February 19, 2021 by JD Supra >
To protect the U.S. industrial base, among other reasons, companies that sell goods to the U.S. government are required to comply with domestic source restrictions that dictate the percentage of domestic content and have the potential to impact design, sourcing, and manufacturing decisions. In many respects, these restrictions are out of step with the decades-long trend toward globalization of commercial supply chains.
Two recent developments, the implementation of former President Trump’s July 15, 2019, Executive Order 13881, Maximizing Use of American-Made Goods, Products, and Materials, and President Biden’s January 25, 2021, Executive Order 14005, Ensuring the Future is Made in All of America by All of America’s Workers, continue to tighten these restrictions. These requirements have the potential to cause a further divergence between commercial and government production, reversing the push toward commercial contracting and eliminating the associated efficiencies and cost-savings to the U.S. taxpayers.
Overview of the Buy American Act
The Buy American Act (BAA), 41 U.S.C. §§ 8301-8305, provides a price preference for goods sold to the U.S. government that are deemed to be “domestic end products.” To qualify for that designation, a product has to be both manufactured in the United States and the majority of its components have to be sourced domestically. For decades prior to the January 2021 final rule, the domestic component, or content, requirement, was set at 50%. In addition, that domestic content requirement was waived for all commercial-off-the-shelf (COTS) items.
Implementation of EO 13881’s Changes to the Buy American Act
Three Major Changes
On January 19, 2021, the Federal Acquisition Regulation Council (FARC) issued a final rule, effective January 21, 2021, implementing President Trump’s EO 13881. The rule, which applies to solicitations issued on or after February 22, 2021, implements the following three major changes for procurements subject to the BAA:
Raises the required amount of domestic content from 50% to 55% as measured by cost.
Except for commercial-off-the-shelf (COTS) fasteners (g., nuts, bolts, pins, rivets, nails, and screws), domestic iron and steel end products and construction material, including commercial items and COTS items, may contain no more than 5% foreign iron or steel.
Raises the price evaluation preference for domestic items in non-Department of Defense (DoD) procurements from 12% to 30% for small businesses and from 6% to 20% for large businesses (the DoD price preference, 50% regardless of the size of the business before this rule, remains the same).
Impact of the Changes
While the percentage changes for domestic content from 50% to 55% may not be large, it could have major impacts on production decisions. For items that previously qualified as domestic such that they received the BAA price evaluation preference, contractors whose products no longer qualify may now need to make significant sourcing and production changes to maintain those price advantages over foreign-manufactured goods.
To the extent contractors are unwilling or unable to make those changes and thereby lose the now-higher price preference, these increased domestic content requirements may have the counter-intuitive impact of providing an advantage to foreign-manufactured goods in some circumstances. Hopefully, the increased price-preference will prove a sufficient motivation to make the necessary sourcing changes.
The separate higher standards for iron and steel end products, which implement for the first time in the BAA regulations a distinction that has existed for years in the Buy America domestic source restrictions applicable to certain federal grant programs (see, e.g., Federal Transit Administration regulations at 49 C.F.R. Part 661 and Federal Highway Administration regulations at 23 C.F.R. § 635.410), may present an even greater challenge.
Because the standard 50% domestic content requirement previously applied to iron and steel end products and construction material, U.S. manufacturers may have to increase the percentage of domestic metal in their iron or steel products by 45% to qualify for the price preference under the new, separate domestic content requirement of 95% for iron or steel products. That may not be economically feasible, and even it if is, it may not be possible before the date on which these new rules will be incorporated into solicitations and resulting contracts. This challenge is mitigated to a degree by the fact that contractors that work on sub-awards funded under federal grants subject to the Buy America regulations likely already manufacture steel and iron end products that comply with the new BAA rules.
Before the issuance of the final rule, the government does not appear to have collected any information regarding how many domestic products will now be considered foreign as a result of these changes. While the final rules recognize that it “has the potential to slightly increase the estimated percentage of foreign offers,” it makes clear that neither the FARC nor the Defense Acquisition Regulatory Council (DARC) “have any data on how many currently domestic products would fall into this category … [n]or do the Councils have any knowledge as to which option an offeror of such products would select since this is a business decision to make.”
While these changes, mandated by EO 13881, were unavoidable, the lack of any market analysis is an unfortunate oversight in a rule purportedly designed to give additional protection to the U.S. industrial base where there is a risk that the increased price preference may be insufficient to motivate domestic manufacturers to make the product changes necessary to continue to qualify for those preferences.
