The PA Steel Products Procurement Act was first enacted in 1978. At its core, the Act provides that any steel products used or supplied on a public works project in Pennsylvania must be U.S. steel products. Under the Act, a product that contains both foreign and U.S. steel qualifies as U.S. steel product “only if at least 75% of the cost of the articles, materials and supplies have been mined, produced or manufactured, as the case may be, in the United States.”
The Act does not define the word “cost,” and it has been somewhat of a mystery as to what can be included as a “cost” for purposes of satisfying the 75% rule. It has always been my view of the 75% rule, and my advice to clients, that whatever cost was incurred as part of the mining, production, or manufacturing process to obtain and produce the materials that are incorporated into the finished product should count as a “cost” in determining whether the 75% rule has been satisfied.
Since its enactment, there have been few cases interpreting the Act, leading to great uncertainty and confusion among all affected parties. Now, in a case of first impression, the Pennsylvania Supreme Court has offered much needed guidance on this issue. In United Blower, Inc. v. Lycoming County Water and Sewer Authority, 259 A.3d 960 (Pa. 2021), the question concerned whether air blowers supplied on a public project for the Lycoming County Water and Sewer Authority qualified as U.S. steel products. During the project, the prime contractor provided the Authority with an ST-3 form, attesting that more than 75% of the cost of the air blowers – which contained both foreign and domestic steel – was attributable to U.S.-produced “articles, materials and supplies.” However, the Authority disputed compliance with the Act. Subsequently, a hearing was held before an independent hearing officer to decide whether the air blowers complied with the Act.
At the hearing, the “foreign” cost of the air blowers was determined to be $67,340. But the supplier of the air blowers claimed that this cost was subject to a 10% deduction for “domestic” overhead costs incurred inside the U.S. After applying the 10% deduction, the total “foreign” cost was $59,655. The total paid to the supplier was $239,800, whereas the amount paid to the contractor was $243,505. In either case, the “foreign” “cost” was less than 25% of the total “cost,” and the contractor therefore argued that the air blowers complied with the Act. The hearing officer rejected the 10% deduction. Without the 10% deduction, the “foreign” cost exceeded 25% of the total “cost.” The hearing officer also determined that the appropriate denominator in calculating the 75% was the amount paid to the supplier, not the amount paid to the contractor.
The contractor filed an appeal with the Common Pleas Court, which reversed, holding that the hearing officer should have taken into account the 10% deduction. The Authority timely appealed to the Commonwealth Court which affirmed the Common Pleas decision. The Authority then appealed to the Supreme Court.
On appeal, the Supreme Court reversed the Commonwealth Court, and made two significant holdings: first, the Supreme Court rejected the 10% deduction and held that the “cost” of the air blowers must include all aspects of the price paid to acquire the materials that are incorporated into the product, including raw material expenses and associated expenses, such as labor, warehousing, marketing, transportation, and intermediary mark-ups, even if these are domestic in nature; second, the Supreme Court held that the correct denominator was the price paid by the supplier to acquire all of the “articles, materials and supplies” that are incorporated into the air blowers, not the price paid by either the Authority or the contractor for the air blowers. The Supreme Court noted that this approach would reduce the risk that the “purchase price” would conceal the true foreign steel content in a steel product. The reasoning by the Supreme Court is sound:
As the entity that manufactured the finished blowers, [the supplier] is best-positioned to identify the various AMSs [articles, materials and supplies] used, substantiate their cost with invoices, and confirm whether they are domestic or foreign in origin.
The takeaway from United Blower? It is now the law under the Act that: (1) the “cost” of the steel product – whether foreign or domestic – includes all costs of whatever “articles, materials and supplies” are associated with the mining, production or manufacture of the finished steel product, or incorporated therein; and (2) the “cost” is determined from the perspective of the manufacturer of the steel product as that party is the proper one to document the “cost,” not the contractor or the owner. In any case, the price paid by either the contractor or the public owner is irrelevant.
If you need assistance with a public contracting issue, feel free to call or email me. I’ll be happy to assist in anyway possible.
Christopher I. McCabe, Esq.
