmentsiioti failed to support that the items were reanulactured or
substantially transformed in the U.S.
•	Report referenced EPA substantia! transformation guidance, but relied on regulatory
definitions of a "manufactured good" and a "domestic manufactured good" found at 2
CFR § 176.140 and ! 76,160, Both regulations require a change in character or
properties.
•	January 27, 2012 - region issued its proposed management Vision; used OW's
substantial transformation guidance to support using a single test to determine that all
questioned equipment complied with Bay American requirements.
» March 15, 2012 - In memo sent to Region 5 and OW, OIG disagreed with proposed
management decision and dcfc~~-ir.od the OW's guidance was flawed and the single
test criteria were inconsistent with legal precedent.
•	August 15, 2012 - OW disagrees with OIG based on OGC legal analysis; supports
region's proposed final decision and states that mc r 'ficavions to the guidance are not
necessary,
2,	Report Mo. 12-R-0377, American Recovery and Reinvestment Act Site Visit of Wastewater
Treatment Plant, Village of Itasca, Illinois
« Report issued March 30, 2012,
•	Based on hotline compiaim.
•	SRF - S10 mill ion; A KKA - 110 million
•	Questioned foreign steel (Canada, China, Philippines, Sweden, Taiwan, and
Thailand), four Aerzen positive displacement blowers, three End ress-Mauser
micropilots (Germany), a Rosernount magnetic flowtabe (Mexico), and ait Eaton
Filtration duplex strainer (China).
•	Documentation was not sufficient to support Buy American.
•	July 27, 2012 - region issued a proposed management decision and concurred with all
OIG conclusions and recommendations for all items except the Ar-^n blowers, the
region used t ?W5s substantial transformation guidance to support using a single test to
determine that the Aerzen blowers complied with Buy American requirements.
•	Discussed propped management decision with region.
•	Agree with proposed decision except for blowers.

-------
Prepared August ? 1 r 20\2
3.	Draft Report No. OA-FY31 -0036, American Recovery and Reinvestment Act Site Visit of
Wastewater Treatment Plait Improvements Project, City of Nappar.ee. Indiana
•	Draft report issued August 16, 2011,
•	Based on hotline complain"..
•	SEP ™ $4.8 million; AREA -• $1.7 million
•	Questioned 11 Kaeser positive displacement blowers (Germany).
•	Documentation failed to support that the items were manufactured or substantially
transformed in the U.S.
•	City replaced two iu-ms (Siemens Mag Flow Meters and Watson-Marlow Peristaltic
Pump) with Buy American compliant equipment as a rv -:;lt of our draft report.
» Final report in last stages of review.
4.	Draft Report No. OA-fY 12-0162 American Recovery and Reinvestment Act Site Visit of
Combined Sewer Overflow Detention facility, City of (joshen, Indiana
•	Draft report issued July 23,2012.
•	Based on hotline complaint
•	SEP - $31 million; AURA - $5 million.
•	Questioned four Rotork actuators (England), one Kaeser positive displacement
blower (Germany), and four Endress+Haaser flowmeter? (Germany).
•	Goshen'*? response to the draft report received on August 20, 2012,

-------
Exhibit 8

-------
¦ >	UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
;	Washington. ru: ;-o4ho
L „ V
iHf iMvt {.H«,u r^i i
MEMORANDUM
SUBJECT: Resolution c! OIO Report No 11 -K-G700, American Recovery timl
Ki'iinwstnw/it Act Sile Visit of li'iisicwulcr i'rc-.nmeut liani -I'inise 11
Improvements Project, I'ity of Ottawa. Ifiirtots. September .21, ?011
TO;	Barbara Bennett
C 'isn't htiannai Officer
V: she Auoenvv F«>!!o\\-t,.1 p Official for the audit resolution prneev,. «re nytitymg \mi
thai we Ua\c reached uu impasse with the Office ut Water <,U\\ ; concerning its position »-in
s!.;ndar.*,e dHtxttv aS'Scciinj,; Rviuoti 5\ proposed mtutit05 ol
me American Reiweiy and Reim esurient Ad of 2"fj9 iKccvvcry At.! i specifically, applying a
test id nut iu euidunce1 prepared by OW*. the region determined ikt! products thai were
discussed in the audit had in fact met the substantia! tianNtonnuhan test and were in compliance
with the Buy American requirements of the Recovery Act
We disagreed with the proposed management decision because we believe that the OW
guidance on which that decision is based insignificantly flawed. The OW guidance includes
legal definitions uf substantial transformation, but then employs a test for use in assessing
-.iih^iuiitiid (ratt'dun nation Ihai seemingly is not based on those ienal definitions. We
recommended thai OW modify its guidance so that the definitions of substantial transformation
are implemented in the OW guidance, and we recommended that the region apply the letydly
Mjuud test to the qneNtiuned equipment items in the Ottawa report We believe 'hat the result will
he tis.i? the Region wiB determine that the equipment is not in compliance with the Bu> American
pn>viflN of the Recover} Act.
On Atanist 13, ?.U12. the Acting Assistant Administrator for ()W n»-iHlvti «»ur office that it
with our rcjceiion of Regtr„»n f's proposed management decssivu and .Mr
H'Ci«rfjinciHiah«»n lo amend the existing Bu> American guid.eice I see attachment O. < >W based its
decision on lepal anaivsis I rum the Office of Oenetal Counsel f OU<') that tile guidance for
1 >m PRM1NINK. WHK! Hl-'R "SUBSTANTIAL TRANSFORMS'! SON" ("OM!>< tNHNTS INTO A
MAMT-Af'il-KH) i'CH !i V HAS (X'(HRRr.i) IN FHh U.S. ANA1 YSIS. KOU.S. AMH
KFSTONSiBfU III-S, (XHibtT "»C, :uoc'
Internet Address (Iff U i • hfj(!;//www o|lifl (Jt iv
Rceyded/Racyclable • f»<«(!>;«««.».< thlmurt! f on- l«w.v:i«il lMp«»

