On February 15, 2024, the Department of Defense (DOD) issued a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to implement Executive Order (EO) 14005, Ensuring the Future Is Made in All of America by All of America’s Workers, and strengthen Buy American Act (BAA) domestic preferences in DOD procurements. Below, PilieroMazza explains the final rule’s implications for defense contractors in the manufacturing sector and safeguarding the defense industry’s supply chain.
- Evolution of BAA Domestic Preference Rules
The DOD’s final rule is part of a broader initiative to revitalize and reinforce the BAA mandate for federal procurements to favor domestically made products and services. As we previously reported, EO 14005, issued in January 2021 by President Biden, directed a series of actions to bolster the use of domestically produced goods, aiming to strengthen the U.S. supplier base and create new opportunities for American businesses and workers. This was followed by a Federal Acquisition Regulation (FAR) Council final rule, effective October 25, 2022, that amended the FAR by, among other things, increasing the domestic content threshold for products to be considered “domestic,” setting a path for the DFARS amendments to align with the FAR Council’s final rule.
- Key Insights from the DFARS Final Rule
a. Increased Domestic Content Thresholds
Echoing the FAR Council’s adjustments, the DOD rule increases the domestic content threshold and allows for industry transition to the higher threshold through the use of a fallback threshold. Under the increased threshold, the cost of qualifying country and U.S. components must exceed 60% of the cost of all the product’s components, with a higher threshold of 65% for items delivered in calendar years 2024 through 2028 and 75% for items delivered starting in calendar year 2029.
Additionally, the DOD rule adopts the FAR’s fallback threshold for unavailable or unreasonably expensive domestic end protects. In this regard, the rule allows the use of the prior 55% domestic content threshold (until January 1, 2030) if domestic products at a higher threshold are not available or the cost to acquire them would be unreasonable. This phased increase underscores a gradual yet firm shift towards strengthening domestic sourcing requirements.
b. Clarification and Revision of Solicitation Provisions
The final rule brings clarity to the certification requirements in DOD solicitation provisions, particularly concerning the identification of supplies that do not meet the definition of a domestic end product. The rule revises the solicitation provisions at DFARS 252.225–7000 and 252.225–7035, requiring offerors to separately list qualifying country end products and other foreign end products in their offers, thereby enhancing transparency and compliance with domestic content thresholds. It also requires offerors to indicate whether their foreign end products exceed 55% domestic content in case the fallback threshold is used.
c. Future Enhanced Price Preferences
A pivotal element of the recent regulatory updates is the preparation for future enhanced price preferences for domestic products or components classified as “critical.” This initiative is grounded in a strategic vision to prioritize elements within the supply chain deemed indispensable for national security and the economic fortitude of the nation.
DOD’s final rule amends the DFARS to provide a framework for future application of the enhanced price preference for critical items. The final rule notes revisions to the DFARS are intended to supplement the FAR by making necessary conforming changes to specifically incorporate the DOD-unique requirements. The guidance as to how the domestic content of critical items will be accounted for and evaluated remains outstanding and will be addressed in subsequent rulemaking.
d. Qualifying Country Exception
The final rule retains the DOD-unique provision permitting the acquisition of products or components from qualifying countries, facilitating a broader sourcing framework for defense contractors. This maintains strategic alliances and reciprocal defense procurement agreements that underpin the defense supply chain’s global interdependencies.
A “qualifying country” is a country that entered into a reciprocal defense procurement agreement with the United States. These agreements are designed to remove barriers to purchasing supplies produced in the other country or services performed by sources of the other country. Offers of qualifying country end products are evaluated without applying the price differentials otherwise required by BAA. Currently, there are 28 qualifying countries, and the list of qualifying countries is provided at DFARS 225.003.
Notably, DOD recently proposed adding new countries to the list of qualifying countries. In October 2023, DOD issued a notice that it is contemplating negotiating a reciprocal defense procurement agreement with India, which would result in India becoming a qualifying country. On February 23, 2024, DOD published a notice that it is contemplating negotiating a reciprocal defense procurement agreement with the Republic of Korea, seeking industry feedback by March 25, 2024.
e. Implications for Defense Contractors
The DOD’s final rule signifies a critical step towards fulfilling the national objective of fostering a robust domestic manufacturing sector through strategic procurement policies. By aligning the DFARS with the FAR and setting the stage for enhanced support of critical domestic industries, this rule reinforces the U.S. commitment to securing a resilient and competitive industrial base.
- Conclusion
Defense contractors should closely review their supply chains to ensure compliance with updated DFARS requirements, particularly the increased domestic content thresholds. The rule’s nuanced changes necessitate a proactive approach to compliance, particularly with the evolving domestic content thresholds and the strategic importance of critical components in future procurements. Defense contractors also should make sure they understand the revised certification requirements so that they accurately represent the status of their products as domestic, qualifying country, or foreign end products.
The BAA requirements in the FAR and DFARS are complex, presenting challenges to government contractors in terms of understanding their obligations and implementing changes to their supply chains and manufacturing processes.
