Over a year after the Biden Administration issued Executive Order 14005 on “Ensuring the Future is Made in America by All of America’s Workers,” (discussed previously here) the Federal Acquisition Regulatory Council (“FAR Council”) has published a Final Rule (87 Fed. Reg. 12780) implementing changes to the Buy American Act (“BAA”) regulations at FAR Subpart 25.1 and 25.2. These new rules require (eventually) for federal agencies to procure end items manufactured in the United States that are at least 75% domestic content – a drastic increase from the current 55% domestic content requirement. Surprised? You shouldn’t be. We’ve been expecting this rule for a while now. What is a surprise is the effective date – October 25, 2022. The FAR Council wants to give companies a little time for the new rule to sink in and for companies to assess their supply chains to ensure that they can comply with the new thresholds. Companies are well-advised to take advantage of this “transition period” between now and October 2022 to get their ducks in a row.

The FAR Council’s proposed rule (86 Fed. Reg. 40980), issued in July 2021 (and discussed previously here), seeks to accomplish three main objectives: (1) to increase the domestic content threshold (currently sitting at 55% since January 2021); (2) to create preferences for a new class of “critical” items and components that would benefit from greater incentives to both make and buy American; and (3) to establish new post-award reporting requirements, particularly when a BAA waiver is issued. The Final Rule largely tracks the proposed rule, albeit with a few minor tweaks – including the notable absence of any post-award reporting requirements.

Increasing the Domestic Content Threshold

Currently, in order to qualify as a “domestic end product” under the BAA, a product must meet a two-prong test: (1) the end product must be manufactured in the U.S.; and (2) the product must also satisfy the domestic content requirement. In January 2021, the Trump Administration created two separate categories for the domestic content requirement: (a) for products that are made wholly or predominantly of iron or steel, the domestic content must be greater than 95% of the total cost of the end product; and (b) for any other manufactured products, the cost of components must exceed 55% of the total product cost – unless the manufactured product is a commercially available off-the-shelf product (“COTS”) (as defined in FAR 2.101).

The Final Rule does not touch the near-total domestic content requirement for products made of iron and steel, leaving that number near-absolute. But the Final Rule increases the domestic content requirement for other manufactured products – eventually imposing a 75% domestic content requirement to satisfy the second prong of the BAA. To ease the burdens on both government agencies and manufacturers alike, the FAR Council created an escalation process, detailed below, which mandates (eventual) compliance with the 75% requirement by calendar year 2029:

Both the proposed rule and Final Rule automatically apply these gradual increases to multi-year contracts that span various threshold requirements – meaning contractors will be required to monitor compliance with the increasing threshold requirements over time, without a separate contract modification incorporating the new thresholds over time.^[1] However, after public comment, the Final Rule now also permits the government to allow contractors, in certain circumstances, to comply only with the lower domestic content threshold in place at the time of award throughout the life of the entire contract – an “alternate domestic content” threshold. See FAR 25.101(d) and 25.201(c).

How does a company take advantage of this special dispensation? The approval for the alternate domestic content threshold must be issued by the agency’s senior procurement executive, in consultation with the White House’s Made in America Office. The regulations seem to contemplate that this approval will be issued at the time of contract award using alternate contract clauses, but it is unclear what types of tea leaves the agency might consider as it tries to predict future needs. Still, where the purpose of the alternate domestic content threshold seems designed to allow the government to get what it needs, the regulations do not foreclose the possibility that the government might agree to the alternate threshold during contract performance.