-------
analyzing substantial iransfbrmatior» is consistent with relevant legal authority, in addition, OW
did not think it prudent to amend the guidance at such a late date Thereferc, OW determined that
the recommended guidance modification was not necessary.
Wc re\ tewed OW's decision and the attached OGC legal analysis, dated August 7, 21; 1 J,
(set- attachinem 4), On September 28. 2012. wc notified Region 5 .jikI OW ('.sec attachment 3i
that in our opinion the legal analysis does not offer adequate support for the position that OW's
substantial tnimformatiurt ie.->t is based in law. W'c continue to believe that the test developed by
OW for the purpose of assessing substantial transformation is net consistent with iegal precedent.
Fhh. mailer is unresohei. 1 he resolution of the Ottawa report is past the i St May period
specified m OMft Circular A-5iiector, Office of Oround Wyter and Drinking Water. Offiee. of Waler
Acting Director, Oifiee nf Wastewater Management, < )flice of Water
Audit bellow-up Coordinator. Region 5
director, Water Division. Region 5
t !«H. .Si,«e and Tribrn pM^rams Branch, ilethon 5

-------
Exhibit 9

-------
MK 11 2013
KL3JEC.T: Resolution ofORi Report No. ! 1 -R-0700. American Rei >m>ry and Ri'imvsimeni
,k't Site I isif *if ifmlewwer Trcaimt'tif Ham Phase I! t vnrm'vnmtts f'mjeci,
{"ity nj Oikmti, llihwis, Septombot 2U! 1
TO:	Barbara Bennett
Chid* Financial Officer
\\ c are tiutifvin™ vmt, as the Agency l*oi!ow~! :p {lor 'autltl resolution process, ;hat
elforts to resoKe issues evneerning the Office of Water's nd operations of the
Agetiev. We h%i\c reviewed the American Recovery and Xeinve.-Jtinem Act and its implcmentm^
"emulation in this ami related Recovery Act audit*. In Attachment 5, we desenbed til detail ihe
risks resulting from Region 5's application of a new, alternative substantial transformation test
created by OW Region 5 used < >W"s alternative test in determine that products that were
discussed in the audit had b<'<*n substantially transformed and therefore were in eomphar.ee with
the Buy American requirements of the Recovery Act, However, as artuulated in Attachment \ .1
is our position that OW tailed to show that its alternative test tor sul*	transformation is
b;w*eU in statutory regulatory, or case Jaw UeftniiUms. t\>u>equcttt;>. the > rrticaoon of this tot
means thai ibretim pn*juth» that were allowed to be used in Rectnery Act projects because the}
passed I rather cawls) the OW alternative test nn»y wvli fwvc been wron^fnlly pui chased with
American dollars.
\\ e further stated that the established test tor assessing whether a foreign product is substantial is
transformed in Ihe United States is the change in character or use test This test is found ir, statute
(l.'.S.t" $ 251 it!4,KBJregulation (19 (' I- K $ I 11.22(a)), and in virtually yfi ease law cited
bv OW and the < hftee of (ieneral Counsel 'l ite test is used regardless of whether the
transformation in the I sided States involve;, assembly or any other process I hider the rigorous
t bsnjv in chauu-UT or use test, there mtv;? be ultimate proof tbfat a fnreijm vomjnmcnt is not ;uu

-------
subjeeied to ttcaimcnt. hbor4 .aid manipulation in the I oiled States, hvi rather thai it uhimalch*
is truly transformed into a new and different article with a wholly distinctive character or use
Bv contrast to the established change in character or use test, the OW alternative test fur
substantial trans! Wmatioti (embodied in question three of the OW substantial transformation
ijucsisomtaire) lias no apparent legal basis. 1 lie U\V test in uuextion requires an "answer" u» two
nut of live iuctui's. Those live factors are. a substantial amount of time for manufacture. u ,'o.stl\
process a high level <\V ss suggesting that the factors in question three represent nperaitoiijl definitions of the
established change its character or use test, i Kiwever. as we noted in Attachment 5, there is no
legal support \bt the claim that the items in question three can he used to establish change m
character or use. Spending time or money on a foreign component in no way ensure?* that it has
hf-n siii'iifieaiith transformed as to use or character. Mere!;, stating that question Ihtre is «
Ultimate method of assessing change in use or character does not make i! su. rhcrelorv. the
proposal does not solve the pioblems related in OW\ alternative test and the potential risk for
incorrect decisions stili exists.
For that reason, OICJ continues co conclude that the prudent action going forward is for the
Ajjuicj V modify its gjidancc as we propose, in order to mitigate tisk. Wc propane that the
cleanest resolution ot the issue would be to eliminate question three from OWs substantial
transformation questioitnarre. In uur vsew, question three is not a legally supportable test fi«i
determining substantia. iransforrratioii Removing question tlnee would mitigate further
potential risk U» the Agency through incorrect application of the Buy American provision of the
Recover) Act, If the Agency ultimately concludes that it does not need to or wish to mitigate the
fisk, n can so declare, It simply goes forward without nutiguimg the risk.
if sou ha«e «iro questiuns regarding Shis memorandum or any related material*. ple.tse cfrrts.ic:
Melissa Heist. Assistant Inspector General for Audit, at (202) 5&6-08W or
i," . j.- : or Hubert Adachi, Product l.inc Director, at (415* *>4/45 J 7 or
Attachments
v e. Acting Assistant A' ninistrator. Office of Water
Principal Deputy Assistant Administrator. Office ot Water

-------
Regional Administrator, Region 5
Deputy Regional Admini.straior, Region 5
lienvia! ( ourisoi
I Jeputs Geiicrai l'(»un>cl
Deputy Ai- •. .;iaie < letters! Counsel tor Ci\il Rights and Hr-.r-x* Law
Director, Office of Ground Water and Drinking Water. Office *,4" Water
AUtng Director. {Iftkx- ofU asieualcr Management. Oifue ot Water
Audit Follow-up Coordinator, Region 5
Diircior, Water !>?vistort. Kcpron 5
Chic.!', Stale and Tribal Pic;r,im.s Brunch. Region 5

