[FAQ] What Are Key Differences Between the Cargo Preference Act Clauses?

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If your company has a Government contract or has a contract under the U.S. Government grant, guarantee, loan, or advance of funds, it likely has one or more of the Cargo Preference Act contract clauses. These clauses require companies to use U.S.-flag vessels when shipping cargo under the contract.

Differences that contractors should be aware

In fact, three relevant differences that contractors should be aware of are: 

(i) the percentage of cargo that the contractor must ship on U.S.-flag vessels; (ii) the ability of contractors to use foreign-flag vessels (when they would otherwise need to use U.S.-flag vessels); and 

(iii) the procedures that contractors must follow in using foreign-flag vessels (when they would otherwise need to use U.S.-flag vessels). The remainder of this article discusses these three differences in more depth.

Percentage on U.S.-flag vessels

The clauses implementing the Civilian Cargo Preference Act require that the contractor use U.S.-flag commercial vessels “to ship at least 50 percent of the gross tonnage involved under this contract (computed separately for dry bulk carriers, dry cargo liners, and tankers).”

In contrast, the Defense Federal Acquisition Regulation Supplement (DFARS) clause that implements the Military Cargo Preference Act requires the use of U.S.-flag vessels “when transporting any supplies by sea under this contract”.

In short, the general rule is that if the DFARS clause is in the contract, the contractor must ship 100% of the cargo on U.S.-flag vessels; if the FAR clause or another clause implementing the Civilian Cargo Preference Act is the only cargo-preference clause in the contract, the contractor must ship at least 50% of the cargo on U.S.-flag commercial vessels.

Use of a foreign-flag vessel

Thus, there are at least two potential but related reasons that a contractor may use a foreign-flag vessel in place of U.S.-flag vessels: (1) availability and (2) the fairness and reasonableness of rates.

The first reason (availability) will often (if not always) be situation-specific, but the second reason is framed largely by 46 C.F.R. Part 382, which partially covers how the U.S. Maritime Administration (MARAD) determines “fair and reasonable rates for the carriage of preference cargoes on U.S.-flag commercial vessels.”

As this part of the Code of Federal Regulations reflects, the determination of “fair and reasonable” is not based on the global market; rather it is a determination based on the rate that the vessel owner/operator charges in the context of the specific costs it incurs for owning and operating the vessel under U.S. laws and regulations.

Like the clauses implementing the Civilian Cargo Preference Act, the clause implementing the Military Cargo Preference Act, DFARS 252.247-7023, permits a contractor to request the use of a foreign-flag vessel if a U.S.-flag vessel is not available for timely shipment.

Unlike the Civilian Cargo Preference Act clauses, though, the DFARS clause does not use language that requires a determination based on MARAD’s 46 C.F.R Part 382 provisions. Rather, it permits a request if the “freight charges are inordinately excessive or unreasonable” or if the “charges are higher than charges to private persons for transportation of like goods.”

Procedures to use a foreign-flag vessel

Neither the Civilian Cargo Preference Act nor the Federal Acquisition Regulation (FAR) clause implementing the statute defines the procedure that a contractor must follow before using a foreign-flag vessel, but the FAR clause does explain that “Guidance regarding fair and reasonable rates for privately owned U.S.-flag commercial vessels may be obtained from” MARAD.

Notably, the contracting officer has discretion in determining whether to permit the contractor to use a foreign-flag vessel (as confirmed in the recent Armed Services Board of Contract Appeals [ASBCA] decision), and the clause prescribes specific information that the contractor must provide the contracting officer in making a request to use such a vessel. 

Such information assists the contracting officer in obtaining internal advice and in making his or her decision on the matter.

The clause requires the contractor to provide the request to the contracting officer at least 45 days prior to the sailing date that would be necessary to meet the delivery schedule. 

Although requesting a determination 45 days in advance may prove difficult for many construction contractors, the ASBCA’s recent decision explicitly found that 45 days is a reasonable timeframe given the internal Government coordination required for a contracting officer to come to a decision.

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Source: lexology

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