On February 15, the Department of Defense (“DOD”) finalized a rule amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) to supplement the Federal Acquisition Regulation (“FAR”) implementation of Executive Order 14005, addressing domestic preferences in DOD procurement. Defense contractors should be aware of the specific changes and ensure their sourcing and supply chain systems incorporate the updated requirements.

Background

As we discussed in prior posts, in January 2021 President Biden issued an executive order strengthening the Buy American Act’s (“BAA”) preference for domestic products and services in federal procurements. The executive order directed the FAR Council to consider proposing a rule to increase the BAA’s domestic content threshold for domestic end products.

The FAR Council then issued a final rule that increased the domestic content threshold for domestic end products (covered here). Previously, a product was considered a domestic end product if the cost of its components mined, produced, or manufactured in the United States exceeded 55 percent of the cost of all components. The FAR Council’s final rule increased that domestic content threshold to 60 percent and implemented a phased increase to 65 percent in 2024 and 75 percent in 2029. However, the rule also included a fallback threshold of 55 percent if (1) no end products exist that meet the new domestic content threshold or (2) such end products do exist but are unreasonably expensive. This fallback threshold will persist until 2030.

The FAR Council’s final rule also proposed an enhanced price preference for domestic products deemed “critical” or made up of “critical components”—though the rule did not identify those products nor articulate the enhanced price preference.

DOD Incorporates and Supplements FAR Council’s Rule

DOD’s final rule amended the DFARS to implement President Biden’s January 2021 executive order. The final rule largely reflects the FAR Council’s modifications to the FAR.

First, DOD’s final rule modifies definitions for domestic end product, qualifying country end product, and domestic construction material by increasing the domestic or qualifying country content threshold to 65 percent, with an increase to 75 percent in 2029. Until publication of the final rule, the DFARS thresholds were 55 percent (for domestic end products and domestic construction materials) and 50 percent (for qualifying country end products). (Qualifying countries are discussed in more detail below.) Similar to the FAR, this rule requires contractors to comply with the threshold in effect at the time of delivery, even if the contract spans across different threshold years. However, in some instances, after approval from the Office of Management and Budget (“OMB”), contractors will be allowed to apply the domestic content threshold in effect at time of contract award.

Second, the rule also adopts the FAR’s fallback threshold of 55 percent if domestic end products are not available or unreasonably expensive. Like the FAR version, the DFARS fallback threshold expires in 2030. This fallback threshold only applies to construction material that does 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, as well as to end products that do not consist wholly or predominantly of iron or steel or a combination of both and that are not COTS items.

Third, the final rule lays the groundwork for a future enhanced price preference for a domestic product that is a “critical item” or made up of “critical components.” A “critical component” is mined, produced, or manufactured in the United States and deemed “critical to the U.S. supply chain.” A “critical item” is a domestic construction material or domestic end product that is likewise “deemed critical to the U.S. supply chain.” However, like the FAR rule, the DFARS rule does not identify “critical components” or “critical items,” nor does the DFARS rule specify the enhanced price preference.

While the DOD’s final rule mostly aligns DOD with general FAR requirements, it also maintains and updates a feature unique to DOD procurements—the exception for foreign products or components that originate from “qualifying countries.” A qualifying country is a country that has a reciprocal defense procurement memorandum of understanding or international agreement with the United States to remove purchasing and sourcing barriers between the two countries. There are currently 28 qualifying countries, including the UK, France, Germany, Japan, and Israel. In contrast to the FAR, a product is a domestic end product under the DFARS if it is manufactured in the United States and the cost of its components from the United States and the cost of its components from a qualifying country collectively exceed the applicable content threshold. Similarly, a product is a qualifying country end product under the DFARS if it is manufactured in a qualifying country and the cost of its components from the United States and the cost of its components from a qualifying country collectively exceed the applicable content threshold. Therefore, under the increased content threshold in DOD’s final rule, if components produced domestically make up 30 percent of the cost of all components, and components produced in a qualifying country make up another 36 percent of the cost of all components, the product will be considered a domestic end product (if manufactured in the United States) or qualifying country end product (if manufactured in a qualifying country).

Takeaways

DOD’s final rule largely incorporates the rules promulgated by the FAR Council. Nonetheless, contractors performing under or bidding for DOD contracts should ensure their products comply with the increased domestic content threshold and prepare for the eventual increase in the coming decade. Furthermore, contractors should consider taking advantage of DOD’s qualifying country exception, which offers expanded options from which defense contractors can acquire materials and components. Finally, contractors should monitor any updates to the FAR or DFARS that shed light on the enhanced price preferences afforded to critical items or critical components.