Proposed Rule Seeks Major Changes to Buy American Requirements

The Biden-Harris Administration recently made another step forward in bolstering American manufacturing, and by extension American national and economic security. Billed as the “most robust changes to the implementation of the Buy American Act in almost 70 years,” the Department of Defense (“DOD”), National Aeronautics and Space Administration (“NASA”), and General Services Administration (“GSA”) issued a Notice of Proposed Rulemaking (86 FR 40980) on July 30, 2021, proposing to amend the Federal Acquisition Regulation (“FAR”) to revise provisions relating to domestic preferences in government procurement. Specifically, the Proposed Rule seeks to increase US content in the products the federal government purchases, furthering the Administration’s initiative of utilizing the federal procurement process to maximize the use of goods, products, and materials that are US origin.

This announcement comes months after the President’s issuance of EO 14005 entitled “Ensuring the Future is Made in All of America by All of America’s Workers,” which took aim at overhauling “Made in America Laws,”—known interchangeably as Buy America or Buy American laws—which provide a preference for purchase of goods and materials that are US origin. While EO 14005 did not make any immediate changes to those rules and rather called for a review of existing laws and implementing rules, the recent Proposed Rule proposes three specific changes to strengthen Buy American requirements.

1. Increase to the domestic content threshold

The Buy American Act of 1933 (“BAA”), 41 U.S.C. § 83, and implementing regulations in FAR Part 25, promote the use of “domestic end products” or “domestic construction materials” in all projects and public works funded by the federal government. The FAR defines an “end product” as “those articles, materials, and supplies to be acquired for public use,” and further defines “construction material” as “an article, material, or supply brought to the construction site by a contractor or subcontractor for incorporation into the building or work.” The key to understanding the BAA is determining whether the goods the government seeks to purchase are “domestic,” i.e. were mined, produced, or substantially manufactured in the United States. The analysis of whether a manufactured end product or construction material qualifies as domestic is done using a two-part test. First, the end product or construction material must be manufactured in the United States; second, more than 55% of all component parts (determined by cost of the components) must also be manufactured in the United States. If a product meets this two-part test, then it can be considered a “domestic end product” or “domestic construction material” under the BAA. Products that do not qualify as domestic under this test are treated as foreign.

The Proposed Rule proposes a series of increases to the domestic content test under the BAA to occur over a period of time. It calls for an immediate increase of the threshold from 55% to 60%, to increase the threshold to 65% in two years, and to increase the threshold to 75% five years after the second increase. Thus, were the rule to go into effect this calendar year, the end result would require domestic end products and construction materials to contain 75% of US-made products by 2028. This phased approach would be applicable to suppliers holding contracts that span the increases, and thus suppliers will need to adapt to each new threshold as it is rolled out. The Proposed Rule also contains a “fallback threshold” whereby until one year after the increase of the domestic content threshold to 75%, the government will apply the former domestic content threshold in instances where end products or construction materials that meet the new domestic content threshold (1) are not available or (2) are of unacceptable cost. Thus, products exceeding the 60% threshold that are determined to be of “unreasonable cost” (after application of the price preference) may be treated by the government for purposes of the evaluation at the current threshold of 55%. However, this fallback threshold only applies to end products or construction material that do not consist wholly or predominantly of iron or steel or a combination of both.

According to the White House, raising this threshold would close a “loophole” in the current regulation—a reference to the manner in which domestic content is measured. This loophole was addressed in EO 14005 which directed the FAR Council to consider proposing changes to the Buy American rules in FAR Part 25 that would, in part, change the domestic content test from a component test to a value added test. However, the current Proposed Rule expressly states that it does not seek to replace the component test at this time. A benefit of the heightened content requirements, according to the White House, would increase and diversify the supply chain participants by affording more small and medium-sized manufacturers opportunities to become a government supplier. As an example, the White House notes the Small Business Administration’s creation of a new manufacturing office in its federal contracting division.

2. Enhanced price preference for critical products and critical components

The BAA essentially requires the government to give preference to domestic end products and construction material over all foreign products in its acquisition of supplies for use inside the US. Thus, while the BAA appears to prohibit the purchase of certain foreign products, in reality, the BAA operates only as an evaluation preference for domestic end products and construction material. The FAR essentially directs Contracting Officers to attach an evaluation penalty (20% if the domestic offer is from a large business; 30% if the domestic offer is from a small business) to the price of any contractor's proposal to supply foreign end products. The adjusted price of the foreign goods is then compared to the price of proposals offering to supply domestic products in order to determine contract award. If the adjusted price of the foreign end product is lower than the price t offered for he domestic item, the domestic price is deemed to be unreasonable and award will be made to the offer of foreign material. See 25.105.