-------
Exhibit 10

-------
EPA Audit Resolution Submission Form
Action Office: OW/R5 Report #; 11 -R-0700
Date: 1/29/13
Audi! Title: American Recovery ami Reinvestment Act Site Visit of Wastewater
Treatment Plant ~ Phase II Improvements Project, City of Ottawa, Illinois
Current Status of Audit: Management position disputed
Brief Description of Audit: The purpose of the site visit was to de?e*~'.ne whether
the City of Ottawa, Illinois, complied with selected requirements of the American
Recovery and Reinvestment Act of 2009 (Recovery Act), PI 111-5, pertaining to
the wastewater treatment plant project jointly funded by the Recovery Act and tie
Illinois Water Poi.ution Control Loan Program, Among other findings no longer at
issue, the Office of Inspector General (GIG) found that the city could not provide
sufficient documentation in four instances to assure compliance with the Buy
American requirements of the Recovery Act for the installation of blowers used in
the project Region 5 disagreed with the findings and proposed a management
plan asserting that the blowers met Buy American requirements because the
blowers were substantially transformed in the United States in accordance with a
test articulated by the Office of Water (OW) in guidance issued in 2009. The OW
2009 guidance, ' Determining Whether 'Substantia! 1 ransformation' of Components
into a "Manufactured Good' Mas Occurred in the U.S.," (the Guidance) which is
the subject of the OIG's September 28, 2012, memo, was designed to assist
recipients in implementing the Buy American requirements of the Recovery Act.
OIG's response to the Region 5 management plan - directed to both Region 5 and
OW ~ reflected the OIG's stated belief that the substantial transformation test
articulated in the Guidance for situations involving the assembly of manufactured
goods was not consistent with the existing Saw associated with substantial
transformation. OIG contends that the OW articulation of the substantial
transformation test potentially resulted in some manufactured goods that were
used in SRF projects being non-compiiant with the Buy American requirements of
the Recovery Act, OIG recommended that OW amend the Guidance. OW and
Region 5 disagree with OiG's findings related to the Guidance, and more
specifically, based on technics? and engineering review, OW and Reg»on 5 he'teve
that the blowers at issue in the Ottawa, Illinois project were "substantially
transformed" and comply with the Buy American requirement,
tssim(s) Under Dispute: Application of the substantial transformation test as
articulated in the Guidance in determining whether a manufactured good is made
in the US. And, whether the blowers used in the Ottawa Illinois project satisfied
the Buy American requirement of the Recovery Act.
Recommendation: G:G recommends that OW modify the Guidance to conform to
what OIG believes is the appropriate test for substantial transformation.

-------
Detailed Description of Dispute
Agency Position;
The Recovery Act inducted a Buy
American provision {Section 1805) that
requires, with limited exceptions, that
funds awarded may only be used for a
project if the "manufactured goods used in
the project are produced in the United
States." Nerther the Recovery Act nor
OMB guidance prescribed a particular test
lor determining whether a "manufactured
good" was produced in the United States.
OW exercised its discretion to develop
reasonable guidance for recipients who
were going to make determinations
regarding the origin of diverse
manufactured goods, OW issued the
Guidance on October 22, 2009. The
Guidance adopted the concept of
"substantial trans'ormation" as a means of
complying with the Buy American
provisions of the Recovery Act, and
provided 3 questions (each to address
deferent fact situations) to further ass st
recipients. The current Guidance satisfies
the legal requirements of the Recovery Act
and is not contrary to OMB ARRA
guidance. Were EPA to follow the OIG's
recommendation, it would have significant
implications for states, communities,
contractors, suppliers and manufacturers,
f he recommendation could result in EPA
requiring states to review over 3300
projects, 3 years after ail projects were
statutorily required to bo under contract or
construction and where applicable, apply a
different BA testing threshold to determine
compliance. This could lead to contract
disputes, litigation and economic hardship
that would be harmful to Slates, ARRA
recipients, contractors and suppliers
Further, ARRA funds are 97% outiayed
and the majority of projects have been
completed for over a year.
OfG Position;
fhis dispute involves Region 5's
proposed management decision, that
by applying a test of its own creation,
EPA correctly ensured that this
project funded by the American
Recovery and Reinvestment Act of
2009 (Recovery Act) complied with
Section 1605 (the "Buy American'
provision) of that Act. The region
rJett.mined that in applying an
alternative substantial transformation
test set out in guidance prepared by
the Office of Water, a number of
products that were discussed in the
audit had in fact met the test The
Office of Inspector General disagreed
with the proposed management
decision because it believed that the
OW guidance on which that decision
was based is significantly flawed and
therefore led to approvals of products
that in fact do not comply with the
Buy American requirements of the
Recovery Act. The OW guidance
includes legal definitions of
substantial transformation, but then
employs an alternative test for use in
assessing substantia! transformation
that seemingly does not comport with
those iegaS definitions
in materials sent to the Agency
Follow-Up Official on October 17,
2012, and January 17, 2013, the OIG
described in detail concerns relating
to Region 5's application of the
alternative substantial transformation
test created by OW. As articulated in
these materials, the OiG concluded
that OW failed to show that its
alternative test tor substantial

-------
transformation was based in
statutory, regulatory, or case law
definitions. Consequently, the
application of Ih.'s test means that
foreign products that were allowed to
be used in Recovery Act projects
because they passed (rather easily)
the OW alternative test may wetl
have been wrongfully purchased with
American dollars.
The OIG further stated that the
established test for assessing
whether a foreign product is
substantially transformed in the
United States is the change in
character or use test. This test is
found in statute {19 U.S.C, §
2518(4){B)), regulation {19 C.F.K, §
177.22(a)), and virtually all case law
cited by OW and the Office of
Genera! Counsel. The test is used
regardless of whether the
transformation in the United States
involves assembly or any other
process. Under the rigorous change
in character or use test, there must
be ultimate proof that a foreign
component is not just subjected to
treatment, labor, and manipulation in
the United States, but rather that it
ultimately is truly transformed into a
new and different article with a wholly
distinctive character or use.
Because the OW alternative test for
assessing substantial transformation
is seemingly not based in law, the
relevant guidance should be modified
to focus solely and effectively on the
appropriate test. By doing so, the
Agency would mitigate further
potential risk through incorrect
application of the Buy American
provision of the Recovery Act,

