March 10, 2022
On March 7, 2022, the Federal Acquisition Regulatory Council promulgated a final rule aimed at increasing federal government preferences for goods and construction materials that are domestically manufactured and increasing the required domestic content threshold for purchases governed by the Buy American Act.
President Joseph R. Biden has made it a priority for his administration to strengthen the impact of federal procurement preferences in the Buy American statute, and this final rule is a result of these efforts. The rule is based on Executive Order (EO) 14005, Ensuring the Future Is Made in All of America by All of America's Workers, signed by President Biden during his first week in office, which directed the government to strengthen Buy American rules and increase the federal government’s procurement of American-made goods.
The administration continued its focus on federal purchasing preferences in EO 14017, America’s Supply Chains, which triggered a comprehensive review of U.S. supply chains and ordered agencies to identify ways to use domestic production to secure the American economy against shortages of critical and essential goods. President Biden reinforced his administration’s focus on strengthening Buy American rules in his March 1, 2022, State of the Union Address. For more details, see McGuireWoods’ Jan. 26, 2021, alert on the Buy American EO, and March 1, 2021, alert on the comprehensive review of the U.S. supply chain EO.
The March 7 final rule makes several significant changes to FAR part 25, which implements the statutory requirements of the Buy American Act, including:
Increased Domestic Content Requirements
FAR part 25 provides certain pricing preferences for “domestic end products” consistent with the Buy American Act. Currently, the FAR uses a two-part test to determine whether a manufactured end product or construction material is a domestic end product. First, the end product must be manufactured domestically. Second, a certain percentage of all component parts that make up the end product or construction material must also be produced or manufactured domestically (a requirement which does not apply to commercially available, off-the-shelf (COTS) items).
The final rule increases the percentage of components required to be produced within the United States necessary to meet the second part of this definition. Specifically, the final rule amends the definition of “domestic end product” to increase the percentage of domestically made components, first from 55 percent to 60 percent, then to 65 percent in calendar year 2024, and the to 75 percent in calendar year 2029. The current 55 percent threshold will remain in effect until Oct. 25, 2022, as the final rule indicates is intended to provide a “grace period” for industry to adjust to the higher threshold. The percentage of each component is determined by the cost to manufacture, produce or acquire the component.
The final rule does not make material changes to the COTS exception.
The final rule also provides that federal contractors must comply with the increased percentage of domestically made components in effect at the time of delivery, not the time of the award of the contract or task order, although it allows for a limited exception. This exception, which allows a contractor to comply with the threshold in place at the time of contract award for the entire period of performance of that contract, can be granted only by the agency’s senior procurement executive. In so doing, the agency’s senior procurement executive must consult with and consider the advice of the Office of Management and Budget (OMB), Made in America Office, prior to deciding to grant an exception. To that end, we expect any exceptions to be functionally limited and based on unique supply chain-related requirements, given the key policy goals that are implemented through the final rule.
FAR Council Declines to Replace Component Test
In EO 14005, President Biden aimed to increase domestic content requirements and close existing loopholes upon which many government contractors currently rely. In particular, the order instructed the FAR Council to consider replacing the “component test” in FAR part 25 (described above) used to identify domestic end products. In the final rule, the FAR Council has chosen to not yet replace the component test, although it will continue to seek additional public comment on viable replacements to it.
Specifically, the FAR Council stated it would “consider the feedback received [related to the component test] for other activities required by the EO, as well as related initiatives to strengthen domestic supply chains.”
The “Fallback” Threshold Requirement
The final rule establishes the so-called fallback threshold requirement that will apply when goods subject to the increased percentage of domestically made component requirements are not available at the enhanced percentage requirement or are available only at an unreasonable cost. When the contracting officer deems the fallback applicable, the goods may be provided at the current standard of 55 percent domestically made components. The final rule is clear that the fallback threshold is available only until calendar year 2030 after which it will no longer be in effect. The final rule indicates that the rationale for sunsetting the fallback threshold is 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 Select Critical Products
The Buy American Act provides a price preference for goods that meet the definition of “domestic end product,” as opposed to an outright ban on the purchase of foreign end products, affording a domestic end product a percentage-based price preference. The price preference is implemented by adding a specified percentage to the price of any foreign products that are proposed, inclusive of import duties, and then measuring this adjusted price against proposed domestic end products. As such, while the price preference for domestic end products often serves as a determinative factor within the contracting officer’s cost reasonableness analysis, it nonetheless is not uncommon for the price of a domestic end product to fail to exceed the Buy American Act price preference. In these cases, the contracting officer may select the foreign end product in a federal procurement.
Currently, FAR part 25 provides that large businesses offering domestic end products receive a 20 percent price preference and small businesses offering domestic end products receive a 30 percent price preference. The final rule indicates that the OMB will promulgate a rule that sets forth an enhanced price preference for select “critical items.” These critical items will include products that are critical to the United States supply chain or are made up of critical components. OMB has not yet published an ongoing rulemaking through which the list of critical products and components will be established. Once that list is established, however, the OMB will assign an additional price preference to each product and component deemed critical. The final rule indicates that this forthcoming OMB rule will consider the results of the U.S. supply chain review conducted pursuant to EO 14017, and the national COVID-19 strategy.
Government contractors (including subcontractors) that sell products to the federal government should review their supply chain, sourcing, and manufacturing processes to ensure continued domestic sourcing compliance under the final rule. Importantly, the administration’s stated goal under the final rule is to ensure “that when the federal government spends taxpayer dollars they are spent on American-made goods by American workers and with American-made component parts.” Consequently, the final rule may make it more difficult for foreign suppliers to compete for – or otherwise supply – certain federal government contracts. Government contractors and their subcontractors and vendors should continue to monitor developments in this area, as compliance with these changing requirements may require significant changes to their supply chain management.
Please contact the authors if you have any questions about Buy American policies and their potential impact on your business, or if you require assistance interpreting the governing rules and regulations.
About McGuireWoods’ Government Contracts Team
The Government Contracts team at McGuireWoods has decades of collective experience assisting contractors and subcontractors in government contracting, including the navigation of proposal submission and compliance issues. Based strategically in the Washington, D.C., area, our full-service practice leverages McGuireWoods’ strong defense and national security credentials at every step in the procurement process. Our attorneys counsel clients ranging from small businesses to the nation’s largest government contractors on issues arising under the Federal Acquisition Regulation and its agency-specific supplements, and our team regularly assists clients in negotiating significant federal contracts and contract modifications.
We also have the deep experience necessary to defend our clients’ interests in bid protests, in litigation with the government and other contractors, and in investigations and regulatory enforcement actions involving a wide range of federal and state agencies, inspectors general, and law enforcement personnel. We provide these services to clients operating in a broad variety of industries and sectors, including defense, national and homeland security, intelligence support, technology, construction, healthcare, aerospace and energy.