As we’ve written about, it seems like there have been more changes to the Buy American Act and domestic preferences in the last few years than in decades before that. Recently, the FAR Council issued a final rule that spells out how the domestic content thresholds will increase over the next few years. This rule is effective October 25, 2022, so contractors need to be preparing for it now.
Originally passed in 1933, the Buy American Act (BAA) supports the policy of federal agencies procuring domestic materials and products, so long as the procured items or the materials thereof are present in sufficient and reasonably available commercial quantities and of a satisfactory quality, with some waivers that may apply.
There have been quite a few changes to the domestic preference rules lately. In early 2021, the percentage for the domestic component requirement under the Buy American Act, a percentage that had been in place for nearly 70 years, increased to 55%.
Also in early 2021, the Biden White House issued an executive order to reshape the bureaucratic structure for domestic preferences, doing things such as centralizing the BAA waiver process under a Made in America Director. That same executive order also asked the FAR Council to propose a potential “value added” test to replace the existing component test. Earlier in 2022, the White House released new details on the Made in America Council, designed to, among other things, work towards “achieving consistency across agencies” when it comes to BAA waivers.
The proposed rule for the final rule we are discussing today was issued in July of 2021. There are a few main changes that are occurring under the recent rule. The FAR Council also responded to various questions and comments about the earlier proposed rule.
As context, the BAA uses a two-part test to determine if something is domestic.
1. The end product or construction material must be manufactured in the United States.
2. A certain percentage of all component parts (determined by cost of the components) must also be mined, produced, or manufactured in the United States—a requirement known as the “component test” until early 2021, when it was redesignated the “domestic content test” to be consistent with terminology used in E.O. 13881, Maximizing Use of American-Made Goods, Products, and Materials. For an end product that does not consist wholly or predominantly of iron or steel or a combination of both, the cost of domestic components must exceed 55 percent of the cost of all components; the test is waived for acquisitions of commercially available off-the-shelf (COTS) items. For an end product that consists wholly or predominantly of iron or steel or a combination of both, the cost of foreign iron and steel must constitute less than 5 percent of the cost of all the components. That test is not waived for COTS items, except for COTS fasteners.
The BAA encourages use of domestic products by slapping a price increase (for evaluation purposes) on products that don’t meet the test. Large businesses offering domestic supplies receive a 20 percent price preference, and small businesses receive a 30 percent price preference. For DOD, the preference is generally 50% across the board.
Domestic Percentage Increase
The final rule will increase the domestic content threshold by ramping up the percentages every couple years. So, while the rule makes the thresholds higher and higher for domestic content, it also provides a little bit of grace in the form of a “fallback threshold that would allow for products meeting a specific lower domestic content threshold to qualify as domestic products under certain circumstances.”
Here is the schedule for the increases:
- October 25, 2022–the domestic content percentage will go from 55 percent to 60 percent
- 2024–increase to 65 percent
- 2029–increase to 75 percent
As far as timing, the percentage applies based on the year of delivery, not the year of award of the contract. “For example, a supplier awarded a five-year contract in 2027 will have to comply with the 65 percent domestic content threshold initially, but in 2030 will have to supply products with 75 percent domestic content.” An agency could allow the lower threshold to apply if the higher threshold “would not be feasible for a particular contract.”
The rule allows the use of the lower 55% in limited circumstances up through 2030 “where an 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.” A contractor has to mark which of its foreign end products exceed the 55% rule. In addition, this fallback exception is inapplicable to products consisting wholly or predominantly of iron or steel and to commercially available off-the-shelf (COTS) items.
The purpose of the fallback is twofold: “(1) Help prevent scheduled increases in the content threshold from taking work away from domestic suppliers who are actively adjusting their supply chains; and (2) avoid unintentionally raising the foreign content of Federal purchases through increased use of waivers while domestic suppliers adjust.”
The headline on critical components is that the rule references them, but the actual list of critical components and the varied enhanced evaluation factors (i.e. price preferences) will be coming soon. The idea behind the critical component concept was that certain products are so important, that an offer proposing non-domestic versions of those products will get tagged with a higher price increase than for standard, non-critical components.
But deciding what is critical, as you can imagine, is not that easy. So, this rule references the critical component enhanced prices, but the list has not been released yet. “When a final rule goes into place establishing the list and preference factors at [FAR] 25.105, the higher price preference for critical items or critical components shall be used.”
There will also be additional reporting requirements for critical components, but those have been kicked down the road to when the additional rule on critical components comes out.
Contractors supplying goods to the federal government need to have October 25, 2022 circled on their calendars, and be aware of the schedule for ramping up percentages required to be considered domestic. But it remains to be seen when the FAR Council will drop the additional details on critical components. Watch this space for additional updates coming soon.