A major pillar of President Biden’s campaign was strengthening the Buy American requirements in procurement law, promising both before and after the election that “[n]o government contracts will be given to companies that don’t make their products here in America.” Five days into office, the President issued an Executive Order designed to bring that promise closer to fruition. As we wrote here, the January 25, 2021 Executive Order directed both dramatic changes to domestic preference regulations and increased enforcement of existing requirements through a variety of means. Now, seven months later, amendments to the Federal Acquisition Regulation (FAR) are being proposed by the Department of Defense (DoD), General Services Administration, and National Aeronautics and Space Administration—collectively, the Federal Acquisition Regulatory (FAR) Council—to implement, at least in part, President Biden’s Executive Order (Proposed Rule).
The Proposed Rule, likely to be made final in some form prior to the end of the calendar year, will be the most sweeping changes to the Buy American requirements for competitive procurements by the US Government in decades. The Proposed Rule provides for, among other things:
- An immediate increase to the “domestic content” threshold to 60 percent, with scheduled increases that will ultimately raise the threshold to 75 percent
- A “fallback” threshold that will allow products meeting a specific lower domestic content threshold to qualify as domestic products under certain (somewhat rare) circumstances
- A framework for the application of a higher price preference for items considered to be a “critical product” or made up of “critical components”
- A post-award domestic content reporting requirement for contractors supplying “critical” products or components
The changes will have significant impacts on contractors—both domestic and foreign—that currently supply US Government agencies goods and construction materials. It is thus imperative that Government contractors relying on foreign content to produce products and materials for US Government consumption reexamine the entirety of their supply chains now. A failure to do so may result in the loss of future contracts—or in significant liability for noncompliance—due to the increased restrictions when they become final.
Summary of the Current FAR Part 25 Buy American Act Requirements
- In competitive procurements for supplies and construction projects, there is a preference for domestic end products and construction materials.
- Whether a manufactured end product or construction material qualifies as domestic is typically determined using a two-part test: (1) the end product must be manufactured in the United States; and (2) a certain percentage of the first-tier components must also be mined, produced, or manufactured in the United States.
- The “component test” or “domestic content test” is measured by the cost of the components. In other words, the cost of domestic components must exceed by a certain percentage the cost of all components. That percentage for end products (other than those consisting wholly or predominantly of iron and/or steel) is currently 55 percent. For iron and/or steel end products, the percentage is 95 percent.
- Except for iron and/or steel end products, the component test is waived for commercially available off-the-shelf (COTS) items sold to the Government. Thus, in order to be entitled to the preference, sellers of COTS supplies and construction materials must only demonstrate that the supply or construction material is manufactured in the United States. COTS items are not to be confused with “commercial items.” In order to qualify as a COTS item, the item must be sold without alteration or modification to the Government agency and must have already been sold in substantial quantities in the commercial marketplace. Commercial items, on the other hand, are more malleable—they can be modified and must only be offered for sale, lease, or license to the general public (or must be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation).
- The Buy American provisions in FAR Part 25 do not prohibit the supply of foreign end products and construction materials. Rather, they establish a preference for them by requiring procuring civilian agencies, in the competitive solicitation of supplies and construction projects, to add 20 percent to the price of foreign end products when competing with large businesses offering domestic end products, and 30 percent to the price of foreign end products when competing with small businesses offering domestic end products. For DoD procurements, the preference increases to 50 percent.
- The percentages for the component test and the price preference were increased in the FAR on January 19, 2021 (discussed here). However, these concepts have been included in the FAR for decades.
- The Buy American domestic preference provisions include many exceptions, the most significant of which are embodied in the Trade Agreements Act (TAA) and its implementing regulations (see, g., FAR Subpart 25.4 and Subpart 225.4 of the DoD Supplement to the FAR). If procurements are subject to certain trade agreements between the US and foreign countries (such as the World Trade Organization Government Procurement Agreement (WTO GPA)), certain end products manufactured or “substantially transformed” in countries that are the subject of these trade agreements (i.e., designated countries) are treated as if they were domestic end products. The TAA provisions typically kick in once an acquisition reaches a certain threshold. For instance, the WTO GPA applies to acquisitions starting at $182,000 for supply contracts and $7,008,000 for construction contracts. If the TAA provisions apply, a contractor may not supply end products that are not manufactured or substantially transformed in the United States or a designated country.
Summary of Proposed Amendments
- The Proposed Rule keeps the component test. The Executive Order required the FAR Council to consider amending the FAR to replace the component test with a test under which domestic content is measured by the “value that is added to the product through U.S.-based production or U.S. job-supporting economic activity.” The regulators were not willing to go that far, perhaps recognizing the vagueness in the Executive Order, and instead asked for public comment on how the domestic content “might be better calculated to support America’s workers and businesses, strengthening our economy, workers, and communities across the country….”