-------
Proposed Agency Alternative:
The use of the "substantial transformation" test as articulated in the OW guidance to
satisfy Urn Buy American provision m the Recovery Act is a question of policy
OMB regulations implementing the Recovery Act define a "manufactured good" as one
"that has been processed into a specific form and shape, or combines with other raw
material it) create a material that has different properties than the properties of the
individual raw materials " 2 CFR §176 140 !t further states that "There s$ no
requirement with regard to the origin of components or subcomponents in manufactured
goods used in the project, as Song as the manufacturing occurs in the United States." 2
CFR § 176, /0(a)(2)(ii). "lie Guidance restates this OMB definition that a "manufactured
good" must have different properties than those of the individual raw materials, OW
believes, therefore, that the Guidance effectively requires a manufactured good made in
the U S. to be changed in character or use from sis foreign components
Neither the Recovery Act nor OMB guidance prescribed a particular test applicable to
OW's State Revolving Fund Programs for determining whether a "manufactured good"
was produced in the United States, Without statutory language thai defines
"manufactured good" or OMB guidance that required a particular test for determining
whether a manufactured good was assembled in the United States, OW had the
authority to develop reasonable guidance. OW concluded that the "substantial
transformation" concept adopted by OMB for international agreements provided a useful
framework for analysis. The OW guidance explains the concept of substantial
transformation and identifies three questions, any one of which should be answered
affirmatively to find that a good has been manufactured in the United States.
With respect to goods that are primarily manufactured through assembly, Question 3 in
the Guidance applred. r he Guidance identified that question and five sub-questions, at
least two of which should be answered in the affirmative for an item to be consioered to
oe made m the U S :
"Question 3 generally addresses situations where the most significant of the
potentially transformative work is assembly. Because assembly is in most cases
further down the spectrum towards non-transformative work, a more demanding
standard is appropriate. Thus, if the answer to at least two of 3a, 3b, 3c, 3d, or
Be is "yes", then the answer to Question 3 is "yes". Manufacturers who wish to
establish beyond a doubt that their product has beers substantially transformed m
the U.S. via answers to Question 3 will want to provide descriptions of their
process(es) that support affirmative answers to as many of the subquestions as
are applicable, to increase the likelihood that the answers to at least two of the
questions are sufficient.
"3. Was(/werej the process(es) performed in the U.S. (including but not t'mited to
assembly) complex and meaningful?

-------
a. Did the processes) take a substantial amount of lime?
b Was (/we re) the process(es) costly?
c Did the processes) require particular high levei skills?
d. D;d the process!es) require a number of different operations'?
o Was substantial value added in the process(es)?"
OW interorcts Question 3 and its sub-questions, in the context of the entire guidance, to
contemplate a change in character or use consistent with the concept of substantial
transformation. The sua-questions establish reasonable, practical indicia for identifying
when assembly wilt result in a good that has different properties from those of the
individual raw materials, as required in the Guidance. Under the Guidance, "complex
and meaningful" assembly operations, such as heavy machining involving high value
labor and sophisticated equipment, are required to produce a material that has different
properties from the individual raw materials and establish substantial transformation Ry
contrast, work that is minima!, simple, or cosmetic in nature cannot amount to the
complex and meaningful process needed to change a good's character or use and
establish substantial transformation.
Nonetheless, the DIG objects to Question 3 in the OW guidance because it views the
five sub-questions as replacing the "change in character or use" test OIG advises that
Question 3 should be removed from the Guidance.
Despite the fact that most of the neariy 3,300 projects funded by the SRFs under the
ARRA are completed and that 97 percunt of the funds have been expended, OW
offered to address OlG's concerns by amending the Guidance to clarify and confirm that
a good manufactured through assembly in the U.S must be cnanged in character and
or use from its foreign components and that the sub-questions are critical factors, In the
proposed amendment, as in the current guidance. Question 3 and two of the five sub-
questions would have to bo answered in the affirmative to determine that a gooc: was
manufactured in the U.S, The proposed change was rejected by the OIG.
As indicated above, this is a dispute about a policy choice, no: a legal requirement.
Substantial transformation is not required to satisfy the Buy American provision m the
Recovery Act. In fad, when the Federal Acquisition Regulations (FAR) were eventually
amended to address the Buy American provision of ARRA m June ?010, the
"substantial transformation" test was not adopted. Instead, the FAR applied a test that
essentially looked to the last pface of assembly to determine the location of
manufacture, Therefore, the OW Guidance does not pose a substantial risk of violation
of the Buy American provision of the Recovery Act. Indeed, the best resolution is for
the Agency to maintain the current language in the Guidance and address any concerns
about compliance with the Buy American provision in the Recovery Act based on
technical and engineering review on a case-by-case basis

