Regardless of whether they were eagerly anticipated or begrudgingly unavoidable, the changes promised to the Buy American Act (BAA) early last year have at last arrived, or at least are quickly approaching. On March 4, 2022, the Federal Acquisition Regulation (FAR) Council released its long-anticipated Final Rule implementing important revisions to the BAA provisions of the FAR and incorporating the requirements outlined in President Biden’s January 28, 2021 executive order, “Ensuring the Future Is Made in All of America by All of America’s Workers.” Although the Final Rule, for the most part, conforms with the Proposed Rule issued in July 2021 (which we previously discussed here), the most notable aspect may be that the Final Rule’s effective date was delayed until October 25, 2022. This generous gap provides contractors with roughly 235 days to fortify their compliance efforts and ensure that necessary policies and procedures are in place to meet the necessary supply chain and regulatory changes imposed by the Final Rule — well in advance of Halloween.
The White House has identified these regulatory changes as the “most robust updates to the implementation of the Buy American Act in nearly 70 years.” To be sure, the updates focus on the core of the BAA: the definition of a domestic end product and changing the calculation of the Act’s domestic content threshold. Below is a summary of the Final Rule and an explanation of how the Final Rule changes the BAA provisions.
Increased Domestic Content Thresholds
In the prior version of the BAA regulations, with exceptions for commercial off-the-shelf (COTS) items, a manufactured end product or construction material (not consisting wholly or predominantly of iron or steel [or both]) qualified as domestic if (1) it was manufactured in the United States and (2) at least 55 percent (since 2021) of the cost of all its components were mined, produced, or manufactured in the United States.
Beginning on October 25, 2022, the Final Rule will increase that domestic content threshold from 55 percent for end products and construction materials up to 75 percent, escalating over the course of the next six years in line with the following schedule:
- 60 percent (for items delivered on October 25, 2022, through 2023)
- 65 percent (for items delivered in calendar years 2024 through 2028)
- 75 percent (for items delivered starting in calendar year 2029)
When a contract’s period of performance spans years with different domestic content thresholds, a contractor will generally be required to comply with the threshold in effect in the year of delivery. However, agencies are also afforded the flexibility to apply an “alternate domestic content test,” which will allow contractors to comply with the domestic content threshold in place at the time of contract award for the entirety of the period of performance. Agencies that utilize the alternate domestic content test must obtain senior procurement executive approval, in consultation with the Office of Management and Budget’s (OMB) Made in America Office.
Until 2030, the Final Rule will allow agencies to utilize the current 55 percent domestic content “fallback” threshold if the agency determines that (1) there are no available end products or construction materials that meet the increased domestic content threshold or (2) compliant products are available, but at an unreasonable cost. The fallback threshold only applies to construction materials and end products that do not consist wholly or predominantly of iron or steel, or a combination of both, and that are not COTS items.
“Critical” Enhanced Price Preferences
In lieu of flat-out prohibiting the federal government from buying foreign-made products, the BAA has long provided an evaluation penalty for foreign-made products intended to effectively increase the price of those products during price proposal evaluations. Similarly, the Final Rule requires agencies, as of October 25, 2022, to apply higher price preferences to end products and construction materials OMB considers “critical” to U.S. supply chains or consisting of “critical components.” While the Final Rule mandates enhanced pricing preferences for end products and construction materials deemed to be critical or comprised of critical components, it deferred the specific framework to subsequent rulemaking. Specifically, the OMB will soon publish a separate Final Rule establishing the list of critical products and components in the FAR (at a new FAR 25.105), and the level of additional price preference for such items. After the OMB finalizes the list of critical items, it will publish the list in the Federal Register for public comment no less frequently than once every four years. We will be closely monitoring developments on this issue.
Contractors should immediately begin to assess the impacts of the Final Rule on their acquisition efforts. While the Final Rule should not affect existing contracts, there is always the possibility that contracting officers may seek modifications to address these new requirements. Note that, should this happen, contractors may be eligible for a price adjustment, something that is not contemplated for after October 25, 2022. Accordingly, when bidding on new procurements, contractors should be aware of evolving domestic content thresholds and should develop their pricing accordingly. The most challenging aspect of managing the escalating threshold requirements will be found in contracts that span the escalation dates (i.e., September into October 2022, 2023 into 2024, and 2028 into 2029). Significant risks and liability will follow companies with inflexible or poorly planned supply chains in these periods. If there is uncertainty in your supply chain or manufacturing process, or if you are part of or reliant on a nascent U.S.-based manufacturing capability, it may be in your best interest to speak with your contracting officer about pursuing an “alternate domestic content test” to facilitate consistent supplies (and prices). While the BAA does not apply to all federal procurements, the regulatory changes will significantly alter the federal marketplace. Contractors should consider whether changes to their business processes and supply chains are necessary. Effectively navigating changes to business processes and supply chains to ensure compliance with the new rule will be vital to remaining competitive in the federal marketplace.