The U.S. Department of Defense (DoD) recently issued a proposed amendment to the Defense Federal Acquisition Regulation Supplement (DFARS) that tightens “Buy American” thresholds for DoD procurements. The Proposed Rule supplements and largely mirrors the Federal Acquisition Regulation (FAR) implementation of President Joe Biden’s Executive Order (E.O.) 14005, “Ensuring the Future is Made in All of America by All of America’s Workers,” while incorporating several DoD-unique requirements. Most importantly, the Proposed Rule introduces the following changes:
Increases the Domestic Content Threshold. The Proposed Rule increases the domestic content threshold initially from 55% to 60% and further ratchets up the threshold by setting a schedule for additional increases — to 65% in calendar year 2024 and to 75% in calendar year 2029. These increases match those introduced last year in the FAR and continue the shift away from globalization that began under the Trump administration, which raised the threshold from 50% to 55%. Before that, this threshold had been fixed at 50% since the 1950s.
Creates a Fallback Threshold. Like its FAR counterpart, this Proposed Rule allows for the use of a “fallback” domestic content threshold of 55% following a determination by the contracting agency that no end-products or construction materials meet the higher domestic content threshold or when the cost of acquiring the products would be unreasonable. This fallback threshold, which is only available until calendar year 2030, requires DoD offerors to identify which of their foreign end-products exceed 55% domestic content. Importantly, this fallback threshold only applies to construction material and end-products that do not consist wholly or predominantly of iron or steel or a combination of both and that are not commercially available off-the-shelf (COTS) items.
For example, if the cost of a domestic end product that exceeds the 60% threshold is unreasonable, the DoD, for evaluation purposes, will treat an end product manufactured in the United States (or a qualifying country) and exceeds the 55% threshold, rather than the 60% threshold, as a domestic end product.
Establishes Enhanced Price Preference for Critical Products and Critical Components. The Proposed Rule provides for a framework in which higher (“enhanced”) price preferences will apply to end-products and construction material deemed to be critical or made up of critical components. A definitive list of the critical products and critical components, along with the associated enhanced price preference(s), will be published at FAR 25.105, after a subsequent rulemaking under FAR Case 2022-004. The report for the definitive list proposed rule is expected to be published early next month. This framework mirrors the one introduced in the FAR in 2022.
Conclusion
The Proposed Rule harmonizes the treatment of defense and civilian contracts by conforming the requirements in the DFARS to those in the FAR. The pace of these changes is striking and could be difficult for contractors to deal with. In just over a decade, for instance, the domestic content threshold, which had been fixed at 50% for almost 70 years, will rise to 75%. This bipartisan shift toward more aggressive domestic preferences also is reflected in the recent expansion of domestic preferences for federal infrastructure projects under the Build America, Buy America Act, which we’ve previously discussed.
Federal contractors will need to be proactive, making efforts to adjust their sourcing, whenever possible, to deal with these changes and/or encourage the agencies they work with to apply the fallback threshold. Comments on the Proposed Rule must be submitted by Aug. 8.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
[View source.]