-------
Kxhibit 11

-------
53150 I-pder.il RrgiMrr Viii, 75, N<«, »m?I MMiiday, A>jj;«r l U», .{lllO/Kulus n«.» Ri^uLitiuii*;
supplies	hv In- r,itvt«rinn I'l Jiiu.iti, '11 sutif the (Hi tjm !
d M.ini:ia«,i-.fre > >. Snhsi.ntt i.sl
t'lMnsixntMit"!, ui i'aul! Shi!!
fheir -.vcir !H;ihv if!	!Ui
i jNu- iif	t( (tut"
i	Buv Attn*! ir.in Ai I .nul .Sulwtunti.il
Tt'.iii'.li ii mutt, m
t'nit't't,.! >«¦«Jj('Iiiii'Hf*.
!ifh''\V'i! (hr Hnv Ar.'iem ,m Ai S
;i	»i< !- . Ms;111 il
ir.<:.s!unti it'i-r. ' >ut* ri'sp-nden! M.tiu'i
Iii.it f!t«. r"i;V r.iiH'il'i :isi the "i
st,(inline iji I'll ill i tn" nl .1
iirci! ijinni, ut fm.i!
MiltKl.mli.il li.ut'ittiiin,it;.>u um;.l m i hi iu
till' ! 'ui'etl ,Si,fit's Atti if'it'I
sMied tlic !'!iiy	Ai t >ii
1 \>' •• to- i;fs ;• i i'lf^t-irtiiSs
«: sut!	u>
•.Utf'i f!i i! "h liisv Aiijenr.fft >i i
If",ill)!'!, ,\ht.'..t,nli >|il it.tlivfulll .it i!'-[| Hi
the I hilled iiiatmi "I he K'Hpuudeili wmn
cunt i*ini'ii 11i;i! ttu' interim ruin nuly
I'rtjimci iiriMifiblv iu lh" JillUui Mules,
Ih\-.p ii?,v> Whether u; !)'.>! (hi- Huv
A'ii<*ri' til. i\; i i»¦'{l11i«'.J" "ns.iiuit.il Pue" >>r
":itn-s;jnli.ti tf.ee H'timi'i'in" nc!
>iln\ tiv rt-li '..till i;r •->! : '¦<: p ii eiou
loi -rtUii	u! M». 11>il 1(4)!. !'hi!
fiunin iln hi'sp!smH'ti!h, vvhe'hei
t	'! ii i!»t- i"'iiv \finii ii .ui Ai t
iHiil .,pp'i:e., -i; Si.-iii,,'!:c ii.i1," '>»:•.>. tU »r.
V"! !. t pi OS •> >jt	.ii
ii	;•'}!>;>	lue.'e ir.i.sin!>'rjii.''".'tl the
Itri} Air,crii .ui • FAK .i-i tii.- tr."j! 'cti*:,.; ui lho	ini
¦i.imt'siit !,iiri''1 »',ul ;m lurl 11 i't lh.,!-. : m; 1 h»	H ¦
\ui.'!.l.nih,i! Irvuviii i^.si :*«n	iuik-ii
in tin 1,'av Atni-Iir.in \i t 'Tht'l.'fiii
inliiil 'i.iir.Uti	mily iitciii".
ink* tl:c l'"AK tu impleR; -a! !r,'u!i-
.is.'.rt'i-si.i'o!,1, Iin¦ i'uiiM'1	h,t
tit"-	i <)M;! I v «''»>( j m ii 1II- t>; it!-1
¦ ok >; • t'tiiii'v ri:»is!;u<.!i-.i,
i,;	jri-i-.i.-'jc!•; i'••• .t
'.In j l, utui * i.l f ! 1». " tii!r.(,I
t! austwi Micii" ii: tiit>ijiiinl'il thfrc i\
lin rt"i|nuvmt'fit It if Mihhlnnti.i!
lrausl!, bnr.t'iMt i1 jii u!c
rimS pi. fh:r'-. -in: in'!	ii,' i,mi:»,
pr.i.t'..-1 . \{	-ii 'ii
"V S •'•..nil" i"lli |l|i'lllt, »*" .Slill'.V l.ltl.l'l
"SKibal.ltili.i! If insiniIllation" u!
";iiu'Hi(.ii lui"" In iii<_' Uiu'ri! M.ild:, tu
qtiiilily ;is n L'.f'i	tnu! pnnim'!,
hiH'iili;.!' the liliv Allti'l ii All A>;! hil'; IjihHI
Wiiivi'i! k.> 11 S nudn fin!	t,-
'.vlii'n liu' \V-»u! 1 twi>>	«!]•.>,i
»it(Vi'm!'U\,i !':• >i-iii'ii.i'iH	,nr;'!
.ipjiiit's. Jt >w(.y>''«. i)ii^ si ii.i* liu- u.jt.f !i>r
^runii.-tu' iu.Imin ir.sifirii t:v»jt;
wlil'li tr.lilc (ijJI'i-i'IIUMll!» ajt|l!v, 'lt)it!i-s!tt.
luju'itructmn tn.'d>:ii.tl ma>i mint! (!«<
HliV Aiiui'iiiuii rrsjuifcitH*!!!-) u!
i!ijrmtsts-i	'! hyrt;furf. litr.st1-
ivn"1, wh'. -ti-'ui' j^flu- Hi'-,1
Ait>i>rr' 'i'i Ai 1 lilt-!, ¦ iiit;» tr.ltai
Iran*.fr ni,;i!ni|) ttc simp"', .vii;u»
ii ,'ilttm!(! "iis.iniiiat lute ' i/i f f«i -i l m1«»
:nchnlc the .slnnthiul id wl.sSutihiil
ii.msii-iimilinii i
I ">iimi:' a! Fuilluii idaboi.sUut.i L.ti
iiib'»t.in!i.iS	'ivi
s•> «•, ¦	il,"
Li'iiih -hMuiii tid.ijil .i ci i uif.
diimn,); ?b>- r-.iit.'pi ui »«nis.fv,U>
t ill*' I.,'ij;..(st>"il! V. lU. < 1 n 1 ' w <•!!<
cst,iht;.-ii>uii ->lnnciariJ" fil'subvliilitjid
iraiinSiiifuaiiuu thi' I'iisl (tail nl'ihn
«\vu |i!uni.;(>il It-,' lur iJnincstir
tonstnil [hut m.ih'ii.il. "flu n::>p<>Mti<'nt
•a tf<*¦ I M,.»i !!)~¦ nit'* simir.t! t;ui i
.iSii't.', m.*!'[ii',' k;. .1 :> :in!i 
r'r.'ipDilili lilfi, by uut iltlfiptiiii;
ir,in>-;inii-ialiait. lilt-* inti'jnn i:ik> tuts
rri'nli'tl .)uibi;.;u!lv 'I'licHt* rfspHiiilnui'i
fitmiii'ti <>u! .t i'lt'.u Hiiiinaistr.ilivt*
jimc'si. tit i!iu Fi-i)r;i.<; CrtM-intii'-iif f'n
• :i.ikinp,	.u
cifIs.1!	.*>:»•„ " hey n*.(It'll ti.ii!
1"v>>tsiiii>. ut,( Jtniik i l'i¦ ¦!>•) 11-.'i.t
it lusli'»m.! i iHi«iilt:i-i tiiu lnt.iii'i, 1,4 fL"
rnr,iiit\sl;moiA W tIK Ihir I.l-IHr-ilifili 'll.i'i I'!
.ulisf.sittml iiaiihiuDnaliMi	i!>
(![!'• u! tilt! ri'^jHiii'lfi'it-i, nljmviti|,>. bnlli
iihkIi'Is tn liiitdrrnmu wiurn |itni t
hris bfi.ni ti'.;iinil,ii tmeil Hi situ tlnih-il
^l.lli"; »•!' ail'fi frtYitPtt	"1 Itl'i
a: ,jrii;iil.'!l! lu'iif-Vk-i-l (lwl "he, ! . etiU
reit.v.in( tmlaw !>.e Trad;-
\t! ! hi ii'!, r •• h i)t»,	ill!
ihn H'.jtiiM'niPn!'- .i'Tinml iiii\)ri 'ivo-'ii
|in'-t's;!;ii(i|i	would
St*< tin!) I lill'i tif the
Rtu.nvci v Ai l dtHr.s not rii|",iistf
suhsjlanthii li.itti.f'innnrtf'i! i! tcninMs
tlui! (H.moinr I ufe'f	l e "intuSnrrti"
,n !!)•• Vhilotj '.I'.'it'i 1'lif iti'iiii si;, h i. i'
in*cr|»ri-»r,ti int.*; nv u>
')i!rnit:rt!i->iv • f ii, utnf.i" li'ii"-! j;U'n! , !u
"matn',n,»!iK' " i\* iliovxicut fti.it (i.f
lii'cuwn At'.l t'udiisnut. Mitin,i>
nstiii.tiun is wiirjfd conjiisHmlly witli
tl.i' liny Aitt««t*i( .in Art, it r. iti.i'uiii.'ihli:
it Ln'ijiit'i'.ifol ui u scniirn Uiumi
"SuIh! ilt'i ti	Sw". ri'"li"!
b'-i'i; n[»j>!t«"»j Ui list: FA-H l'i
i.uivr.ti i(t j,i;itf*ri.n. ,m! >iri,i};i>^!ti,!
(,;i';:i!f v t.ttWltlli tt'iu r Mini t.,|! 1 n it is
villi'?!! tu Im'tti ui;lci-iiit'ot",
Thmcit.n,, tiui fiiiitl mil! rt,n;t ui;n:s tit
i.«tni»( Urn 1- \l<	Uitii ijaidlli-i',
(lit: |i)'i*	ujii*;lnn ln>ti cjiilitid
1 •( ti'iti ;n.i ,-;!,tri'in' in 1tn
i
ill H> iititli-.u; i ,f Mrira:f.'H t.n i;
< .bliilnr.'ifs Olluti l tthjiuitil.'iil.i vveii'
l UUI fl'inui -ifjUllt tilt* (ilililliiilMl ui'
"ni.iituf.irtnitt " A H'HjiiiiHliui! '.tiiit'i! ili.ii
thf > n t l-fi(iitti't« t,,i" wh.it t.,iits!i(nti",
sr.'i.i'.lii! fl;-r l t1 n i-.i tu 4> i-ittii--
-.vh-'tiit't ,-uttn it,-n*	t,>i '-Si
p'i!i •• in ti;»' ! in'i'ii St.ilt", I,it ,i MUtl»-,ri.<;
!(> >n< ( IJii'.tiifH'tl jl|,ii!l i ,M< in l!|t> i '(nil (I
Sl.t'.u'j. I ikt-wisu, ia't> r-.'!;p(»!nl!>ntM (luted
tlti' vat iiiii'; llilt'i-pltildiinns ut
''iintmili'tilnit'," j c , nonit! br'Iinvm st c.
innihit t.r ttit-i;tn.,it iti r'lut.fjM !<¦
•HibitiMnti f|,(!Khitir..ittuti	i
f_..!S' "i-n-.it in,tut"i < I,mi" 'i-^t Im
tjimiitfdr'uu' S int> !iti it!:,pinit|ent,s
•jsktiii ill.it tin1 final rn! ; i..l,ni|\ tia<
,i>.'liiiititiii Yet iitmllR'r resfHtuil'int
bi.itf.tl ihn! ,i!tlnmgli !hti mil' (Ineji nut
dtthiif: "iu,tact,'in-
»U;,;^t>si ili.it ihf ti.",'. wii, !«• -.nritiii! *.,
"tke fpt(ntrt'in<'i>', <'it U.S siiiii,i:;,iilHn-
'i;;ti<'t lilt- HiiV -\itlH! ,! Mi At t
J'ltli iiuty its sami,, .-;iiUS tn- less
t}p2i:aiid.»i; than thr: sMbstiiiiftal
U,tu:,totir»ittit!it test, wl.li'h •tviimnh'.s
wtielht'i •, 'I'Sst- C ..nut '1-e
,u till- jv.i'st ,!i, Lir.;it;; u
l!<4 " in,H,ui,it '.Bi!'* tn iijt: !•
tj'iS tlid in,it tit) \itiliiU'tifi ¦,!
"laiiiniliiCtfiK-" uruii'r the Buy Aitti'fu
At,I ISnt; Im exiiiiiple H I >',kiti,t.( td
Nuvt.'iiibcr ,t, ['175, win id i iitldftww'd the
is-.ni: rif w!it,tliei ii r.nii :t h;itl biH-it
Ht.'tll1 llilf I uttM til ' It" i J titrli ,-ii lilt-, 1
CAO thd titj f
-------
Exhibit 12

