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The Federal Acquisition Regulation (FAR) Council published a proposed rule on July 30, 2021 to overhaul the regulations implementing the Buy American Act (BAA) in federal procurements. If enacted, the proposed rule would introduce major changes by: (1) increasing the domestic content threshold in BAA acquisitions, (2) adopting enhanced price preferences for “critical products” or items consisting of “critical components,” and (3) requiring contractors to report the domestic content of “critical” items delivered under federal contracts. The rule also foreshadows other potentially major changes by soliciting input regarding the BAA’s commercial information technology (IT) exception and certain BAA waivers for commercial-off-the-shelf (COTS) items and in procurements covered by the Trade Agreements Act (TAA).

Government contractors that may be impacted by these changes should strongly consider attending an upcoming public meeting (August 26, 2021) and submitting comments (due September 28, 2021) on the proposed rule, as these could be the only meaningful opportunities they have to help shape the BAA requirements of the FAR.

BAA Background

The regulations implementing the BAA appear in FAR Part 25. Under the current regulations, federal agencies determine whether a manufactured end product or construction material qualifies as “domestic” using the following two-part test:

1. The end product or construction material must be manufactured in the United States; and
2. At least 55 percent of all component parts, measured by the cost of the components, must also be mined, produced, or manufactured in the United States.

The second element of the BAA test historically has been referred to as the “component test.” This part of the test is waived for acquisitions of COTS items (FAR 25.201(b)). For an end product consisting wholly or predominantly of iron or steel (or a combination of both), the cost of foreign iron and steel must be less than five percent of the cost of all components. This iteration of the component test is not waived for COTS items, except for COTS fasteners. Acquisitions for commercial IT currently are exempt from all BAA requirements (FAR 25.103(e)).

Importantly, the BAA does not prohibit federal agencies from purchasing foreign end products or use of foreign construction material. Rather, it encourages the use of domestic end products and construction material by imposing a price preference that makes agencies more likely to buy them. Currently, large businesses offering domestic supplies receive a 20 percent price preference, and small businesses receive a 30 percent price preference. It also is important to remember that the BAA does not apply to procurements subject to certain trade agreements, as set forth in the TAA and FAR subpart 25.4. In TAA-covered procurements, foreign end products and construction materials receive equal treatment if they come from certain countries with which the United States maintains a multilateral or bilateral trade agreement.

The New Proposed BAA Regulations

President Biden issued an executive order in January 2021 that promised to increase purchasing of American-made products and construction materials under federally-funded procurement contracts and financial assistance awards. Among the executive order’s many directives, Section 8 instructed FAR Council to consider amending the FAR to:

1. Replace the “component test” 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
2. Increase the threshold for the domestic content requirement
3. Increase the price preferences for domestic end products and domestic construction materials

The FAR Council has now spoken, issuing a proposed rule that would:

1. Immediately increase the domestic content threshold from 55 percent to 60 percent
2. Establish a schedule for gradual future increases up to 75 percent
3. Create a temporary “fallback threshold” of 55 percent for use in acquisitions where qualifying end products or construction material are not available or too expensive
4. Enact enhanced price preferences for any domestic product that is considered a “critical product” or comprised of “critical components”
5. Impose a new postaward domestic content reporting requirement for contractors

Notably, the FAR Council did not recommend replacing the component test entirely, but indicated that it will continue to study ways the test can be improved to support domestic industry.

Increases to Domestic Content Threshold

Under the proposed rule, the domestic content threshold under the BAA’s two-part test would immediately increase from 55 percent to 60 percent. In two years, the threshold would jump to 65 percent and then to 75 percent five years thereafter. Suppliers with contracts that span one or more of these changes will be expected to comply with each increase as it arises. For example, according to the proposed rule, “a supplier awarded a contract in 2027 will have to comply with the 65 percent domestic content threshold initially, but in 2029 will have to supply products with 75 percent domestic content.”

