Proposed rule seeks to significantly strengthen U.S. Government “Buy American” requirements

Hogan Lovells

[co-author: Lauren Olmsted]

On 30 July 2021, the FAR Council published a proposed rule to significantly strengthen “Buy American” requirements applicable to goods sold to the U.S. Government. The proposed rule promotes the procurement of goods, products, and materials “from sources that will help American businesses compete in strategic industries and help America’s workers thrive.” The proposed rule implements the Biden Administration’s Executive Order 14005, titled Ensuring the Future is Made in All of America by All of America’s Workers, issued on 25 January 2021, which prescribes a series of actions to allow the Government to maximize the use of goods, products, and materials produced in the U.S. The proposal reflects major changes in three key areas by: (1) increasing domestic content thresholds; (2) providing a framework for application of enhanced price preferences for domestic product considered to be critical or made up of critical components; and (3) imposing post-award content reporting requirements.

Increased domestic content thresholds

The Buy American statute, which is codified at 41 U.S.C. Chapter 83, requires federal agencies to procure materials and supplies that are “substantially all” made from domestic components, unless a waiver or exemption applies. The determination of whether the Buy American requirement is satisfied is made using a two-part test. First, the end product or construction material must be manufactured in the United States. Second, a certain percentage of all components (determined by cost of the components) must also be mined, produced, or manufactured in the United States. For an end product other than one consisting wholly or predominantly of iron or steel or a combination of both, the cost of domestic components must exceed 55 percent of the cost of all components. For an end product that consists wholly or predominantly of iron or steel or a combination of both, the cost of foreign iron and steel must constitute less than 5 percent of the cost of all the components.

Under the proposed rule, the cost threshold for components will increase to 60 percent immediately, and then to 65 percent and 75 percent by 2024 and 2029, respectively. Federal contractors must comply with the domestic content threshold in effect during the year of delivery. The proposal includes a temporary “fallback” threshold to provide domestic manufacturers sufficient time to transition their supply chains. Specifically, until one year after the increase of the domestic content threshold to 75 percent, agencies may accept goods meeting the former domestic content threshold if end products or construction materials meeting the new threshold are unavailable or too expensive. The fallback threshold would only apply to products and construction materials that do not consist wholly or predominantly of iron or steel or a combination of both. The Federal Acquisition Regulation (FAR) Council has stated that it will consider as part of the rulemaking process public comment on the imposition of larger or smaller increases in the content thresholds, as well as differently timed increases.

Section 8 of the Executive Order 14005 (see our analysis of the Executive Order here) directed the FAR Council to consider whether approaches other than a “value added” calculation should be employed to achieve the Administration’s Buy American goals. While the proposed rule increases the domestic content threshold, it does not impact application of the existing FAR Part 25 “component test” and its calculation methodology. Rather, the FAR Council requests industry input regarding the component test’s strengths and shortcomings, and how domestic content might be better calculated.

Heightened domestic price evaluation preferences

To strengthen domestic supply chains for critical goods and to eliminate reliance on foreign sources, the proposed rule establishes a framework to apply enhanced price evaluation preferences to certain critical end products and components. The Office of Management and Budget will choose qualifying critical products and components from those items identified in the Critical Supply Chain review performed under Executive Order 14107 and the National COVID Strategy established under Executive Order 14001. This list will be placed in the newly-designated FAR 25.105. To qualify for the enhanced price preference for evaluation purposes under the proposed rule, offerors will be required to identify any domestic end products containing critical components. Contracting officers will apply the higher price preference when appropriate. Currently, for FAR-based procurements, large businesses receive a price preference of 20 percent for domestic end products or construction materials, while small business offerors receive a price preference of 30 percent for those items. (The price preference is 50 percent for Department of Defense (DoD) procurements for both large and small businesses.) Contractors eager to know the new price preferences will be kept waiting, however, as the FAR Council plans to undertake a separate rulemaking to establish the enhanced price preferences.

New post-award reporting requirement

One of the Biden Administration’s manufacturing and national security goals is to solidify the U.S. domestic manufacturing and supply chain capabilities for critical products. As such, the proposal includes two new FAR clauses (one for supplies and one for construction materials) that would require government contractors to provide detailed information regarding domestic content of critical items, domestic end products containing critical components, and domestic construction materials that contain critical components. The reporting obligations would be post-award and, if implemented as proposed, add another layer of significant compliance obligation associated with Buy American domestic content requirements. Neither commercial item acquisitions nor acquisitions below the simplified acquisition threshold will be exempt from the rule. However, the proposal does not require contractors to report the domestic content of COTS items.

According to the proposal, the domestic content data reported by contractors subject to the new FAR clauses is expected to provide the Made in America Office valuable insight on the domestic content of the manufactured products that are integral to U.S. national and economic security.

Potential future action regarding TAA, commercial IT, COTS waivers and exceptions, and services

A series of pointed questions accompanying the proposed rule are aimed at potential further actions relating to several of the waivers and exemptions that currently apply to the Buy American requirements.

Trade Agreements Act. Pursuant to the TAA, the domestic content requirements do not apply to most non-DoD acquisitions over US$182,000. Under the TAA, a purchase may be U.S.-made if it is mined, produced, or manufactured in the United States or substantially transformed in the United States, even if the product is made predominantly of foreign content. While expressing that U.S. Trade obligations are beyond the proposed rule’s scope, the FAR Council and Made in America Office are seeking information relating to the TAA’s “substantial transformation test” and potential lost opportunities for American workers. Among other things, this includes information on the usefulness of collecting data such as the percentage of domestic content and country of origin for certain components.

Commercial IT exemption. By statute, the Buy American Act does not apply to commercial IT. However, section 10 of Executive Order 14005 requires a review of the impact of the commercial IT exemption, which has prompted the FAR Council to seek input on the extent to which the original purpose of the exemption, or other goals of the exemption, remain relevant. This includes, for example, whether current marketplace conditions support narrowing or lifting the statutory exemption for commercial IT.

COTS waiver of component test. In 2009, the Office of Federal Procurement Policy (OFPP) waived the component test of the Buy American statute for the acquisition of COTS items. The waiver was based on OFPP’s conclusion that the domestic content requirements restrict the Government’s ability to purchase products already in the commercial market. In connection with the proposed rule, the FAR Council is seeking feedback on this COTS waiver provision, including whether the waiver has benefitted domestic firms and their employees.

Services. Although the Buy American requirements do not currently apply to services, the FAR Council is seeking information regarding how Federal agencies can promote the use of “Made in America services.” Specifically, the FAR Council is asking for comment on standards or methodologies, and whether there are critical services that should be accorded price preferences.

Comments and public meeting

Comments on the proposed rule are due no later than 28 September 2021. Additionally, the Government will host a virtual public meeting on 26 August 2021, to collect feedback on the proposed new Buy American requirements.

[View source.]

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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