[co-author: Mary Colleen Fowler]
On January 19, 2021, the Department of Defense (DoD), the General Services Administration, and the National Aeronautics and Space Administration issued a final rule amending the Federal Acquisition Regulation (FAR) concerning a renewed emphasis on Government procurement requirements to purchase domestically-manufactured products. The amendment implements Executive Order 13881 (E.O. 13881), “Maximizing Use of American-Made Goods, Products, and Materials,” and became effective January 21, 2021. The new changes address domestic preferences in Government procurement and are applicable to solicitations issued on or after February 22, 2021, as well as subsequent contracts. Companies, at any tier, that are suppliers to the number one consumer in the world (e.g., the United States Government) should consider taking this opportunity to evaluate supply chains and ensure positioning for future procurements.
Significantly, the new rule updates the definitions of “domestic construction material,” “domestic end product” and “predominantly of iron or steel or a combination of both,” while adding a new definition to clarify the meaning of “foreign iron and steel.” Now, to satisfy the definition of “domestic construction material” or “domestic end product,” a product’s cost of foreign iron and steel, meaning “iron or steel products not produced in the United States,” must be less than five percent of the cost of all product elements. For all other products, the new rule raised the domestic content requirement from 50 percent to 55 percent of the cost of all elements. Importantly, the new rule does apply the domestic content test to commercially available off-the-shelf (COTS) items made entirely or primarily of iron or steel, but will not apply the domestic content test to COTS fasteners, such as nuts, bolts and screws.
Additionally, the new rule updates the domestic preference requirement. The domestic preference requirement does not prohibit use of foreign products or materials, but encourages entities use domestic products and materials. This is accomplished through price preferences for domestic products, which vary based on type of business. The new rule increases the price preference from six percent to 20 percent for large businesses, and from 12 percent to 30 percent for small businesses. Notably, implementation of the E.O. 13881 does not impact DoD procurement price preferences because the DoD already exceeds the requirements of the E.O. 13881.
In light of this new rule, companies should consider evaluating supply chains and adjusting to become in compliance with the new (or renewed) mandates to help ensure a competitive advantage in future Government Contracting opportunities. Companies should continue to pay close attention as the new administration reviews prior executive orders and whether such review brings additional changes to FAR requirements. However, as these hold-over regulations increase domestic manufacturing, it is expected that such requirements may remain effective for the foreseeable future.
Companies should also consider the revised acquisition regulations impact on longstanding U.S. Customs and Border Protection’s country of origin marking requirements. Specifically, all imported articles of foreign origin must be legibly marked with the English name of their “country of origin” unless an exception applies. The country of origin marking must remain on the goods (or their container) until they reach the ultimate purchaser. However, goods can be “substantially transformed” in the United States after importation. Whether or not a substantial transformation has occurred depends on a number of factors, including but not limited to, the amount of foreign and domestic content in the final product. This same factor is utilized by the Federal Trade Commission in regulating the use of “Made in [or Assembled in] the USA” labels for products sold in the Unites States.
For these reasons, companies that import foreign goods and/or that use “Made in [or Assembled in] the USA” labels should closely scrutinize this new rule and its potential impact on their obligations to mark products that contain foreign content. For example, a company may comply with the country of origin requirements and specifically reference a foreign country. But, that does not necessarily mean it is not compliant with the new FAR provisions. Thus, when product is delivered or installed, there may be confusion concerning compliance with the new FAR requirements.
If a company supplies the Federal Government (or even State Governments that are utilizing Federal funds), they should consider taking the opportunity to evaluate compliance with government contracting socio-economic requirements and adjust accordingly. The failure to comply may lead to breach of contract claims, terminations for default and even potential False Claims Act issues. As such, a company that is bidding on a Government contract opportunity should ensure that it is able to source items accordingly to meet the contract performance requirements.
