A proposed amendment to the Federal Acquisition Regulations (“FAR”) published on July 30, 2021 will “strengthen the impact of the Buy American Act” (“BAA”) over the next eight years, according to the Federal Register notice. Federal contractors and subcontractors were put on notice of coming proposed changes in January when President Biden issued Executive Order (“EO”) 14005 revoking or superseding multiple EOs issued by the Trump Administration. The Proposed Rule arising from Section 8 of EO 14005 would alter and build upon existing requirements of the BAA. The Proposed Rule includes immediately higher domestic content thresholds that will increase over time, price preference enhancements for “critical” items, and contractor reporting of domestic content within 15 days of an award to the newly created Made in America Office of the Office of Management and Budget (“OMB”). The new proposed Buy American restrictions will not apply to acquisitions subject to various trade agreements under the Trade Agreements Act.
Comments on the Proposed Rule and other EO 14005 issues are due September 28, 2021 and a virtual public meeting will be held on August 26, 2021. Below we summarize the major proposed changes.
Domestic Content Price Preferences Will Jump to 60% and Eventually to 75% in 2029
Under the BAA, contractors are given “price preferences” when they supply items or materials with a minimum amount of domestic content. Currently, the BAA’s “component test” (also known as the “domestic content test”) requires that the cost of domestic components of most end products other than Commercially Available Off-the-Shelf (“COTS”) items exceed 55 percent of the item’s total cost for the offeror to receive a price preference. Once triggered, the price preference adds 20 percent to the non-BAA compliant low offer price when determining the “domestic” offer’s price reasonableness, or 30 percent if the domestic supplier is a small business.
The Proposed Rule would immediately increase the threshold needed to be considered a “domestic end product” or “domestic construction material” to 60 percent with increases to 65 percent in 2024 and 75 percent in 2029. The Federal Register notice states that suppliers holding contracts spanning threshold increases will be required to comply with the subsequently increased thresholds (e.g., items supplied for a three-year contract beginning in 2023 would need to comply with the 60 percent threshold in 2023 and then the 65 percent threshold in 2024-2025). A so-called “fallback threshold” would be implemented through 2029 to allow contracting officers to prevent perverse outcomes where the new rules could result in more foreign sourcing, not less. Iron and steel end products, which already must exceed 95% domestic content to receive a price preference, are not affected by the Proposed Rule.
“Enhanced” Price Preferences Will Be Applied to “Critical” Items
The Biden Administration has made the strengthening of America’s supply chains a key executive priority (see our blog posts here, here, and here). We are beginning to understand how that initiative will affect federal contractors. In addition to the 20 percent and 30 percent price preferences that already exist (as we describe above), the domestically sourced end products and construction materials deemed to be “critical” or made up of “critical” components will be subject to even more dramatic price preferences. The quadrennial supply chain review initiated in EO 14017 will provide the scope of possible “critical” end products, materials, and components, and the OMB will further determine for which of those critical items federal contracting price preferences could make a meaningful difference toward strengthening the supply chain. The final list will then be designated in FAR 25.105 along with the additional price preference that applies to each item. None of these “critical” items have been named yet, so contractors should continue to monitor the government’s progress in evaluating critical supply chains and stand ready to provide input if items they supply appear likely to be affected. Department of Defense contractors should note the Proposed Rule does not address the 50 percent preference for Department of Defense procurements, which remains in place.
Two New FAR Clauses Will Provide OMB Postaward “Critical” Items Data
The Proposed Rule publishes two new clauses requiring contractors to report domestic content percentage data on “critical” items supplied in federal contracts (other than COTS items) to OMB within 15 days of award. The clauses will give OMB the capability to verify whether the FAR amendments and related changes to the Buy American waiver process arising from EO 14005 are actually increasing domestic sourcing.
Comment Opportunity Includes Other Sections of EO 14005
Finally, the Proposed Rule also requests comments from the public on other EO 14005 topics:
- The commercial information technology (“IT”) items exemption from the BAA;
- The COTS exemption from the BAA;
- Federal government promotion of Made in America services; and
- Whether there are ways to comply with the Trade Agreements Act (“TAA”) while also further promoting US critical supply chains.