On 7 March 2022, the Federal Acquisition Regulatory Council (FAR Council) published a final rule implementing changes to “Buy American” requirements for federal contractors. The final rule largely mirrors a proposed rule published in July 2021, which we discussed in a previous alert.

KEY TAKEAWAYS

The final rule makes several material changes to the regulations at FAR Part 25, which implements the Buy American Act (BAA).

1. Increased domestic content requirements. The final rule increases the percentage of domestic content necessary for a product to qualify as a “domestic end product” in compliance with the BAA. Currently, the BAA regulations require a product to contain 55% domestic components to qualify as domestic. The final rule increases this threshold to 60% effective 25 October 2022, followed by an increase to 65% in 2024 and an increase to 75% in 2029.

   • Example: You domestically manufacture a widget that contains 58% domestic components. Your widget currently qualifies as “domestic” under the BAA, but will no longer qualify after 25 October 2022.

2. “Fallback” threshold for products that meet the current domestic content threshold but not the increased thresholds. The final rule provides for a “fallback threshold” that will allow agencies to use the existing 55% domestic content threshold in certain circumstances if the agency determines that there are no products that meet the new threshold, or such products are of unreasonable cost. The fallback threshold expires in 2030, one year after the domestic content threshold increases to 75%.

   • Example: On 30 October 2022, an agency needs to procure widgets but determines that there are no widgets manufactured domestically that contain at least 60% domestic components. The agency may purchase your 58% domestic component widget instead, because it meets the “fallback threshold” of 55%.

3. Forthcoming enhanced price preference for select critical products. Like the proposed rule, the final rule states that the FAR Council will enact an enhanced price preference for “critical items,” but defers identification of “critical items” and details on the enhanced price preference until later rulemaking. The standard BAA preference applies a threshold above which the cost of a domestic product is deemed “unreasonable,” thereby allowing an agency to purchase a lower-cost foreign product. An enhanced price preference will increase that threshold, making it more difficult for an agency to justify the purchase of a lower-priced foreign product.

   • Example: Future rulemaking lists your widget as a critical product. Agencies previously were able to purchase foreign widgets provided that they were at least 20% cheaper than domestic widgets. Now agencies will have to apply an “enhanced” price preference that, although to be determined, will be greater than 20%. This means a foreign critical item widget will need to be more than 20% cheaper (how much cheaper to be determined) than a domestic widget for the agency to justify purchasing the foreign widget.

CHANGES FROM THE PROPOSED RULE

While the final rule largely mirrors the July 2021 proposed rule, there are several differences:

1. Grace period for domestic content increases. The proposed rule envisioned that the domestic content increases would occur 30 days after enactment of the final rule. The final rule provides a 6-month grace period, with the 60% increase becoming effective 25 October 2022.

2. No reports on domestic content in critical items. The proposed rule required companies supplying critical items to report on the amount of domestic content in those products. The final rule eliminates this requirement.

3. Potential to relax requirement to comply with threshold increased mid-contract. The proposed rule required a contract with a period of performance that spanned multiple domestic content threshold increases to comply with the threshold in place at the time of product delivery to the government. The final rule relaxes this requirement somewhat, by adding a process by which an agency can allow a contractor to use the domestic content threshold in effect at the time of contract award throughout the life of the contract.

INDUSTRY IMPACT

The final rule impacts companies—and their supply chains—performing federal contracts subject to the BAA. Notably, the BAA only impacts a small percentage of federal contracts, because over certain thresholds the United States is obligated to procure products from certain of its trading partners without favoring U.S. domestic products (i.e., countries that are members of the World Trade Organization Government Procurement Agreement or with whom the United States has signed a free trade agreement).

Accordingly, the BAA, and therefore the impact of this final rule, only applies to contracts below the current trade agreement thresholds of US$183,000 for supply contracts and US$7,032,000 for construction contracts, as well as to certain types of contracts exempt from trade agreements such as small business set asides. However, for those contractors that are subject to the BAA, and the manufacturers that supply products and components to those contractors, this final rule significantly impacts the ability to source and supply foreign products and component parts.

Moreover, this final rule marks a continuing trend in strengthening Buy American policies: the domestic increase to 60% marks the second increase in less than two years (the first being an increase from 50% to 55% in January 2021). Prior to 2021, the 50% threshold had remained unchanged since 1954.

These changes, coupled with potential future changes directed by President Biden’s “Made in America” Executive Order and a new “Buy American” regime for federally-funded infrastructure projects, result in a shifting compliance landscape for federal contractors. The K&L Gates Government Contracts and Procurement Policy and International Trade groups can assist contractors in navigating this complex domestic sourcing regime.