The Proposed Rule proposes applying enhanced price preferences to domestic end products and construction material deemed to be a critical items or made up of critical components. The Proposed Rule provides definitions for each, both of which will be located in FAR 25.003:

• Critical component means a component that is mined, produced, or manufactured in the United States and deemed critical to the US supply chain.
• Critical item means a domestic construction material or domestic end product that is deemed critical to the US supply chain.

The list of these critical items and critical components will be contained in the newly designated FAR 25.105 (existing FAR 25.105 is proposed to be redesignated as 25.106). The procedures for applying the price preferences associated with critical items and components will be contained in the redesignated FAR 25.106 (supply contracts) and 25.204 (construction contracts). The Proposed Rule puts the onus on offerors to identify in their offer any domestic end products or construction material that contain a “critical component” so that the Contracting Officer can apply the higher price preference where warranted. The Proposed Rule notes that the process of identifying critical items and components that will receive the price preference is being conducted pursuant to the Critical Supply Chain review, mandated under EO 14017, and the pandemic supply chain strategy called for under EO 14001. The Proposed Rule states that the products that will receive a price preference will be determined in a separate rulemaking, “to allow time for the supply chain review and trade pact waiver review to be completed first.” However, the Proposed Rule notes that not all critical products identified through the supply chain review will necessarily qualify for the preference, and this list will be updated and published in the Federal Register no less than once every four years.

3. Post-award reporting requirement

In a significant change to the existing law, the Proposed Rule requires contractors to report the specific domestic content of (1) critical items, (2) domestic end products containing a critical component, and (3) domestic construction material containing a critical component, that were awarded under a contract. The purpose of this reporting requirement is to track the actual domestic content of products sold under contract to measure against the Biden Administration’s broader supply chain security initiatives. The Proposed Rule notes the creation of two new FAR Clauses: FAR 52.225-XX, Domestic Content Reporting Requirement-Supplies, and FAR 52.225-YY, Domestic Content Reporting Requirement Construction Materials. The new clauses are applicable to acquisitions at or below the Simplified Acquisition Threshold (currently $250,000) and to acquisitions for commercial items. The Proposed Rule notes an exception to the reporting requirements for procurements that are for the acquisition of Commercial-Off-The-Shelf (COTS) items—a subset of commercial items.

Key Takeaways

 The Proposed Rule seeks to tighten the existing rules regarding what qualifies as a domestic end product or construction material.  As a result, contractors will need to reassess their supply chains in an effort to qualify their products as domestic under the new content requirements. Contractors and suppliers whose products do not meet the heightened thresholds will need to adjust their supply chains to ensure compliance, or else the suffer the penalties under BAA. Contractors and suppliers who hold multi-year contracts will need to examine the stepped-up content threshold requirements in order to ensure compliance year over year. However, even those contractors who fail to meet the new thresholds could still receive a price preference at the prior threshold (55%) in instances where (1) no offers of domestic end products are received or (2) the domestic end products are of unreasonable cost.

 Contractors and suppliers will need to examine the new price preference regime in the context of the goods and supplies they are manufacturing. While the Proposed Rule states that it is only providing a framework, the impact associated with this framework will be captured in a separate ruling to add critical products and components to the FAR and to establish the associated preferences. Thus, whether those goods and supplies are critical items or goods that contain critical components will be ascertained from reviewing the updated list in the newly-designated FAR 25.105.

 Furthermore, contractors will have to ensure compliance with the new reporting requirement rules set to be rolled out. This will require contractors to have a firm grasp on their supply chains to ensure they ascertain the true content of their products. This reporting requirement implicates a contractor’s due diligence in assessing the supply chain. For instance, to what extent can a contractor rely on its subcontractor’s representations regarding country of origin, and how far down the supply chain is a contractor expected to go to ensure compliance.

A final takeaway—contractors are likely to see a heightened scrutiny of Buy American representations by agencies, as well as a greater likelihood in Agency pursuit of false representations. Contractors should ensure their compliance programs are up to date to account for these issues.

The Proposed Rule directs interested parties to submit comments to the Regulatory Secretariat Division within 60 days to be considered in the formulation of a final rule. A virtual public meeting will be held on August 26, 2021.