Examples of the New Iron and Steel Requirements
To help contractors understand how the new iron and steel requirements will be implemented, the rule includes these helpful examples:
A steel beam. For purposes of this example, this steel beam consists wholly of steel. The cost of all material in the beam, excluding final manufacture, overhead costs, and profit, is $50. If the steel beam is rolled from steel bloom, then the steel beam probably contains either all domestic steel or all foreign steel. However, if the beam is welded or riveted from separate steel plates, then it is conceivable that some of the steel plates could have been formed from steel not produced in the United States. If the cost of the foreign steel plates used to make the beam equals or exceeds $2.50 (i.e., 5% of the cost of all the components used in the product), then the entire beam is a foreign construction material.
A steel safe. The steel safe may include other components such as a combination lock, a dehumidifier, or drawers. The safe costs $1,000 and the cost of all components in the safe is $500. If the cost of the steel plates or other steel mill products (excluding COTS fasteners) utilized in the manufacture of the safe exceeds $250 (i.e., 50% of the total cost of all the components as defined in FAR 25.003), then the safe consists predominantly of steel. If the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the safe and a good faith estimate of the cost of all foreign iron or steel components (excluding COTS fasteners) is less than $25 (i.e., 5% of the cost of all the components used in the product), then the safe is a domestic end product.
A refrigerator. The refrigerator consists of many components and materials. The exterior cabinet and door and the inner cabinet of this refrigerator are steel. The refrigerator also includes insulation, a cooling system, refrigerant, and fixtures. The refrigerator costs $2,000 and the cost of all components in the refrigerator is $1,000. If the cost of the steel plates or other steel mill products (excluding COTS fasteners) utilized in the manufacture of the refrigerator does not exceed $500 (i.e., 50% of the total cost of all the components as defined in FAR 25.003), then the refrigerator does not consist predominantly of steel.
President Biden’s EO 14005
In his first three weeks in office, President Biden has issued a flurry of 30 Executive Orders, including one that will have both near-term and, potentially, long-term impacts on the BAA regime. Following through on a campaign promise, EO 14005 provides that it is the policy of the new administration to use grants and procurements to “maximize the use of goods, products, and materials produced in, and services offered in, the United States.” The EO, which revokes several of President Trump’s BAA Executive Orders and supersedes others, including EO 13881, to the extent they are inconsistent with EO 14005, does not, however, mandate any immediate changes to the BAA rules. Rather, EO 14005 tightens waiver processes, heightens reporting requirements, and directs a review of the current laws and regulations to determine what, if any, changes are necessary.
While the EO directs a review of the BAA, its impact is much broader, requiring a general review of all statutes, regulations, rules, and EOs relating to grants or procurements that provide a preference for U.S. goods referred to generally as “Made in America Laws.” It also establishes a “Made in America Office” in the Office of Management and Budget, to which any waiver request must be submitted with a detailed supporting justification. No doubt these soon-to-be-implemented waiver requirements will impact contractors by slowing the process and putting in place a more rigorous review of waiver justifications.
The EO also does the following:
Directs review of the current list of nonavailable articles.
Requires agencies file an initial report with the new Made in America Director regarding implementation and compliance with Made in America Laws, use of longstanding waivers, and recommendation on how to further effectuate the EO, as well as bi-annual reports thereafter.
Directs that there be increased transparency relating to waivers.
With regard to the BAA, the EO directs the FARC to promote enforcement of the BAA by considering the following revisions:
Replace the “component test” in Part 25 of the FAR that is used to identify domestic end products and domestic construction materials 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.
Increase the numerical threshold for domestic content requirements for end products and construction materials.
Increase the price preferences for domestic end products and domestic construction materials.
Takeaways for Government Contractors
For companies that expect to compete for government contracts subject to the BAA in the near future, it is important to confirm your goods meet the increased domestic content requirements – 95% for iron and steel end items, 55% for everything else – before certifying compliance. And while it will be some time before we can assess the full impact of EO 14005, in the near term the heightened review of waivers and the increased focus on domestic sourcing suggest that contractors should review their manufacturing process to ensure compliance with all Made in America laws and, to the extent contractors are relying on waivers, confirm that the justification supporting those waivers are still valid.
These domestic source requirements are complex, and with the additional attention and more rigorous review comes an increased likelihood of enforcement actions for inaccurate certifications and other violations.