Like the proposed rule, the Final Rule also includes a “fallback” threshold, allowing certain products and construction materials to meet the current 55% domestic content threshold under certain circumstances. For example, where an agency has determined there are no end products or construction materials that meet the new thresholds, or where fully-compliant products are only available at an unreasonable cost, the government may choose to impose the lower 55% content requirement. See FAR 25.106(b)(2) and (c)(2); FAR 25.204(b)(1)(ii) and (b)(2). The fallback threshold will remain in place until 2030, at which time it will go away. Like the “alternate domestic content” threshold, the “fallback” threshold is designed to allow the government to get what it needs, notwithstanding the vagaries of the supply chain and vendors’ ability to certify compliance to the government. Both options still will require the government to buy American-made products with majority U.S. content, but maybe with just a little bit less U.S. content. But these threshold options also signal to the supply chain that 75% domestic content is the wave of the future… eventually, if not inevitably.

Preferences for Critical Products and Critical Components

Rather than prohibiting the government from buying foreign-made products, the BAA actually encourages “buying American” through price preferences – adding an evaluation penalty to offers containing foreign end products and making the foreign-made products appear to be (for evaluation purposes) more expensive. Currently, these preferences are 20% for small business contractors, 30% for large business contractors, and 50% for purchases by the Department of Defense. As introduced in the proposed rule, the Final Rule carves out a separate category for “critical products” and “critical components,” both of which will receive even higher price evaluation preferences. This new carve out effectively creates a two-tiered evaluation process – one process for standard products, and a heightened process for “critical” items.

What is considered “critical”? Well, that’s something we’re going to have wait for a little bit. The key criteria is that it includes any product or component that is “deemed critical to the U.S. supply chain.” But a separate rulemaking^[2] will create this official list in a new FAR 25.105, which also will identify the products’ “associated enhanced price preference(s)” – suggesting different tiers of critical items and components will have different price preferences moving forward. Functionally, this means that a foreign offer automatically will be slapped with a 20 or 30% price evaluation penalty. But if an offer includes “critical items” or “critical components,” then there will be an additional price evaluation penalty (30% + X%). It is unclear whether the additional price evaluation penalty will also be applied to DOD procurements (50% + X%), but we should expect updates to the DFARS sometime in 2022.

Not Forgotten; Still on the Table

Noticeably absent from the Final Rule is any discussion of key issues that have been on the table since Executive Order 14005 was issued, including: (1) the impact this rule has on Trade Agreements Act compliant products; (2) whether the government will replace the longstanding BAA “component test” (focusing on hardware content) with a more expansive “domestic content” (looking more broadly to the total added value of U.S. processes); and (3) whether the government will change, or possibly remove, certain longstanding waivers, including for commercial Information Technology and COTS products. Perhaps these issues also will be addressed in forthcoming rulemakings. As to the timing of the rules on these issues that remain on the table, we do not know. Sometime in 2022 seems reasonable, but the FAR Councils have not given any indication.

The Big Surprise – Delayed Implementation

For the most part, the Final Rule tracks the proposed rule fairly closely. In that respect, the Final Rule contains few surprises. The one big surprise is the relative slow-roll of the Final Rule – effective October 25, 2022. This gives contractors nearly seven months to prepare for enforcement of the increased 60% domestic content threshold, allowing companies the chance to assess their supply chain now, in preparation for the future heightened requirements. The delayed implementation was in response to public comments decrying the massive burdens on industry if the rule were to take effect immediately. Though these changes only are applicable to acquisitions subject to the BAA (generally, those contracts valued less than $183,000 for supplies or $7,032,000 for construction), all contractors are encouraged to take stock of their end products being delivered to a government customer – assessing and documenting their current or future compliance with the BAA’s new domestic thresholds. This includes reviewing contractor supply chains to ensure offered end products remain compliant with the evolving threshold standards throughout the life of a contract.

ENDNOTES

[1] One key question that is not addressed in the Final Rule is whether the new BAA clauses will be added to existing contracts or merely to new contracts awarded on or after October 25, 2022. Right now, it appears these clauses will not apply to existing contracts. But if the government tries to add the new clauses to your existing contracts, please be aware that this could be considered a change entitling you to a price adjustment.

[2] This separate rulemaking also will address the proposed rule’s intent to impose new postaward reporting requirements, as we discussed previously.