New Federal Acquisition Regulation Buy American Act Requirements Go into Effect

The Biden-Harris administration’s amendments to the domestic preference requirements in Federal Acquisition Regulation Part 25 become effective on October 25. The new requirements will increase the domestic content threshold for government purchases under the Buy American Act over a several-year period.

BACKGROUND

Executive Order 14005, titled “Ensuring the Future Is Made in All of America by All of America’s Workers,” was issued by President Biden on January 25, 2021. The executive order launched a federal government initiative to use federal financial assistance awards and procurements to maximize the use of US goods, products, and materials and support greater domestic production. In furtherance of this policy, the Department of Defense, General Services Administration, and National Aeronautics and Space Administration issued a final rule on March 7, 2022, that made significant changes to the domestic preference requirements in Federal Acquisition Regulation (FAR) Part 25 (outlined below).

While new requirements ordinarily take effect 30 days after publication of a final rule in the Federal Register, here, the effective date was delayed to allow industry and government personnel to prepare for the changes. However, the changes will finally go into effect at the end of this month.

SUMMARY OF NEW REQUIREMENTS

The Buy American Act (BAA), as implemented in FAR Part 25, applies certain pricing preferences to acquisitions of “domestic end products.” Specifically, the FAR adopts a two-part test to determine whether a manufactured end product or construction material qualifies as a domestic end product: (1) the end product or construction material must be manufactured in the United States, and (2) the cost of any components mined, produced, or manufactured in the United States must exceed a certain percentage of the cost of all components. [1] The test is waived for acquisition of commercially available off-the-shelf (COTS) items. [2] The test also does not apply to end products or construction materials that consist wholly or predominantly of iron or steel or a combination of both, which are subject to more stringent domestic preference requirements that were not impacted by the final rule. [3]

Before October 25, 2022, the cost of domestic components was required to exceed 55% of the cost of all components to satisfy the component test. The new final rule increases this domestic content threshold significantly over the course of the next several years: from the current 55% to 60% on October 25, 2022, then to 65% in calendar year 2024, and 75% in calendar year 2029.

The final rule specifies that a supplier that is awarded a contract with a period of performance that covers multiple domestic content threshold increases will be required to comply with the applicable increased threshold for the items delivered in each year—e.g., a supplier awarded a five-year contract in November 2022 will have to comply with the 60% domestic content threshold initially, but in 2027 will need to supply products with 65% domestic content.

However, where such compliance would not be feasible for a particular contract, the procuring agency’s senior procurement executive, after consultation with the Office of Management and Budget’s Made in America Office, may allow the supplier to comply with an “alternate domestic content test” where the supplier complies with the domestic content threshold that applies at the time of contract award for the entire period of performance.

The final rule also allows a “fallback threshold,” until 2030, for the use of the original 55% domestic content threshold in instances where the procuring agency has determined that there are no end products or construction materials that meet the new domestic content threshold or that such products can be obtained only at an unreasonable cost. The fallback threshold only applies to construction material and end products that do not consist wholly or predominantly of iron or steel or a combination of both and that are not COTS items.

Finally, the rule also provides for a framework through which higher price preferences will be applied to end products and construction material deemed to be critical or made up of critical components. The final rule does not specify what items are considered “critical” for these purposes, or the associated enhanced price preferences, both of which will be established through subsequent rulemaking. The government also intends to address a post-award reporting requirement on the specific amount of domestic content in critical end products, construction material, or components receiving the enhanced price preference, when it issues the subsequent rule. Despite the upcoming effective date for the final rule, the related rule addressing both of these items has not yet been issued.

IMPACT ON CONTRACTORS

Contractors that supply products or construction materials to the federal government under a contract or subcontract that is subject to the BAA should be prepared for the initial threshold increase to go into effect imminently on October 25, 2022. Although this deadline represents only a 5% increase from the current standard, the ultimate threshold of 75% is substantial, and companies should be prepared for the potential impact on their sourcing and manufacturing processes over the next few years. Moreover, although the final rule provides for an alternate domestic content test and a fallback threshold, both exceptions are time limited and will not survive past 2030.