On 30 July 2021, the FAR Council published a proposed rule (see our previous update here), which directed the Council to strengthen the impact of Federal procurement preferences in the Buy American Act (BAA) for products and construction materials that are domestically manufactured from substantially all domestic content. The final rule makes limited changes from the proposed rule and amends the FAR to implement: 1) a near-term increase to the domestic content threshold following a short grace period during which contractors and the workforce prepare for the increase and a schedule for future increases; 2) a fallback threshold that would allow for products meeting a specified lower domestic content threshold to qualify as domestic products under certain circumstances; and 3) a framework for application of an enhanced evaluation factor (price preference) for a domestic product that is considered a critical item or made up of critical components.
Increase to the Domestic Content Threshold & Alternate Domestic Content Test
The final rule increases the domestic content threshold initially from 55 percent to 60 percent, then to 65 percent in 2024 and to 75 percent in 2029.1 The initial increase to 60 percent will be put in place several months from publication of the final rule to allow industry time to plan for the new threshold and to provide workforce training on the new fallback threshold. A supplier that is awarded a contract within a period of performance that spans the schedule of domestic content threshold increases will be required to comply with each increased threshold for the items in the year of delivery.
However, in instances where complying with this requirement would not be feasible for a particular contract, a senior procurement official may allow the application of an alternate domestic content test in defining “domestic end product” or “domestic construction material” after consultation with the Office of Management and Budget’s Made in America Office (MIAO). The alternate domestic content test would allow the supplier to comply with the domestic content threshold that applies at the time of contract award for the entire period of performance for that contract.2
The final rule also allows, until one year after the increase of the domestic content threshold to 75 percent (i.e., 2030), for the use of the 55 percent domestic content threshold in instances where an agency has determined that there are no end products or construction materials that meet the new domestic content threshold or that such products are of unreasonable cost.3
The fallback threshold requires offerors to indicate which of their foreign end products exceed 55 percent domestic content. It only applies to end products and construction material that do not consist wholly or predominantly of iron or steel or a combination of both and that are not commercially available off-the-shelf (COTS) items.
Enhanced Price Preference for Critical Products and Critical Components
The final rule 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.4 A subsequent rulemaking will establish the definitive list at FAR 25.105 of critical items and critical components in the FAR, along with their associated enhanced price preferences. When a final rule goes into place establishing the list and preference factors, the higher price preference for critical items or critical components will be used.
The final rule does not include language from the proposed rule to require post-award reporting on the specific amount of domestic content in critical end products, construction material, or components receiving the enhanced price preference. Coverage on this requirement will be deferred to the rulemaking that establishes the definitive list of critical items and critical components so that industry can better understand and comment on the scope and scale of reporting and have that input considered by the regulatory drafters before a requirement is finalized.
- This final rule will only impact procurements subject to the BAA and does not impact procurements that are exempt from the BAA, such as procurements over $183,000 that are subject to the Trade Agreements Act (TAA). The BAA applies to supply and construction contracts between $10,000 and the TAA threshold.5 It is worth noting that certain categories of contracts remain subject to the BAA even where the estimated value of the contract exceeds the TAA Threshold (48 C.F.R. § 25.401). The most common categories of procurements which remain subject to the BAA at any value are: 1) arms, ammunition, or war materials; 2) purchases indispensable for national security; 3) sole-source acquisitions; and 4) small business set-aside contracts.
- The commercial information technology (IT) acquisition exemption from the Buy American statute will remain in place. The final rule indicated that no action is being taken with regard to the feedback received on this exemption, but that the FAR Council and MIAO intend to consider this feedback for other activities required by the E.O., as well as for related initiatives to strengthen the domestic supply chain.
- Companies selling COTS items continue to be exempt from the component percentage requirement, so the domestic content increases will not impact them.
