Increased Domestic Content Requirements in the Final Buy American Act Rule
On March 7, 2022, the FAR Council published a final rule implementing some of the revisions to the Buy American Act (BAA) that were contemplated by President Biden's “Ensuring the Future is Made in All of America by All of America's Workers” Executive Order. The final rule is very similar to the proposed rule published in July 2021 and it makes significant changes to the regulations at FAR Part 25, which implements the BAA.
Currently, the FAR uses a two-part test to determine whether a manufactured end product or construction material qualifies as a “domestic end product” for purpose of the BAA. First, the end product must be manufactured in the U.S. Second, at least 55% of the component parts that make up the end product or construction material must also be produced or manufactured in the U.S., or the end product or construction material must be a commercially available, off-the-shelf (COTS) item.
Effective Oct. 25, 2022, the amount of domestic content required for compliance will increase to 60%, followed by an increase to 65% in 2024 and an increase to 75% in 2029.
The final rule includes a fallback threshold that will allow agencies to use the current 55% domestic content threshold if the agency determines there are no products available that meet the new threshold or such products are only available at an unreasonable cost. The fallback threshold applies only to end products and construction materials that do not consist wholly or predominantly of iron or steel or a combination of both, and those that are not COTS items. The fallback threshold expires in 2030.
If a contract has a period of performance that crosses a scheduled increase in the percentage of domestic content required, contractors will have to comply with the content threshold in effect at the time of delivery. As a result, contractors may need to comply with more than one domestic content requirement over the life of a particular contract. However, an agency may issue an exception to allow the contractor to comply with the threshold in place at the time of contract award, for the entire period of performance of a contract. This exception can be granted only by the agency's senior procurement executive, who must consult with and consider the advice of the Office of Management and Budget (OMB) Made in America Office before granting an exception. As a result, contractors should not count on obtaining an exception, it is more likely they will be granted only on a limited basis and under uncommon circumstances.
Finally, the BAA operates as a price preference for U.S. products. That means an agency may purchase a “foreign end product” if it determines the price of the lowest domestic product offer is unreasonable or another exception applies. Before purchasing a foreign end product, agencies are required to apply a “price penalty” during proposal evaluation. This is done for evaluation purposes only; it allows the agency to compare the domestic product to a foreign product on a more equal price footing. Currently, civilian agencies add 20% to offers of foreign products — 30% if the lowest domestic product offer is from a small business — and Department of Defense agencies add 50% for both large and small business offers.
According to the final rule, the FAR Council plans to enact an enhanced price preference for “critical items.” While a list of critical items and their associated price preference will be implemented through a later rule, we do know these items will include products that are critical to the U.S. supply chain or include critical components.
The final rule will impact federal contractors performing contracts that are subject to the BAA. That includes contracts that are below the current Trade Agreements Act thresholds of $183,000 for supply contracts and $7.032 million for construction contracts, sole-source acquisitions, small business set-asides, and contracts for arms, ammunition, or war materials, and contracts indispensable for national security.
Federal contractors and subcontractors need to review how they manufacture and source their products now to confirm they can meet the increasing domestic content thresholds set forth in the final rule. Contractors need to pay close attention when preparing bids and proposals, especially for procurements that will include differing domestic content percentages. To ensure compliance, many contactors may need to start making changes to their supply chains now.
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