-------
8-175633
NOV 3 1?S
The Honorable Gerry i. Studds
House of Representatives
Dear Kt. Studds »
four letter of May 15# 1975* on behalf of Bristol
Electronic*, Inc,, New Bedford, Hassachuaetts, requested that
we determine the validity of certain allegations against two
firms supplying AS/PRC-7? radio sets under Array contracts
swarded under invitation for bids No. DAAB05-7 2- 8-0 012» The
firms involved are the Cincinnati Electronics Corporation,
Cincinnati, Ohio, and Sentinel Electronics, Incorporated,
Philadelphia, Pennsylvania.
We discussed the contracts with officials at the Army
Materiel command Headquarters, Alexandria, Virginia, and
reviewed contract files and interviewed cognisant personnel
at the Army Electronics Coranand, Port Monaouth, Sew Jersey.
Me alBO discussed the Cincinnati contract with the adminis-
trative contracting officer, Defense Contract Administration
Services District, Cincinnati.
BACKGROUND
The AN/PRC-77 is a portable, short-range radio set
originally developed and initially Manufactured by the Radio
Corporation' of America. The radio was later produced by
various other manufacturers ptlor to the Atay Electronics
Command' s award of fixed-price contracts to Cincinnati and
Sentinel in June 1973.
The invitation for bids contained a Buy Aaierlean Act
clause, and both contractors certifled that the radios to
be delivered under their contracts would be domestic source
end products in coapliance with the act *s Implementing regu-
latory requirements.
Cincinnati'a contract required the first delivery of
production radios in January 1975? Sentinel's contract
required first delivery in Pebruary 1975. Both contracts
scheduled delivery of about 16,450 radios over a 27-«onth
period and included m option for iHe Army to increase the
quantity. Both Cincinnati and Sentinel priced the scheduled
requirements at approximately 9431 per unit.
PBAD-?6-4i

