Don’t get sunk: 5 common misunderstandings when shipping cargo under government contracts

Nearly every Government contract contains one or more of the Cargo Preference Act clauses, but many contract managers and subcontract managers have never looked at the full clauses that are usually incorporated by reference.  Contracting personnel working on contracts where any is shipped must, however, be aware of the clauses’ requirements because non-compliance can give rise to serious consequences.  The likelihood of being found in non-compliance is apt to increase as Congress continues to examine agencies’ compliance and as President Biden’s “Made in America” policies take effect.[1] In fact, earlier this month OMB issued a memorandum that specifically noted that a new office will be working with agencies to “ensure agency compliance with cargo preference requirements.”[2]  Furthermore, compliance is financially costly, and those costs continue to rise as the number of vessels that a contractor can use to comply with the cargo-shipment requirements continues to shrink.[3]

Understanding the clauses and costs, however, is not necessarily easy.  In fact, misconceptions about the clauses and their requirements are frequently circulated among contractors.  Below are five common misunderstandings often made when shipping cargo under Government contracts and an overview for attorneys of what is actually required by the Government. 

1. I know what the Cargo Preference Act requires; I’ve dealt with it before.

   Many people (and the introduction to this article) say the “Cargo Preference Act” as though it is a single statute, but when people refer to the “Cargo Preference Act,” they may be referencing one or multiple statutes or regulations.  These statutes and regulations are undoubtedly related, but they are not the same.  Each of these authorities places different obligations on the Government and/or its contractor or the entity shipping the cargo, as described further below:

   Military Cargo Preference Act. In 1904, Congress passed the Cargo Preference Act of 1904.  Now known as the Military Cargo Preference Act and codified at 10 U.S.C. § 2631, the Act requires using U.S.-flag vessels for transporting cargo for the military.  The Government obligates contractors to comply with the obligation through DFARS 252.247-7023, “Transportation of Supplies by Sea.” 

   Public Resolution 17.  In 1934, Congress passed Public Resolution 17, which is now codified at 46 U.S.C. § 55304, and it requires that if an instrumentality of the Government makes a loan to foster the export of products, these products, if transported by vessel, must be transported on U.S.-flag vessels.  This essentially means that if the Export-Import Bank provides a loan to assist in exporting a product, the company must use a U.S.-flag vessel to export the products.

   Civilian Cargo Preference Act. In 1954, Congress amended the Merchant Marine Act of 1936 to include a cargo-preference requirement for civilian agencies.  Now known as the Cargo Preference Act of 1954 or the Civilian Cargo Preference Act, it is codified at 46 U.S.C. § 55305 and requires that at least 50 percent of the gross tonnage of all Government cargo be transported on privately owned, U.S.-flag commercial vessels to the extent that such vessels are available at fair and reasonable rates.  The Government obligates contractors to comply through FAR 52.247-64, “Preference for Privately Owned U.S.-Flag Commercial Vessels.”

   Some contractors even refer to the Jones Act as the Cargo Preference Act.  This statute, which comes from the Merchant Marine Act of 1920 (Public Law 66-261), requires, in part, that all goods transported by vessel between U.S. ports be carried on vessels that, generally speaking, were built and are registered in the United States and are owned and operated by U.S. citizens.[4]

   In sum, multiple statutes and regulations form a ship-American policy, and many people refer to one or all of them as the “Cargo Preference Act.”  Before relying on someone’s knowledge of the Cargo Preference Act, you should confirm which part or parts of the ship-American policy the person truly understands.  More importantly, contractors and their attorneys must know which part (or which combination of them) applies to their contracts, subcontracts, or shipments.

   Although 46 U.S.C. § 55304 may apply to some contractors, and although all contractors must comply with the Jones Act if applicable to their shipments, the remainder of this article will focus on the Government contractor clauses that implement the Military Cargo Preference Act and the Civilian Cargo Preference Act.

2. All this clause does is tell us how the Government prefers we ship cargo; we don’t actually have to do anything.

   Influenced by the FAR clause’s use of the word “preference” in its title, some contractors wrongly believe that the clause simply states a Government preference for the use of U.S.-flag vessels. As the above discussion on the statutes and regulations explains, however, the use of “preference” to refer to the FAR and DFARS clause is a misnomer.  Both require compliance with the stated provisions.  For instance, FAR 52.247-64 states, “The Contractor shall use privately owned U.S.-flag commercial vessels to ship at least 50 percent of the gross tonnage involved under this contract . . . .”  (emphasis added).  Likewise, the Basic and Alternative versions of DFARS 252.247-7023 state, “The Contractor shall use U.S.-flag vessels when transporting any supplies by sea under this contract.” (emphasis added).  Thus, both the FAR clause and the DFARS clause state more than a preference; they state requirements.

