The Federal Acquisition Regulation (FAR) Council published a proposed rule on July 30, 2021 to overhaul the regulations implementing the Buy American Act (BAA) in federal procurements. If enacted, the proposed rule would introduce major changes by: (1) increasing the domestic content threshold in BAA acquisitions, (2) adopting enhanced price preferences for “critical products” or items consisting of “critical components,” and (3) requiring contractors to report the domestic content of “critical” items delivered under federal contracts. The rule also foreshadows other potentially major changes by soliciting input regarding the BAA’s commercial information technology (IT) exception and certain BAA waivers for commercial-off-the-shelf (COTS) items and in procurements covered by the Trade Agreements Act (TAA).
Government contractors that may be impacted by these changes should strongly consider attending an upcoming public meeting (August 26, 2021) and submitting comments (due September 28, 2021) on the proposed rule, as these could be the only meaningful opportunities they have to help shape the BAA requirements of the FAR.
The regulations implementing the BAA appear in FAR Part 25. Under the current regulations, federal agencies determine whether a manufactured end product or construction material qualifies as “domestic” using the following two-part test:
- The end product or construction material must be manufactured in the United States; and
- At least 55 percent of all component parts, measured by the cost of the components, must also be mined, produced, or manufactured in the United States.
The second element of the BAA test historically has been referred to as the “component test.” This part of the test is waived for acquisitions of COTS items (FAR 25.201(b)). For an end product consisting wholly or predominantly of iron or steel (or a combination of both), the cost of foreign iron and steel must be less than five percent of the cost of all components. This iteration of the component test is not waived for COTS items, except for COTS fasteners. Acquisitions for commercial IT currently are exempt from all BAA requirements (FAR 25.103(e)).
Importantly, the BAA does not prohibit federal agencies from purchasing foreign end products or use of foreign construction material. Rather, it encourages the use of domestic end products and construction material by imposing a price preference that makes agencies more likely to buy them. Currently, large businesses offering domestic supplies receive a 20 percent price preference, and small businesses receive a 30 percent price preference. It also is important to remember that the BAA does not apply to procurements subject to certain trade agreements, as set forth in the TAA and FAR subpart 25.4. In TAA-covered procurements, foreign end products and construction materials receive equal treatment if they come from certain countries with which the United States maintains a multilateral or bilateral trade agreement.
The New Proposed BAA Regulations
President Biden issued an executive order in January 2021 that promised to increase purchasing of American-made products and construction materials under federally-funded procurement contracts and financial assistance awards. Among the executive order’s many directives, Section 8 instructed FAR Council to consider amending the FAR to:
- Replace the “component test” with a test under which domestic content is measured by the value that is added to the product through U.S.-based production or U.S. job-supporting economic activity
- Increase the threshold for the domestic content requirement
- Increase the price preferences for domestic end products and domestic construction materials
The FAR Council has now spoken, issuing a proposed rule that would:
- Immediately increase the domestic content threshold from 55 percent to 60 percent
- Establish a schedule for gradual future increases up to 75 percent
- Create a temporary “fallback threshold” of 55 percent for use in acquisitions where qualifying end products or construction material are not available or too expensive
- Enact enhanced price preferences for any domestic product that is considered a “critical product” or comprised of “critical components”
- Impose a new postaward domestic content reporting requirement for contractors
Notably, the FAR Council did not recommend replacing the component test entirely, but indicated that it will continue to study ways the test can be improved to support domestic industry.
Increases to Domestic Content Threshold
Under the proposed rule, the domestic content threshold under the BAA’s two-part test would immediately increase from 55 percent to 60 percent. In two years, the threshold would jump to 65 percent and then to 75 percent five years thereafter. Suppliers with contracts that span one or more of these changes will be expected to comply with each increase as it arises. For example, according to the proposed rule, “a supplier awarded a contract in 2027 will have to comply with the 65 percent domestic content threshold initially, but in 2029 will have to supply products with 75 percent domestic content.”
“Fallback Threshold” of 55 Percent
The proposed rule also would allow federal agencies — until one year after the domestic content threshold reaches 75 percent — to purchase end products or construction materials with at least 55 percent domestic content when products or materials meeting the then-current threshold are not available or are too expensive. For example, during the applicable period for the 60 percent threshold, “if a domestic end product that exceeds the 60 percent domestic content threshold is determined to be of unreasonable cost after application of the price preference, then for evaluation purposes the Government will treat an end product that is manufactured in the United States and exceeds 55 percent domestic content, but not 60 percent domestic content, as a domestic end product.” This so-called “fallback threshold” of 55 percent does not apply to construction material that consists wholly or predominantly of iron or steel (or a combination of both) or to end products that consist wholly or predominantly of iron or steel (or a combination of both).
