Halloween is coming up and, right on cue, the FAR Council has released a proposed rule that has potentially frightening implications for contractors. Last year, on July 15, 2019, the president signed Executive Order 13881 (the E.O.), Maximizing Use of American-Made Goods, Products, and Materials (84 FR 34257, July 18, 2019). As we noted in our previous post on this topic, the E.O. mandated significant changes to Federal Acquisition Regulation (FAR) clauses implementing the Buy American statute by substantially increasing both domestic content requirements and price preferences for domestic products. As we also pointed out, the E.O. contained several ambiguities as to how the desired changes would be implemented. At long last, we have (proposed) answers. On September 14, 2020, the FAR Council issued a proposed rule designed to implement the requirements of the E.O. (85 FR 56558, Sept. 14, 2020). While this proposed rule incorporates the overarching objectives of the E.O., it also adds a fairly unsettling spin in that it expands on the E.O.’s mandate by reintroducing the domestic content test for commercially available off-the-shelf (COTS) items as it pertains to iron and steel products.
As an initial matter, the proposed rule would amend the FAR’s existing domestic component cost threshold to effect a massive increase – from 50% to 95% – for end products or construction materials that consist wholly or predominantly of iron or steel or a combination of both. The new threshold for “domestic construction material” or a “domestic end product” that does not consist wholly or predominantly of iron or steel or a combination of both would rise from 50% to 55%.
In addition, the proposed rule would expand domestic pricing preferences for acquisitions of foreign end products or construction material. If the potential awardee is a large business offering domestic end products, the price of an offer consisting of non-domestic end products would be increased by 20% (up from the 6% factor currently in the FAR) for evaluation purposes. Small businesses offering domestic end products receive even greater preferential treatment, such that offers including foreign end products would be comparatively increased by 30% (up from 12%). This brings the price preference provision closer to the current Defense Federal Acquisition Regulation Supplement requirements, which apply a 50% increase to the price of foreign end products.
But that’s not all. In a harrowing expansion of the E.O., the proposed rule would reconstitute a seismic compliance burden on contractors by restoring the domestic content test for all iron and steel COTS items with the exception of fasteners. Since 2009, the domestic content test of the Buy American statute has been waived for COTS items. The proposed rule notes that the waiver was “in part due to the complexity and cost of keeping track of components in a world of global sourcing where the Government is not a market driver.” Although the “complexity and cost” of such an effort have not changed, the proposed rule nonetheless eliminates the waiver for most iron and steel COTS items, opining that “the domestic content test for the iron and steel items does not require tracking of all components, only a good faith assurance that not more than 5 percent of the iron and steel content is foreign.” The proposed rule also notes that the “bulk of iron and steel products acquired by the Government are primarily COTS items, used as construction material” and that preserving the waiver of the domestic content test for these items would mean that “the E.O. 13881 requirement with regard to iron and steel construction material would have very little effect.” We appreciate the conundrum faced by the FAR Council in attempting to reconcile the intent of the E.O. with the reality of the Government supply chain, but the proposed solution offers cold comfort to contractors who will be facing future Government demands regarding compliance with the ominously vague “good-faith assurance” standard introduced by the proposed rule.
While these requirements alone may strike fear in the hearts of contractors, the fear of the unknown is perhaps the greatest fear of all. The proposed rule acknowledges that the Government does “not have any data on how many currently domestic products would [now be evaluated as foreign],” and further makes clear that Uncle Sam “lack[s] data” regarding the expected economic impacts on contractors. Thus, it will be incumbent on the contractor community to educate the FAR Council as to how to implement a rule that both complies with the E.O. and which does not cause catastrophic disruptions of Government supply chains at the punishing expense of industry.
Comments on the proposed rule are due on or before November 13, 2020, and we expect that a final rule will be published in the ensuing months. While the proposed rule may be amended around the margins as a result of input from industry, the policy intent of the E.O. is clear, and we do not expect to see many tricks or treats in the form of substantive changes. Thus, contractors of every variety should carefully examine their existing supply chains now to ensure that they are prepared to meet the impending requirements. Without question, this is the best way to keep the noncompliance goblins at bay.