Final Rule Amends FAR Part 25 Domestic Content Threshold Under Buy American Act
Government Contracts Update
Date: March 14, 2022
Contractors supplying end products and construction material in support of a federal contract subject to the Buy American Act (BAA or Act) will be required to comply with an increased domestic content threshold beginning this fall. On March 7, 2022, the Department of Defense, General Services Administration and National Aeronautics and Space Administration issued a final rule amending Part 25 of the Federal Acquisition Regulation (FAR), which implements the BAA. The final rule follows a proposed rule issued last summer, which established a gradual increase in the domestic content threshold required under the Act from the current 55% threshold to a 75% threshold in 2029. The final rule implements aspects of the Biden administration’s Executive Order of January 25, 2021 (EO 14005), which focused on increasing the federal government’s purchase of domestic products and developing the supplier base in the United States. The new final rule, effective on October 25, 2022, also provides for relaxation of the increased domestic content threshold upon an agency determination that compliance with the increased threshold is not feasible or that there are no end products or construction materials that meet the new domestic content threshold, or that such products are of unreasonable cost.
The Act requires federal agencies to procure articles, materials and supplies that were mined, produced or manufactured in the United States, substantially all from domestic components, subject to exceptions such as nonavailability, unreasonable cost, public interest or information technology that is a commercial product. The Act is implemented in FAR Part 25, which provides guidance on whether end products or construction material qualifies as “domestic” for purposes of the Act. The FAR adopts a two-part test to determine whether a manufactured end product or construction material qualifies as domestic: (i) the end product or construction material must be manufactured in the United States and (ii) a certain percentage of all component parts (determined by the cost of the components) must be mined, produced or manufactured in the United States. This second prong, originally referred to as the “component test” and now known as the “domestic content test,” currently requires that for an end product not consisting wholly or predominantly of iron or steel or a combination of both, its cost of domestic components must exceed 55% of the cost of all components (with the test waived for acquisition of commercially available off-the-shelf (COTS) items). For an end product that consisting wholly or predominantly of iron or steel or a combination of both, the cost of foreign iron and steel must constitute less than 5% of the cost of all components (and the test is not waived for COTS items (except for COTS fasteners)).
On January 25, 2021, President Biden issued Executive Order 14005, “Ensuring the Future Is Made in All of America by All of America’s Workers,” which aims to increase the federal government’s use of domestic products and to diversify domestic supplier bases by “maximiz[ing] the use of goods, products, and materials produced in, and services offered in, the United States.” Among the actions directed by the order were amendments to FAR Part 25 to strengthen the impact of the Act. The order required the FAR Council to consider amending the FAR to (i) replace the domestic component test with a test under which domestic content is measured by the value that is added to the product through U.S.-based production or U.S. job-supporting economic activity; (ii) increase the threshold for the domestic content requirement; and (iii) increase the price preference for domestic end products and construction materials.
The FAR Council issued a proposed rule on July 30, 2021, implementing some of the considerations identified in the order. The proposed rule included (i) an increase to the domestic content threshold, a schedule for future increases and a fallback threshold that would allow for products meeting a specific lower domestic content threshold to qualify as domestic products under certain circumstances; (ii) a framework for applying an enhanced price preference for a domestic product that is considered a critical product or made up of critical components; and (iii) a postaward domestic content reporting requirement for contractors. The proposed rule did not replace the component test, and instead sought comments on strengths and shortcomings of the test and how domestic content might be better calculated. The preamble to the final rule states that the FAR Council and the Office of Management and Budget’s Made in America Office (MIAO) will consider the public comments received on this and other topics “as well as related initiatives to strengthen domestic supply chains.”
As with the proposed rule’s adoption of considerations set forth in the order, the final rule adopted many, but not all, elements of the proposed rule. The final rule amends FAR Part 25 to implement (i) a near-term increase to the domestic content threshold following a short grace period during which contractors can prepare for future increases and a schedule for such increases; (ii) a fallback threshold that would allow for products meeting a specific lower domestic content threshold to qualify as domestic products under certain circumstances; and (iii) 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 a critical component. Each element of the final rule is discussed in detail below.
Increase to Domestic Content Threshold
The final rule gradually increases the domestic content threshold of the Act over a period of several years. The rule increases the threshold from 55% to 60% initially, then to 65% in calendar year 2024, and then to 75% in 2029. The rule provides that the initial increase to 60% will occur in October 2022 to allow industry time to plan for the new threshold, a change from the proposed rule. The rule states that a supplier that is awarded a contract with a period of performance spanning the schedule of content increases will not be entitled to maintain the applicable threshold at the beginning of contract performance, and instead will be required to comply with each increased threshold for the items in the year of delivery. As an example, the rule cites a supplier awarded a five-year contract in 2027 that initially would have to comply with the 65% threshold, would then have to supply products with 75% domestic content in 2030.