3. If we don’t comply, our customer will waive this, so it’s not a big deal.

   Some contractors mistakenly believe that they do not have to comply with the FAR and DFARS clauses because they can obtain a “waiver” of the obligations and follow the maxim, “It’s easier to ask forgiveness than to get permission.”[5]   Professionals at these companies direct their company to ship covered cargo on a foreign-flag vessel and then attempt to obtain the waiver.[6] Such a plan overlooks the limited discretion agencies have to grant waivers in the procurement context.  Further, President Biden has sought to reduce the number of (already limited) waivers granted.  He has established an office within the White House’s Office of Management and Budget (“OMB”) that will provide an additional level of review that agencies must use (in most circumstances) prior to granting a waiver of domestic-preference laws.[7] That office will also make the requests public.  OMB has stated that it will be taking a phased approach to implementing the new waiver procedures and has specifically noted that it will be addressing “Compliance with Cargo Preference Laws.”  Thus the likelihood of obtaining a waiver is bound to decrease even further. 

   Additionally, taking the ask-forgiveness route can have at least two serious consequences if the contractor does not obtain the waiver.  First, a contractor’s non-compliance could lead the Government to bring a monetary claim against the contractor or take some other action under the contract.  Second, such non-compliance could also lead the Government to make a non-responsibility determination,[8] which may result in considerable administrative actions against the contractor, such as a suspension or debarment.  Given these significant risks, contractors should carefully weigh any decision to disregard their Cargo Preference Act obligations without a waiver in hand.  

4. The clause doesn’t apply to us because we’re shipping commercial items.

   Many contractors and attorneys misread the clauses and believe their companies do not have to comply with the clauses’ requirements because the companies are shipping commercial items.  Although there are some exceptions for subcontractors shipping commercial items, most prime contractors and many subcontractors and suppliers shipping commercial items must comply with these clauses. 

   In particular, the FAR clause does not include an exception for prime contracts for commercial items, and it is one of the clauses that contracting officers should include (through a checkmark) in applicable solicitations and contracts for commercial items via FAR 52.212-5, Contract Terms and Conditions Required to Implement Statutes or Executive Orders-Commercial Items.  Additionally, if the prime contract is for ocean transportation services or construction, it will apply to subcontracts or purchase orders for commercial items.  It will also apply to subcontracts and purchase orders for commercial items if the supplies being transported are “Items the Contractor is reselling or distributing to the Government without adding value” or “Shipped in direct support of U.S. military—(1) Contingency operations; (2) Exercises; or (3) Forces deployed in connection with United Nations or North Atlantic Treaty Organization humanitarian or peacekeeping operations.” 

   The prescription for the DFARS clause instructs agencies to “Use the basic or one of the alternates of the clause . . . in all solicitations and contracts, including solicitations and contracts using FAR part 12 procedures for the acquisition of commercial items . . . .”  The DFARS clause applies to commercial-item contracts and subcontracts similar to the FAR clause.  Thus, although there are some exceptions for subcontracts for commercial items, most prime-contract and many subcontract shipments of commercial items must comply with the clauses’ obligations.

5. Components that will be used to make an “American” end product don’t have to be shipped on U.S.-flag vessels.

Some contractors recognize that these Cargo Preference Act requirements are part of the Government’s domestic-preference policies, and they conflate the various analyses.  In particular, contracting professionals often combine the analyses for country-of-origin determinations and cargo-shipment compliance.  Nevertheless, a country-of-origin determination is used only to assess whether a product or material complies with the Trade Agreements Act, Buy American Act, or some other domestic-preference policy that looks at the origin of the provided item.  That analysis does not, however, impact whether a product or material (or a component of either) must be shipped on U.S.-flag vessels under FAR 52.247-64 or DFARS 252.247-7023.  Thus, a contractor must ensure that the company does not ignore its shipping obligations simply because the company has ensured it is in compliance with a country-of-origin requirement.

***

In short, misunderstandings regarding FAR 52.247-64 and DFARS 252.247-7023 abound, and contract professionals and attorneys must know what a company’s obligations are under those clauses.  Indeed, Government contractors and their subcontractors should fully consider these substantive provisions prior to making an offer or entering into a contract or subcontract that will include the clauses and that will require shipments of cargo on vessels.  Additionally, contractors and subcontractors dealing with issues related to the clauses must keep in mind the potential risks for non-compliance to avoid potentially disastrous financial or administrative consequences for the company.

Jayna Marie Rust is an associate in Thompson Coburn’s Washington, D.C. office. She counsels clients on Federal contract- and grant-administration matters, including analyzing and negotiating subcontractor and joint-venture agreements and following small-business requirements. She also represents Government contractors in claims, protests, and disputes.