- While keeping the component test, the amendments increase the domestic content threshold—initially from 55 percent to 60 percent, then to 65 percent in two years (beginning January 1, 2024), and then to 75 percent in seven years (beginning January 1, 2029). Notably, for any contract awarded whose term extends into periods when the threshold increases, the contractor shall be bound to increase the domestic content (measured by the cost of domestic first-tier components) consistent with the threshold increases. These changes are reflected in changes to FAR Part 25 and Buy American Act FAR clauses 52.225-1, 52.225-3, 52.225-9, and 52.225-11.
- The Proposed Rule permits the use of former domestic content thresholds (the fallback threshold) for a certain period of time under certain conditions. Here’s how this works: for the period up to one year after the increase to 75 percent (presumably eight years after enactment), when end products or construction materials that comply with the new threshold requirement “are not available or are of unacceptable cost,” the fallback threshold will be applied. What does that mean? The discussion of the proposed amendments provides an example: if in the first two years after the enactment of the amendments the proposed price in a competitive procurement of a domestic end product that exceeds the 60 percent threshold is higher than the price offered for a competing foreign end product after application of the price preference (more on that below), then “for evaluation purposes” the Government will treat an end product that exceeds the current 55 percent threshold as a domestic end product. This will require offerors to disclose whether end products being offered meet the 55 percent threshold.
- Higher price preferences will be applied to end products and construction materials deemed to be “critical” or made up of “critical components.” A definition of these terms will be added to FAR 25.003 and a list of critical items and components will be added to a newly designated FAR 25.105. Offerors will be required to identify in their offer whether the end product or construction material being supplied is one of those identified as critical or containing a critical component. It is unclear whether, in a situation where an end product contains a critical component, the price preference would be applied to the end product itself or merely to the component. This could potentially raise troublesome cost/pricing disclosures for certain fixed-price procurements. The Proposed Rule punts this question to “separate rulemaking.” However, it provides that the process for determining what constitutes critical items and components would involve the Office of Management and Budget’s review and distillation of the quadrennial critical supply chain review (instituted by Executive Order 14017, America’s Supply Chains, and the National Strategy for COVID-19 Response and Pandemic Preparedness).
- Following award, contractors shall be required, with the exception of COTS items, to disclose the specific domestic content of critical items, domestic end products containing critical components, and domestic construction materials containing critical components. Since specific critical items or critical components will not be added to the FAR until there is a separate rulemaking, the final enactment of this aspect of the amendments will not trigger any additional obligations until finalization of the separate rule.
Request for Comments
The preamble to the Proposed Rule reveals that the FAR Council is unclear as to whether the pool of qualified suppliers would be reduced as a result of these amendments, citing the large percentage of COTS item acquisitions in FY 2020 acquisitions (for which the component test does not apply) and the availability of the fallback threshold, which, according to the comments, will allow contractors to gradually transition to a US-based supply chain. However, the regulators state that they will be responsive to public comments with regard to larger or smaller increases in the content thresholds and differently timed increases in the final rule. The preamble to the Proposed Rule sets forth specific questions to the public addressing these topics. Contractors whose businesses will be adversely affected by these proposed changes should not hesitate to weigh in. The regulators state that they will be sensitive to comments addressing adverse impacts on competition; dilution of supplier diversity, including participation of small, disadvantaged businesses and businesses in other underserved communities; and lost opportunities for American workers. Comments will be received through September 28, 2021. Moreover, a virtual public meeting will be held on August 26, 2021, beginning at 9:00 a.m. and not ending until the discussion ends. Instructions on attendance and the making of a presentation at the meeting can be found here.
The changes proposed by the Biden Administration in the Proposed Rule will likely have far-reaching effects on contractor supply chains and the way in which companies do business with the Federal Government in the future. The 20 percent increase in domestic content over the next eight or so years—from 55 percent to 75 percent—may have dramatic (and possibly unintended) consequences for a diverse array of industries. Therefore, it is imperative that interested contractors take this valuable opportunity to offer comments as to how these changes will impact the cost and availability of the products and materials sought by the Federal Government. However, we expect the Biden Administration is not done yet—we have yet to see the form a “value added” test may take, and when and if such a test is implemented, it could permanently alter the face of Federal procurement. Until then, contractors should continue to recalibrate their supply chains as necessary to maximize domestic content. While we don’t yet know what form the final Buy American rules will take, based on the rapid developments in the past seven months, we assume that the Biden Administration will only increase the domestic content requirements as the next several years unfold.