The final rule states that in response to comments received following issuance of the proposal rule, the FAR Council has included provisions at FAR 25.101(d) and 25.201(c) that provide for a senior procurement executive to allow the application of an alternate domestic content test in defining “domestic end product” or “domestic construction material” where the requirement to comply with the increased thresholds would not be feasible. The rule requires the senior procurement executive to consult with the MIAO prior to application of any alternate domestic content test, and it states that the MIAO will work with agencies to develop an appropriate process for consultation.
The final rule provides that until one year after the increase of the domestic content threshold to 75%, an agency may use the current 55% domestic content threshold in instances where the agency has determined that there are no end products or construction materials that meet the new domestic content threshold, or such products are of unreasonable cost. The rule cites the example of a domestic end product that exceeds the 60% domestic content threshold that is determined to be of unreasonable cost after application of the Act’s price preference. In such instance, the agency will treat an end product that is manufactured in the United States exceeding 55%, but not 60%, domestic content as a domestic end product. The rule states that the fallback threshold requires offerors to indicate which of their foreign end products exceed 55% domestic content, and that the 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 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. The fallback threshold would cease to apply one year after the domestic content threshold increases to 75 percent, in order 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.”
Enhanced Price Preference for Critical Products and Critical Components
The final rule establishes a framework through which higher price preferences will be applied to end products and construction material that are determined to be critical or made up of critical components. The rule states that a subsequent rulemaking issuance will establish the definitive list at FAR 25.105 of critical items and critical components in the FAR as well as their associated enhanced price preferences that OMB deems to be “critical” to U.S. supply chains or made up of “critical components,” which will be based upon the supply chain reviews that federal agencies conducted pursuant to President Biden’s Executive Order of February 24, 2021 (EO 14017). The final rule did not adopt language in the proposed rule that would require postaward reporting on the specific amount of domestic content in critical end products, construction material or components receiving the enhanced price preference. The final rule notes that while reporting remains a government priority, the reporting requirement will be deferred to the rulemaking that establishes the definitive list at FAR 25.105.
Contractors that supply products or construction materials in support of a government contract that is subject to the BAA should understand the implications of the final rule as well as the status of issues identified in the January 2021 executive order on procurement of domestic products.
- The increased domestic content thresholds established by the final rule may require some companies to alter their sourcing and manufacturing practices to continue benefiting from domestic preferences under the Act. While the final rule delays implementation of the initial increase in the domestic content threshold from 55% to 60%, the final rule maintains the proposed rule’s timetable for implementation of the remaining threshold increases through 2029. The increase from the current threshold of 55% to the ultimate threshold of 75% is significant, and while contractors have time to adjust their sources of supply and manufacturing processes, any delay in a contractor’s efforts to prepare for the threshold increases will pose significant compliance risks.
- Although the final rule allows for use of an alternate domestic content test by which a senior agency procurement executive determines that compliance with the applicable threshold would not be feasible, the specifics of this process remain unclear. In particular, the final rule does not address the standard that the procurement executive should use in determining whether compliance with the applicable threshold is feasible or not. Further, use of an alternate content test requires consultation and approval by the MIAO, which is a yet-to-be determined process.
- Despite the January 2021 executive order directing the FAR Council to examine the current exemption for commercial information technology under the BAA, the final rule is silent on the exemption or its future. The commercial information technology exemption remains a significant relaxation of the BAA’s requirements, and any effort by the FAR Council to rescind it will have a significant impact upon companies that supply IT products to the federal government.
- As mentioned above, the domestic content thresholds set forth in the final rule will not apply to end products or construction materials that consist wholly or predominantly of iron or steel (or a combination of both). Such items will continue to be classified as domestic for purposes of the Act only if the cost of foreign iron and steel constitutes less than 5% of the cost of all components used in an end product or construction material. The fallback threshold also described above would not apply to such items either.
- Companies should carefully consider and assess the impact of the final rule’s changes to the BAA, including whether existing trade agreements, such as the WTO GPA or the USMCA, entitle their goods to non-discriminatory treatment in federal government procurement activities.
The final rule’s implementation of increased domestic content thresholds for products subject to the Buy American Act reflects the current administration’s emphasis on procurement of domestic products and strengthening of domestic manufacturing and sourcing capabilities. Although the Act applies only to a portion of contracts issued by federal agencies, it remains a significant compliance obligation for many contractors that sell products to government customers. The final rule does provide a grace period in which contractors subject to the Act’s requirements can prepare for the initial threshold increase, and the final increase will not be implemented until 2029; however, given the level of increases to the domestic content threshold required by the final rule, contractors should begin the process of addressing compliance with those increases immediately.
FOR MORE INFORMATION
For more information, please contact:
Francis E. (Chip) Purcell, Jr.
Jessica V. Haire
Ryan S. Spiegel
Joseph R. Berger
This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.
This document may be considered attorney advertising in some jurisdictions.
© 2022 THOMPSON HINE LLP. ALL RIGHTS RESERVED.