Buy (More) American: The Trump Administration Finally Ups The Ante On Domestic Origin Requirements (With The Final Impact Still TBD)

McCarter & English - Government Contracts & Export ControlsThe Trump administration’s focus on enhancing “Buy American” requirements in federal procurement took a leap forward on July 15, 2019, with the issuance of an Executive Order (EO) on Maximizing Use of American-Made Goods, Products, and Materials. Unlike the administration’s previous executive orders – Executive Order 13788 of April 18, 2017 (Buy American and Hire American) and Executive Order 13858 of January 31, 2019 (Strengthening Buy American Preferences for Infrastructure Projects), this EO contains instructions to the FAR Council to change regulations that have been in place since the Eisenhower administration, tightening restrictions on acquiring foreign end products. In particular, the EO makes dramatic changes to the domestic origin requirements for iron and steel products.

The EO dictates that, within 180 days of the date of the order, the FAR Council is to consider proposing for notice and public comment amendments to Buy American Act FAR provisions that:

  • Provide that materials shall be considered to be of foreign origin if:
    • For iron and steel end products, the cost of foreign iron and steel used in such iron and steel end products constitutes 5% or more of the cost of all the products used in such iron and steel end products; or
    • For all other end products, the cost of the foreign products used in such end products constitutes 45% or more of the cost of all the products used in such end products.

Current regulations allow for a domestic origin determination as long as the cost of domestic components used in products subject to the Buy American Act are 50% or more of the cost of all the components used in the products. (For commercial off-the-shelf items (COTS) items, the components test is not used; domestic manufacturing is the only requirement.) The new requirement suggested by the EO applicable to all end products (presumably other than COTS items) increases the 50% threshold to 55%. With respect to “iron and steel end products,” the product will be deemed to be of foreign origin unless 95% of the iron and steel components used in the composition of the end products are of domestic origin.

  • Modify the premium applied to prices proposed by offerors in the evaluation of proposals submitted in competitive procurements where the offeror identifies products to be supplied are of foreign origin to:
    • 20% for foreign end product included in offers from other than small businesses; and
    • 30% for foreign end products included in offers from small businesses.

Current regulations use, respectively, a 6% and 12% premium for offers from other than small businesses and small business when a foreign end product is proposed. (Note that the Department of Defense (DoD) employs a 50% premium in the evaluation of offers which disclose the supply of foreign end products.)

The EO also directs the Secretary of Commerce and the Director of OMB to submit a report to the President on “any other changes to the FAR that the FAR Council should consider in order to better enforce the Buy American Act[.]”

The EO has no immediate effect on current acquisitions and depends on the establishment of a final rule (after notice and the review of comments on a proposed rule) by the FAR Council. If these changes are implemented, however, it will have significant consequences for many contractors. Contractors subject to the Buy American Act that rely on foreign suppliers for first-tier components will need to rethink their supply chain sources, especially those contractors that supply iron and steel end products. It is impossible to predict how abruptly this change will take effect; the EO contains no guidance as to how the new requirements are to be implemented, such as whether there would be a phase-in or grace period for compliance.

In addition to ignoring the question of implementation, it also ignores the need for clearly defined terms critical to Buy American Act compliance. For example, the EO does not identify whether the changed requirements would apply to “domestic construction material” as well as “domestic end products,” which are defined differently under the existing regulations and are subject to different tests for “domesticity.” The EO also fails to define “iron and steel end products,” leaving vague the categories of products to which the enhanced 95% requirement will apply, and further confuses the matter by creating a subcategory of “products used in…iron and steel end products.” If left undefined, these ambiguities are sure to tie contractors and contracting officers up in knots.

Nevertheless, the administration’s direction is clear, and it will be up to the FAR Council to fill in these gaps. Contractors that suspect pricing strategies may be affected by these proposals should consult with counsel and consider participating in the comment period following any notice of proposed rulemaking by the FAR Council. The FAR Council should be receptive to any comments that indicate that the proposed rule may result in marked price increases to the U.S. Government and disruptions to the supply of products currently relied upon by Government agencies.

Finally, contractors must be mindful that the Buy American Act is simply one of the many domestic origin requirements and conditions imposed on federal contractors, and its applicability varies depending on whether the solicitation is from DoD or civilian agencies. Despite the appearance of the clause in solicitations, contracts, and subcontracts, it is often not applicable and/or is supplanted by other domestic origin requirements such as those found in the Trade Agreements Act, the various transportation-related Buy America Acts, the Berry Amendment, and the “specialty metals” clause. Caution! We can think of no better example of an area of government contract law where “figure it out on your own” is NOT the best course. Seek counsel early and often. In the meantime, we will continue to provide updates to this blog as the impact of the EO becomes clearer.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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