- The changes implemented by this final rule will not impact contractors for another several months—until 25 October 2022, after the beginning of the next fiscal year. Although it is possible that contracting officers will take steps to apply them to existing contracts, bilateral contract modification may be necessary to implement such changes.
- Contractors will want to monitor increases in domestic content threshold. This is because a supplier will be required to comply with each increased threshold for items in the year of delivery. For example, a supplier awarded a five-year contract in 2027 will have to comply with the 65 percent domestic content threshold initially, but in 2030 will have to supply products with 75 percent domestic content. However, in instances where complying with this requirement would not be feasible for a particular contract, a senior procurement official may allow the application of an alternate domestic content test, which would allow the supplier to comply with the domestic content threshold that applies at the time of contract award for the entire period of contract performance.
- The fallback threshold is meant to give small businesses and other market participants time to make adjustments to their supply chains. The Council believes that the fallback threshold should: 1) help prevent scheduled increases in the content threshold from taking work away from domestic suppliers who are actively adjusting their supply chains; and 2) avoid unintentionally raising the foreign content of Federal purchases through increased use of waivers while domestic suppliers adjust. Sunsetting the fallback is also meant to send a clear signal to the Federal marketplace that the Federal Government is fully committed to suppliers who increase their reliance on domestic supply chains.
- Contractors will want to look out for future rulemaking regarding post-award reporting of the specific domestic content of critical items, domestic end products containing a critical component, and domestic construction material containing a critical component. The final rule removes this requirement and will instead propose the requirement in a subsequent rule establishing the list of critical items and components in the FAR.
- The changes provided in the final rule are mostly consistent with the Make it in America section of the Infrastructure Investment and Jobs Act (IIJA). Section 70921 of the IIJA includes a “sense of Congress” that the FAR be amended to increase the domestic content requirements for domestic end products and domestic construction material to 75 percent. Section 70921 also envisions use of a fallback threshold, although it suggests that the threshold should be set at 60 percent and should continue indefinitely. However, this final rule does not impact the domestic content requirements for Federal financial assistance as addressed in the Build America, Buy America Act portion of the IIJA (§§ 70901 – 70917). The IIJA’s domestic content thresholds for Federal financial assistance set at 55 percent will not be raised in conjunction with the FAR BAA increases, unless changed through legislative or other regulatory means.
We have deep experience advising businesses on the challenges and opportunities of the Buy American requirements. Please feel free to reach out to any of the authors if you would like additional information about the proposed rule, assistance drafting a public comment, or other assistance concerning the complex and evolving area of domestic content restrictions.
Authored by Mike Mason, Joy Strum, Allison Pugsley, Willian Ferreira, Stacy Hadeka, Chandri Navarro, Kelly Ann Shaw, and Maya Desai.
1 These changes will be reflected in amendments throughout FAR part 25 (e.g., FAR 25.101(a)(2)(i) and 25.201(b)(2)(i)) and to FAR clauses 52.225-1, 52.225-3, 52.225-9, and 52.225-11.
2 Amendments have been made to FAR 25.101, 25.201, 25.1101, and 25.1102 to implement the alternate domestic content test. Alternates to FAR clauses 52.225-1, 52.225-3, 52.225-9, and 52.225-11 are created for those contracts where use of an alternate domestic content test is authorized. Due to the new Alternates, conforming changes were made to FAR 13.302-5 and FAR clauses 52.212-5 and 52.213-4.
3 The final rule makes amendments at newly designated FAR 25.106 and 25.204 (i.e., FAR 25.106(b)(2) and (c)(2), and 25.204(b)(1)(ii) and (b)(2)); and FAR clauses 52.212-3, 52.225-2, 52.225-4, 52.225-9, and 52.225-11. Text has been added at FAR 25.103(b)(2)(i) and 25.202(a)(2), clarifying that a nonavailability determination is not reuired when the fallback procedures are used.
4 See FAR 25.106(c) and 25.204(b)(2)).
5 The TAA threshold increased to $183,000 on January 1, 2022.