New Changes to the Buy American Act to Impact Federal Contractors
Bilzin Sumberg Publication
Publication
April 1, 2022
On March 7, 2022, the Federal Acquisition Regulatory Council (FAR) published a final rule implementing changes to Buy American requirements for federal contractors. The final rule is largely identical to a proposed rule announced on July 30, 2021, by the FAR. The origin of these recent changes to the Buy American Act (BAA) can be traced to Executive Order 14005, Ensuring the Future is Made in All of America by All of America’s Workers, signed by President Biden in his first week in office, which launched a whole-of-government initiative to strengthen the use of federal procurement to support American manufacturing. The final rule makes several important changes to the BAA, including (1) increasing domestic content requirements, (2) establishing a “fallback” threshold for products that meet the current domestic content requirements, but not the rule’s new, increased thresholds, and (3) providing an enhanced price preference for certain critical products and components.
What is the BAA?
The United States government is the single largest purchaser of consumer goods in the world. Given the United States’ $600 billion annual procurement, the federal government has endeavored to “reinvest” in itself by creating policies that push federal agencies to procure materials and products available domestically. The codification of these policies is reflected in the BAA. The BAA requires federal agencies to procure domestic materials and products if: (1) the procurement must be intended for public use within the United States and (2) the items to be procured or the materials from which they are manufactured must be present in the United States in sufficient and reasonably available commercial quantities of satisfactory quality. The most common types of procurements involving the BAA include: (1) arms, ammunition, or war materials, (2) purchases indispensable for national security, (3) sole-source acquisitions, and (4) small business set-aside contracts. Procurements that are exempt from the BAA, such as procurements over $183,000 under the Trade Agreements Act, are not affected by the recent rulemaking.
Domestic Content Requirements
A manufactured product generally qualifies as a “domestic end product” (excluding wholly or predominantly iron or steel products) if (1) it is manufactured in the United States, and (2) the cost of the components mined, produced, or manufactured in the United States exceed by a certain percent the total cost of the end product’s components. Before the FAR’s pronouncement of the final rule, the BAA only required 55% of the total cost of components to consist of components mined, produced, or manufactured in the United States. The final rule increases the domestic content requirement to 60% effective October 25, 2022, followed by an increase to 65% on January 1, 2024, and an increase to 75% on January 1, 2029. The gradual increase is meant to give small businesses time to adjust their supply chains. As an example, a widget manufactured domestically which contains 57% domestic components, currently qualifies as a “domestic end product” under the BAA, but as of October 25, 2022, the widget will no longer qualify as such due to the change in threshold.
Fallback Provisions
The proposed final rule contains a “fallback” provision that allows agencies to use the existing 55% domestic end product threshold under limited circumstances if the agency determines that there are no products available that meet the new threshold, or such products are of unreasonable costs. Time may be of the essence, as the fallback threshold sunsets in 2030, one year after the domestic content threshold increases to 75%. For illustration purposes, if on January 2, 2024, an agency wishes to procure certain widgets manufactured domestically that contain only 57% domestic components, and the agency determines no other widgets manufactured domestically meet the 65% domestic component requirement, the agency may purchase the 57% domestic product widgets instead, because these meet the fallback threshold of 55%. By contrast, effective 2030, the widget must meet the 75% threshold (or the domestic end product threshold in place at the time).
Enhanced Price Preference for Critical Products and Components
Though still pending more specific information, the FAR Council intends to issue further rulemaking aimed at making it more difficult for agencies to simply purchase foreign components and products because of cost savings. Currently, agencies may deem the cost of a domestic product as “unreasonable” if the cost of the domestic product is above a certain threshold as compared to a foreign domestic product. The final rule provides for a framework through which higher price preferences will be applied to end products and construction materials which are deemed to be critical or made up of critical components. A subsequent rulemaking will establish the definitive list of critical items and components, as well as their associated enhanced price preferences. Hypothetically, if a foreign critical item is currently 20% cheaper than the domestic counterpart, an agency may currently justify the purchase of the foreign product. Under an enhanced price preference, the foreign critical item may need to be 40% cheaper than its domestic critical counterpart to justify the agency’s actions, therefore making it tougher for agencies to select foreign products.
