The FAR Council released its proposed revisions to Buy American Act regulations on July 30, 2021, following President Biden's instructions in Executive Order 14005 (January 25, 2021)1. While the executive order instructed the FAR Council to consider far-reaching changes, the Council opted for incremental amendments to the existing framework. These changes, if adopted, would increase the level of domestic content that certain products sold to the federal government must contain and impose additional reporting requirements on contractors, and could signal future, more radical changes to domestic preference procurement rules. The proposed changes would not alter the treatment of procurements that are subject to the Trade Agreements Act clause (52.225-5).
Earlier this year, President Biden signed Executive Order 14005, titled “Ensuring the Future is Made in All of America by All of America's Workers,” announcing the intent to bolster “Buy American” requirements in federal government procurements.2 Much of this EO focused on reducing the use of Buy American Act waivers, but the order also instructed the FAR Council to consider amending the FAR to:
- Replace the so-called “component test” used to identify domestic end products with a “value-added” test that measures the value that US-based production or US job-supporting economic activity adds to a product;
- Increase the domestic content threshold; and
- Increase the price preferences granted domestic end products.
Proposed FAR Changes
The FAR Council has taken a conservative approach, proposing changes to the details of procurements subject to the Buy American Act but keeping the current framework for determining domestic content. The Notice of Proposed Rulemaking,3 published July 30, 2021, broadly proposes three changes.
First, pursuant to the EO's instruction, the FAR Council proposes to increase the domestic content requirements for domestic end products. The historic “component test” in FAR Part 25, now denominated as the “domestic content test,” defines a domestic product based on whether a certain percentage of the value of components of the end item were mined, produced or manufactured in the United States. Readers will remember that a July 2019 executive order increased this threshold from 50 to 55 percent, a change that became effective in January 2021.4
Now, the FAR Council proposes to raise that percentage to 60 percent immediately, followed by an increase to 65 percent in two years and a further increase to 75 percent five years after the penultimate increase takes effect. This change will have a dynamic impact on current contractors—if a contractor holds a contract with a period of performance encompassing these staged increases, the contractor will be required to meet the new, higher threshold when it goes into effect.
To shield against these increases resulting in a lack of product available for purchase by the US government, the FAR Council proposal includes a “fallback threshold,” under which until one year after the increase to 75 percent, agencies can accept products meeting the formerly applicable standard if products that meet the new threshold are either not available or are of unacceptable cost. This fallback threshold would never apply to products consisting wholly or predominately of iron or steel. The FAR Council explained the purpose of this fallback threshold is twofold: (1) to “help prevent scheduled increases in the content threshold from taking work away from domestic suppliers who are actively adjusting their supply chains, and (2) to “avoid unintentionally raising the foreign content of Federal purchases through increased use of waivers while domestic suppliers adjust.”
Second, the FAR Council proposes designating a new group of “critical products,” including products “made up of critical components,” that will receive an enhanced price preference in agency evaluation processes. The purpose of this new grouping is “to provide a steady source of demand for domestically produced critical products.” Critical items and components will be listed in the newly created FAR 25.105 and will be identified initially via the critical supply chain review instituted in EO 14017 and the National COVID Strategy, and then will be further refined by OMB before being published in a separate rulemaking for notice and comment. The areas under review by the critical supply chain review include semiconductors, critical minerals and other identified strategic metals, and high-capacity batteries. The Notice explains that the preliminary list must be published at a later date “to allow time for the supply chain review and trade pact waiver review to be completed first.” The proposed rule does not hint at what types of products might be deemed critical, but it seems that the items reviewed in the critical supply chain review, including some pharmaceuticals and semiconductors, would likely qualify. Offerors will be required to identify products containing critical components in their proposal documents so that contracting officers can apply the higher price preference.
Third, the FAR Council proposes imposing a post-award domestic content reporting requirement for contractors. Two new FAR clauses (FAR 25.1101 for supplies and 25.1102 for construction) will require contractors who are subject to one of the BAA clauses to report the domestic content of critical items, domestic end products containing a critical component and domestic construction material containing a critical component that were provided to the federal government. The purpose of this data collection effort is to better understand the impact of domestic preference rules and what domestic content the federal government is actually acquiring.
What Will Not Change?
