As the Biden Administration outlines its infrastructure plan in greater detail, procurement professionals should stay up-to-date because the plan will create immense opportunities and new risks for procurement managers. Although the final form of Biden’s "Build Back Better” agenda is certain to change if the administration pursues bipartisan negotiations or the Democrats pass the plan without Republican support via budget reconciliation, a monumental overhaul of federal spending and procurement is inevitable.
Procurement practices and standards will be directly and indirectly impacted in several key areas, including transportation services, labor costs, construction material sourcing and corporate tax rates.
Massive government spending on transportation and infrastructure will create the most significant investment and support for domestic manufacturing capabilities since World War II:
The proposed infrastructure plan will direct about $600 billion dollars toward transportation infrastructure, including highways, roads, bridges, public transit, ports, airports, waterways, the electrical grid, broadband connection and electric vehicle charging stations. Biden’s use of federal procurement and large government contracts will create a significant and overnight surge in demand for domestic manufacturing output, thereby creating market incentives for new suppliers to emerge and new opportunities for local sourcing.
The infrastructure plan will also support significant investment in renewable energy technologies in the transportation sector, including solar and wind. To achieve these transportation and domestic manufacturing investments, Biden will update procurement standards through tightened trade loopholes, reduced use of waivers and stringent enforcement of domestic content rules.
Rising Labor Costs and Inflation
President Biden’s executive order raised the minimum wage to $15 per hour for federal contractors effective January 2022, thus elevating labor costs:
Biden also plans to broaden the application and compliance standards for the Davis Beacon Act, which requires employers performing construction for federal contracts to pay laborers a prevailing wage and fringe benefits established by the Department of Labor. The impact of these new wage and benefits standards by the Department of Labor will likely to spill over into the private sector because small, medium and large firms will raise wages to win federal contracts or to compete to attract talent, thereby increasing labor costs for procurement departments.
Each trillion dollars invested in infrastructure has the opportunity to create 11 million jobs in our economy over the next decade, according to Georgetown University’s Center of Education and the Workforce. The infrastructure plan will also create a range of new jobs, including building, rehabilitating, and retrofitting housing, commercial buildings, schools, federal buildings and child care facilities.
Domestic Construction and Building Materials
There will be a surge in demand and flood of investment in American-made steel, cement aggregates, concrete, timber, iron, recycled plastics, copper and other building materials:
The Biden administration will leverage billions in federal spending to purchase American steel and other made-in-America products, including $10 billion toward the modernization of federal buildings. However, these lucrative federal contracts will only be awarded to firms that purchase American-made low carbon materials for construction and clean power for federal hospitals and buildings.
As demand for American-made construction material increases, prices for key building material inputs will expand. For instance, the American Iron and Steel Institute (AISI), an association of North American steel producers, has signaled that each one billion in funding would require about 50,000 net tons of American-made steel. An overnight surge in demand for American-made products will drive building materials prices higher and create new opportunities for domestic manufacturing investments.
Corporate Taxes and New Incentives
Procurement departments will need to closely observe changes to the tax code to ensure compliance, mitigate risk and increase value for their firms:
Changes to the corporate tax rate and the creation of a global minimum tax will raise the capital to pay for the infrastructure bill while new tax credits will create new incentives to mobilize private capital investment. For instance, the Biden administration is reportedly aiming for a corporate tax rate between 25% and 28%; a tax rate on the lower end of the range would represent substantial compromise to appease Republicans in order to secure funding for the infrastructure bill. Moreover, Biden’s American Jobs Plan introduced a 15% minimum tax on book income and profits of multinational corporations. Procurement professionals will need to adapt to changing tax law by openly disclosing overviews of the various functions performed across the supply chain, thus creating increased visibility for tax authorities into the procurement functions.
Corporations and procurement departments will have a range of new opportunities and tax incentives to offset the amount of taxes owed by a taxpayer via new tax credits. For instance, there are proposed investment tax credits to buildout high-voltage capacity power lines, create hydrogen production facilities, retrofit buildings, develop clean energy manufacturing facilities, onshore jobs and close foreign tax credits for fossil fuel companies.
- Procurement managers should proactively leverage strong supplier relationships to lock in cost escalation terms for building materials during contract negations before demand and prices rise.
- Although the knock-on effect of increasing labor costs by raising federal contractor wages to $15 per hour will pressure labor costs and inflation upward, the creation of new higher paying jobs will take place gradually over the next decade.
- The changes to domestic tax rates are aimed at raising revenue to pay for the proposed investments in domestic infrastructure while the global minimum tax is aimed at preventing corporations from offshoring operations to tax havens around the world.
- The establishment of a global minimum tax will significantly increase the compliance and financial burden of procurement departments in multinational corporations in the form of value added tax (VAT) registrations, transfer pricing reports, country-by-country reports (CbCR) and social security obligations for business travelers.
By: Riley Mallon