-------
B-175633
EVALUATION OF ALLEGATIONS
Each of the allegations cited in your letter is restated
below and ie followed by our evaluation.
I, Both Cincinnati and Sentinel are assembling all
or part of these Tidio s*;t8 in flex icc- infl Israel
In'''possible violii ion f the"Buy~X?>MrTcan Act of
mr	 —	
Essentially, the Buy Amerlean Act require® that only
domestic aourc* end products shall be acquired tot fttbiic use.
The act, aa implemented by the Armed Setvicea Procurement
Regulation (KSP9.), provides that an end product is to be con-
sidered a domestic source end product {1) if it is manufactured
in the Onited States ind {2) if the cost of its components which
are manufactured in the United States exceeds 50 percent of the
total cost of all its components. Components are defined as
those articles, materials, and supplies which are directly in-
corporated into the end product delivered to the Government.
Me have previously examined the quest ion of Sent inel1s
compliance wittt the Buy American Act in connection with its
originally planned procurement arrangement with Tad itan,
Israel Electronics Industries, Ltd. Me cone"uded in our de-
cision to the Secretary of the Amy in 52 Comp. Gen, 886,
May 31, 1973, that this arrangement, wherein TadIran would
function as a component purchasing agent for Sentinel, did
not constitute a violation of the act since the majority of
the components would be of domestic origin and the end product
radio would be assembled by Sentinel in the United States.
He learned, however, In the course of our current review,
that Sentinel now intends to purchase components directly fro®
United States finis rather than through Tad Iran. The Array
Electronics Command has, accordingly, requested the Govern-
ment 's quality assurance representative at Sentinel's plant to
review all purchase orders pcioi to release and to identify
any orders that are for foreign firms. We believe the controls
established are adequate to assure Buy American Act compliance
under Sentinel1s direct procurement plan.
Cincinnati has taken a different approach to the production
of radios under its contract. Components are purchased by
Cincinnati*t Ohio plant, inspected there, and shipped to a wholly
owned subsidiary {CE Sonora) in Bermosillo, Sonora, Mexico, for
assembly. The Sonora plant ships back a nearly fully assembled
radio for final assembly, testing, conditioning, and adjusting
at the Ohio plant.
. 2 -


-------
8-175533
The Defense Contract M« in lit ration Services Oistr ict
km Cincinnati, Ohio, inspect* *11 coaponents before they
art shipped to the Sonora plant. The Mats Ict administra-
tive contracting officer stated that virtually all ate of
domestic aci§l»,
Although m believe the monitoring system establishad
is adequate to assure that the level of foteign-aade com-
ponents supplied to Sonora does net exceed the liait pre-
scribed by the Buy American Act, we have reservation# m
to whether the manufacturing effort conducted by Cincinnati'a
Ohio plant i* in keeping with the intent of the act's other
provision, which requires that the end product be "manufac-
tured in the United States,"
Document• In ch* Mmy Electronic* Commsna' • contract
files indicated that Sonoca assembles an essentially complete
radio and that only 10 to 15 percent of the total assembly
man-hours are performed at the Ohio Plant.
The Army has taken the position that, if the final mnu-
factur ing process takes place in the Onited States, th* end
product is "aanufactured in the Onited States.* Thus, since
the completing or final asaeably operation is performed at the
Ohio plant, even though it amounts to only 10 to 15 percent of
the total assembly work, the Army believes that Cincinnati is
in compliance.
It is reasonably clear under the act that, if all assembly
operations were performed at the Ohio plant, the end product
would qualify as being "manufactured in the United States,"
and that, if all assembly operations were performed at Sonora,
the end product would not qualify.
Tha Buy American Act and ASPR, however, are silent with
respect to situations such m Cincinnati's where the manu-
facture of an item is split between foreign and domestic
locations and, though ve have reaervae ions, as stated above,
we are not prepared to say that Cincinnati has violated the
Buy Aaet ican Act. We dieruesed both the Buy A»erlean Act
issue and our conclusions with a knowledgeable official in
the Office of the Assistant Secretary of Defense who told
us he relieved the Aray'« position waa in accordance with the
intent of the act. Re also told us that, although questions
regarding interpretation of the requirement that end products
be "nanufacturud in the United States" have «risen before,
they had not occurred with sufficient frequency to lead the
ASPR Committee to consider amending the Regulation.
- 3 -
t
A,.-, .nm	.. -fe. , . .lartfriSlMiiw , rMA»,',,i

-------
B-175633
He believe that the infceguency of questions regarding
interpretation of the requiresent that erf product* be "manu-
factured in the United States" provides little assurance that
the requirement la being either appropriately questioned or
properly interpreted. Accordingly, we recoaaend that the
Secretary of Defense anend ASPR to define and clarify the re-
quirenent that items acquired for public use be "manufactured
in the United States."
2* Both Cincinnati and Sentinel are behind
immr
The allegation is correct in the sense that neither
Cincinnati nor Sentinel met the original delivery schedules,
The Army Electronics Command, however, has issued modifica-
tions to both contracts revising the delivery requirements.
At the time of our review, the modified contracts required
first product ion delivery fro* Cincinnati in August 1975
{* 7-month slip) and from Sentinel to Decsaber 1975 (a
1C-month 8lip).
The Array acknowledged that 3 months of the Jelay on both
contracts was attributable to deficiencies in the technical
data package furnished to the contractor* by the Electronics
Command.
Cincinnati and the Electronics Command negotiated an
agreement in Karch 1975 that the 4-»ontfe balance of the 7-
month slip on the Cincinnati contract would be incorporated
at no change In contract price and that both the contractor
and the Army would withdraw prior claims for monetary con-
sideration on certain other matters.
At the completion of our review, Sentinel and the
Electronics Command had not agrered on the causes for the 7-
rr.onth ba lance of the 10-month si ip on the Sentinel contract
and both parties had reserved their rights. The modification
revising the delivery schedule states the parties are not in
agreement that the delay is excusable and that both agree that
the contract sod if teat Ion shall in no way waive, prejudice,
or alter the rights and remedies of either.
3, Both Cincinnati and Sentinel have applied for
eaerger.iy financial aid which f if* "appfov'gc ,
will Be*;1, an increased cent per unit oh 'tEe
**
- 4 -
¦i
t
I