Enhanced Price Preferences for “Critical Products” and “Critical Components”
In addition, the proposed rule creates a framework for imposing enhanced price preferences in procurements for end products or construction materials that are deemed to be “critical” or made up of “critical components.” This would require offerors to identify in their proposals all domestic end products that are critical or contain a critical component. The products subject to the enhanced price preferences, along with the preferences themselves, will be identified in a separate rulemaking. According to the proposed rule, the process for identifying critical items and critical components will align with the quadrennial critical supply chain review instituted in E.O. 14017, America’s Supply Chains (86 FR 11849), as well as the National Strategy for the COVID-19 Response and Pandemic Preparedness. Not all critical products identified through the supply chain review will necessarily qualify for the preference, however. Instead, the Office of Management and Budget (OMB) will lead a subsequent assessment to identify “those products for which procurement is likely to make a meaningful difference toward strengthening U.S. supply chains.”
Postaward Reporting Requirement
Finally, the proposed rule would require contractors to disclose, after contract award, the specific domestic content of the critical items, domestic end products containing a critical component, and domestic construction material containing a critical component they will deliver under the contract. This requirement will be implemented via two new FAR clauses, though neither clause would apply to COTS items or become “operational” until the rulemaking specifying critical items and components is completed. According to the FAR Council, this reporting requirement is intended to provide the government “insight into the actual domestic content of products sold under contract and thereby support the Administration’s broader supply chain security initiatives.”
Up Next: Taking Aim at Longstanding BAA Exceptions and Waivers?
Since issuing the E.O., the Biden administration has consistently signaled that it intends to challenge the continuing need for several BAA exceptions and waiver long-relied upon by government contractors. This includes the BAA’s commercial IT exception, the partial BAA waiver for COTS items, and the full BAA waiver in TAA-covered procurements. The proposed rule reinforces this message by seeking public input on the following questions:
- With respect to the BAA’s commercial IT exception, under what situations (if any) do current marketplace conditions support narrowing or lifting the statutory waiver?
- As to the partial BAA waiver for COTS items, the FAR Council asks:
- Has the use of COTS expanded (or narrowed) since 2009 in ways that may not have been originally contemplated?
- Has the COTS waiver benefitted domestic firms and their employees? Why or why not?
- Under what situations, if any, do current marketplace conditions support narrowing or lifting the partial waiver?
- Regardless of any other changes to the COTS partial waiver, should the federal government gather data on the domestic content of all COTS items, some COTS items, or categories of COTS items to inform future policy making? If so, what items or categories should be addressed? How might this be accomplished consistent with the intent of the COTS partial waiver to reduce administrative burdens?
- Recommendations to maintain and increase domestic production of COTS items (both manufacturing of the end product and its components) in critical industries
- Regarding TAA-covered procurements:
- What specific types of products are sold to the government that count as being made in America under the TAA (U.S.-made end product’), but contain less than 55 percent domestic content under the BAA?
- Do the differing standards provide a benefit to domestic firms?
- Is the “substantial transformation” under TAA a useful tool to promote good domestic jobs and domestic manufacturing? Why or why not?
- What steps could the government take, consistent with its trade obligations, to acquire useful information about the content of goods procured pursuant to trade obligations, including in critical supply chains?
- Do you have any recommendations to maintain and increase domestic production in critical industries in acquisitions subject to trade obligations?
Understandably, most government contractors have taken a “wait and see” approach since President Biden announced in January 2021 that the FAR’s BAA regulations would change. But now that the administration has laid its cards on the table in a proposed rule, the time for action has arrived. Contractors must immediately turn to evaluating the impact of the proposed rule on their business, supply chains, and compliance programs. They also should strongly consider weighing in on the proposed rule, either by attending the public meeting scheduled for August 26, 2021 or submitting comments to the FAR Council by September 28, 2021, or both. If you have questions about the proposed BAA rule or would like to become involved in the rulemaking process, please contact one of the Miller & Chevalier attorneys listed below:
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FND Note: The content of this article is intended to provide a general guidance for the subject matter.