As the Biden Administration continues to focus on boosting American manufacturing, especially in light of the demands and strains supply chains have felt, both at home and around the world, during the COVID-19 pandemic, we expect to continue seeing changes to the BAA. Federal contractors will want to monitor future increases in the domestic content threshold, look out for further rulemaking on critical products and components, and ensure that they are complying with all disclosure requirements including possible post-award disclosures of domestic end products and critical products and component requirements.
What is the BAA?
The United States government is the single largest purchaser of consumer goods in the world. Given the United States’ $600 billion annual procurement, the federal government has endeavored to “reinvest” in itself by creating policies that push federal agencies to procure materials and products available domestically. The codification of these policies is reflected in the BAA. The BAA requires federal agencies to procure domestic materials and products if: (1) the procurement must be intended for public use within the United States and (2) the items to be procured or the materials from which they are manufactured must be present in the United States in sufficient and reasonably available commercial quantities of satisfactory quality. The most common types of procurements involving the BAA include: (1) arms, ammunition, or war materials, (2) purchases indispensable for national security, (3) sole-source acquisitions, and (4) small business set-aside contracts. Procurements that are exempt from the BAA, such as procurements over $183,000 under the Trade Agreements Act, are not affected by the recent rulemaking.
Domestic Content Requirements
A manufactured product generally qualifies as a “domestic end product” (excluding wholly or predominantly iron or steel products) if (1) it is manufactured in the United States, and (2) the cost of the components mined, produced, or manufactured in the United States exceed by a certain percent the total cost of the end product’s components. Before the FAR’s pronouncement of the final rule, the BAA only required 55% of the total cost of components to consist of components mined, produced, or manufactured in the United States. The final rule increases the domestic content requirement to 60% effective October 25, 2022, followed by an increase to 65% on January 1, 2024, and an increase to 75% on January 1, 2029. The gradual increase is meant to give small businesses time to adjust their supply chains. As an example, a widget manufactured domestically which contains 57% domestic components, currently qualifies as a “domestic end product” under the BAA, but as of October 25, 2022, the widget will no longer qualify as such due to the change in threshold.
Fallback Provisions
The proposed final rule contains a “fallback” provision that allows agencies to use the existing 55% domestic end product threshold under limited circumstances if the agency determines that there are no products available that meet the new threshold, or such products are of unreasonable costs. Time may be of the essence, as the fallback threshold sunsets in 2030, one year after the domestic content threshold increases to 75%. For illustration purposes, if on January 2, 2024, an agency wishes to procure certain widgets manufactured domestically that contain only 57% domestic components, and the agency determines no other widgets manufactured domestically meet the 65% domestic component requirement, the agency may purchase the 57% domestic product widgets instead, because these meet the fallback threshold of 55%. By contrast, effective 2030, the widget must meet the 75% threshold (or the domestic end product threshold in place at the time).
Enhanced Price Preference for Critical Products and Components
Though still pending more specific information, the FAR Council intends to issue further rulemaking aimed at making it more difficult for agencies to simply purchase foreign components and products because of cost savings. Currently, agencies may deem the cost of a domestic product as “unreasonable” if the cost of the domestic product is above a certain threshold as compared to a foreign domestic product. The final rule provides for a framework through which higher price preferences will be applied to end products and construction materials which are deemed to be critical or made up of critical components. A subsequent rulemaking will establish the definitive list of critical items and components, as well as their associated enhanced price preferences. Hypothetically, if a foreign critical item is currently 20% cheaper than the domestic counterpart, an agency may currently justify the purchase of the foreign product. Under an enhanced price preference, the foreign critical item may need to be 40% cheaper than its domestic critical counterpart to justify the agency’s actions, therefore making it tougher for agencies to select foreign products.
As the Biden Administration continues to focus on boosting American manufacturing, especially in light of the demands and strains supply chains have felt, both at home and around the world, during the COVID-19 pandemic, we expect to continue seeing changes to the BAA. Federal contractors will want to monitor future increases in the domestic content threshold, look out for further rulemaking on critical products and components, and ensure that they are complying with all disclosure requirements including possible post-award disclosures of domestic end products and critical products and component requirements.
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