While these changes, if implemented, will be significant, this is not the top-down revision of domestic preference rules that the EO's language seemed to invoke. The domestic content test lives on for procurements subject to Buy American restrictions. And, for now there are no changes for larger procurements above the Trade Agreements Act (TAA) threshold, as doing so would require derogation or at least amendment of the US's many trade agreements (more on this later).
There will also be no larger impact to acquisitions at or below the simplified acquisition threshold and for commercial and COTS items. Domestic preference rules will continue to apply to these acquisitions “as they did before.” Notably, the rulemaking makes no changes to FAR 52.225-5 (Trade Agreements), the clause most commonly applied to larger supply and service procurements (e.g., most Federal Supply Schedules). Of note, the Notice specifically contemplates potentially reviving the component test for COTS in the future (but not for now). Any such revival could have broad impacts on several industries to the extent that those procurements are subject to the BAA and not the TAA.
Impact on Contractors
Contractors have been carefully watching this space, as the January executive order seemed to signal larger changes to the domestic preference procurement regime. The FAR Council itself expresses its hope that these changes will have “de minimis” impact on contractors, for several reasons:
- Contractors do not have to learn a new compliance regime; the “domestic content test” continues, just with increased percentages.
- The Notice included a citation to a study5 that found that “82% of the value of US manufacturing output is comprised of domestic content” leading the FAR Council to conclude then that the BAA's increased threshold should “not inflict additional burden on contractors.” The Notice also points out that the prior increase from 50 to 55 percent did not seem to result in an increase in waivers, which the FAR Council concludes “suggest[s] companies may already be incorporating content that can meet at least the 55 percent level.”
- If a particular industry does have to adjust its supply chain, the fallback provision will apply to the extent that no company is able to meet the revised domestic content requirements in time.
- A self-serving assertion that the reporting obligation is an added burden, “but that burden should be offset by the benefit of potentially still receiving a price preference for these end products.”
The real saving grace for contractors is that these changes will only apply to procurements that are below the Trade Agreements Act threshold, currently $182,000. The contractors who operate under the Buy American Act (largely small businesses) should immediately begin evaluating what changes need to be made to their supply chain—and how long those changes will take to implement. In addition, those impacted by the changes should begin preparing to report on domestic content, as will be required under FAR 52.212-3.
Opportunity for Comment
A large portion of the Notice is dedicated to a long list of questions on which public comments are requested. These questions reveal both the intent behind the currently proposed changes and the target of potential future changes:
- Companies are asked to report if their products meet the 60/65/75 percent thresholds, and if not, if they would be willing to change their supply chain or manufacturing process to meet these thresholds in order to access the government market.
- Would increasing price preferences for domestic goods help compensate US companies for making these changes?
- Is the idea of the “fallback threshold” useful?
- Along with “critical products” and “critical components,” are there “critical services” that should be afforded price preferences?
- Potentially alarming for technology contractors, under what situations, if any, do current marketplace conditions support narrowing or lifting the statutory waiver for commercial IT?
- As flagged above, what would be the market impact of eliminating the COTS waiver?
- The Notice includes a long list of questions about the TAA. The Biden Administration is clearly very interested in strengthening domestic preferences in federal procurement, but its ability to do so will be limited so long as the US's trade agreements remain unaltered. The Notice requests industry's comments on, among other aspects of the TAA, whether its “substantial transformation” test is beneficial to certain US companies versus the “component” test used under the BAA, as well as what specific types of products sold to the federal government meet one test but not the other.
In sum, while real, tangible changes are coming for Buy American compliance, the changes are not as significant as perhaps were foretold, largely due to the limits imposed by the US's trade agreements and thanks to the FAR Council's decision to stick with the “domestic content” test—for now. The FAR Council seems to be trying to balance the administration's demand to increase Made-in-America purchasing while at the same time not imposing undue burdens on industry.
Industry should note that the FAR Council construed as consent the lack of pushback after January's increased domestic content requirements were imposed; it seems likely that a lack of response to the current Notice of Proposed Rulemaking will also be construed as support for the changes. Companies with an interest in this space should pay close attention to the comments process and consider voicing their concerns if these new proposed rules would adversely impact their business.
2 More detail in our prior alert, found here
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