-------
8-175633
The allegation is correct. Both contractors have requested
financial relief under the provisions o£ Public Law 85-804 and,
If the request* art granted, the unit price of radios on both
contract* would be increased eubstantially.
The impleaenting regulations of Public Law 35-804 peroit
an increaae in contract price when necessary to prevent a lo»a
under a contract which would impair the productive ability of
a contractor whose continued operation is essential to national
defense.
Cincinnati*s request, which was submitted in February 1975»
sought relief in the amount of $2,258 million for the full term
of the contract. This would amount to a unit pr ice increase of
approxioately $136 {about 32 percent) on the Cincinnati contract.
Sentinel's request, which was submitted in April 1975 ,
sought relief to the amount of $1.706 mill ton for radios sched-
uled for delivery in the first year of production. This would
amount to a unit price increase of approximately $258 (about 60
percent) for first year quantities on the Sentinel contract.
Sentinel also requested 100 percent progress payments for first
year quantities. In addition, Sentinel requested that the con-
tract pr ices for the second and third year quantities be adjusted
upward for inflation, using the increased first year price as a
base.
Sentinel asked that the contract be terminated for the
convenience of the Government if the requested eelief was not
granted.
The contractors' requests for financial relief and matters
related to those requests are further discussed in the enclosure.
At the completion of our review, the Army had not made a
decision on either contractor's request for financial relief.
If the Army Electronic* Command recomaends approval, that recom-
mendation would then be submitted to the Army Contract Adjustment
Board, Washington, D.C., for final approval.
It is our understanding, based on discussion with your
office in early August, that you will provide Senator Edward M.
Kennedy with copies o J* th i s report.
As you know, Section 236 of the Legislative Reorganisation
Act of 1970 requires the head of a Federal agency to submit a
written statement on actions taken on our recommendations to
- 5 -
i

-------
B-1756S3
the House and Senate Committees on Government Operations not
later than 60 days after fete date of the report and to the
Sous# and Senate Committees on Appropriation® with the agency's
first request for appropriations aade more than 60 days after
the date of the report. We will be in touch with your office
in the naar future to arrange for copiae of thia report to be
sent to the Secretary of Defense and the four Com#itteea to
*et in motion the requirement! of Section 236.
Sincerely yours,
D^poUComptr oiler General
of the United States
Enclosure

-------
ENCLOSURB
ENCLOSURE
DZ
m
Undec tfte implement ing provisions of Public Law 85-804
contained to the Armed Service® Procureaent Regulation, both
contractors maintained that their continued per fornance on
virion# Government contracts was essenti-al to national defense
end that relief was necessary In order to prevent losses under
the AH/PRC"77 contracts which would impair their continued
operations. Sentinel stated that it would be forced into bank-
ruptcy if the Government failed to grant relief or to terminate
the contract for the convenience of the Government.
Sentinel maintained that the asjoc portion of the expected
loss under its contract resulted from * substant ial increase
in the cost of mater ial. The contractor stated that its mate-
rial cost estimates were developed when Phase II of the Covern-
»ent's wage and price control program was In effect and that,
when the controls were later lifted, Its aater ial coats rose
significantly.
Although the Sentinel and Cincinnati contracts both
contained a price escalation clause, it waft applicable only
to labor cost increases after the first year of product ion
deliver iea.
Sentinel claimed that it and the Army Electronics Command
were parties to a mutual mistake, as to a saterial fact, in
failing to anticipate the escalation of prices after the eli
-------
ENCLOSURE
ENCLOSURE
In confection with the matter of a spl it award* a
Sentinel protest to m in latt 1972 challenged Cincinnati's
small business eligibility, and a Bristol Electronics pcotest
in, early 1973 challenged Sentinel's* We concluded in our
dec is Ion to the Secretary of the Army in 52 Coop. Gen. 886 ,
May 31, 1913, that, for the putpose of this procurement»
Cincinnati did not qualify as 4 wall business concern m
c«quired for the gist-Mid# port ion (one-half) of the invita-
tion for bids, ftm found no aerlt* however, in Br istol'«
contention that Sentinel was not qualified m a small baa tnees
concern because of improper affiliation of contractual arrange-
ments with a large foreign firm. The set-aside poction of
the procurement was subsequently awarded to Sentinel.
Cincinnati filed a protest with us against the award
to Sentinel and, in June 1973, brought suit in the United
State* District Court for the Southern Oistrict of Ohio against
the Secretary of the Array and the Administrator, Saali Business
Adainitteation. Although Cincinnati had taken a different
approach with the court than it did with us, the issues raised
In the proteat were so intertwined with those raised in the
suit before the court that we declined consideration of the
protest,
The District Court ruled against Cincinnati and, in August
1973, Cincinnati filed an appeal with the United States Court
of Appeals for the Sixth Circuit. We were advised by a repre-
sentative of the Army Electronics Command'% Office of Chief
Counsel that the Court of Appeals found that the contractlng
officer should have (1) forwarded Cincinnati's protest of
Sentinel's business size to the Small Business Administration
and 12} withheld the award- of the aet-aside contract to Sentinel
pending a <3etermination by the Administration.
In January 1975, the Court of Appeals declared that the
contracting officer' s failure to' observe the above procedure
was improper, but it denied Cincinnati *a request that the
Amy be restrained from continuing the contract with Sentinel.
We were further advised by the Electronics Comaand represent-
ative that the matter had been referred back to the District
Court for further proceedings and that it had not been finally
settled,

-------