“Fallback Threshold” of 55 Percent

The proposed rule also would allow federal agencies — until one year after the domestic content threshold reaches 75 percent — to purchase end products or construction materials with at least 55 percent domestic content when products or materials meeting the then-current threshold are not available or are too expensive. For example, during the applicable period for the 60 percent threshold, “if a domestic end product that exceeds the 60 percent domestic content threshold is determined to be of unreasonable cost after application of the price preference, then for evaluation purposes the Government will treat an end product that is manufactured in the United States and exceeds 55 percent domestic content, but not 60 percent domestic content, as a domestic end product.” This so-called “fallback threshold” of 55 percent does not apply to construction material that consists wholly or predominantly of iron or steel (or a combination of both) or to end products that consist wholly or predominantly of iron or steel (or a combination of both).

Enhanced Price Preferences for “Critical Products” and “Critical Components”

In addition, the proposed rule creates a framework for imposing enhanced price preferences in procurements for end products or construction materials that are deemed to be “critical” or made up of “critical components.” This would require offerors to identify in their proposals all domestic end products that are critical or contain a critical component. The products subject to the enhanced price preferences, along with the preferences themselves, will be identified in a separate rulemaking. According to the proposed rule, the process for identifying critical items and critical components will align with the quadrennial critical supply chain review instituted in E.O. 14017, America’s Supply Chains (86 FR 11849), as well as the National Strategy for the COVID-19 Response and Pandemic Preparedness. Not all critical products identified through the supply chain review will necessarily qualify for the preference, however. Instead, the Office of Management and Budget (OMB) will lead a subsequent assessment to identify “those products for which procurement is likely to make a meaningful difference toward strengthening U.S. supply chains.”

Postaward Reporting Requirement

Finally, the proposed rule would require contractors to disclose, after contract award, the specific domestic content of the critical items, domestic end products containing a critical component, and domestic construction material containing a critical component they will deliver under the contract. This requirement will be implemented via two new FAR clauses, though neither clause would apply to COTS items or become “operational” until the rulemaking specifying critical items and components is completed. According to the FAR Council, this reporting requirement is intended to provide the government “insight into the actual domestic content of products sold under contract and thereby support the Administration’s broader supply chain security initiatives.”

Up Next: Taking Aim at Longstanding BAA Exceptions and Waivers?

Since issuing the E.O., the Biden administration has consistently signaled that it intends to challenge the continuing need for several BAA exceptions and waiver long-relied upon by government contractors. This includes the BAA’s commercial IT exception, the partial BAA waiver for COTS items, and the full BAA waiver in TAA-covered procurements. The proposed rule reinforces this message by seeking public input on the following questions:

1. With respect to the BAA’s commercial IT exception, under what situations (if any) do current marketplace conditions support narrowing or lifting the statutory waiver?
2. As to the partial BAA waiver for COTS items, the FAR Council asks:
   • Has the use of COTS expanded (or narrowed) since 2009 in ways that may not have been originally contemplated?
   • Has the COTS waiver benefitted domestic firms and their employees? Why or why not?
   • Under what situations, if any, do current marketplace conditions support narrowing or lifting the partial waiver?
   • Regardless of any other changes to the COTS partial waiver, should the federal government gather data on the domestic content of all COTS items, some COTS items, or categories of COTS items to inform future policy making? If so, what items or categories should be addressed? How might this be accomplished consistent with the intent of the COTS partial waiver to reduce administrative burdens?
   • Recommendations to maintain and increase domestic production of COTS items (both manufacturing of the end product and its components) in critical industries
3. Regarding TAA-covered procurements:
   • What specific types of products are sold to the government that count as being made in America under the TAA (U.S.-made end product’), but contain less than 55 percent domestic content under the BAA?
   • Do the differing standards provide a benefit to domestic firms?
   • Is the “substantial transformation” under TAA a useful tool to promote good domestic jobs and domestic manufacturing? Why or why not?
   • What steps could the government take, consistent with its trade obligations, to acquire useful information about the content of goods procured pursuant to trade obligations, including in critical supply chains?
   • Do you have any recommendations to maintain and increase domestic production in critical industries in acquisitions subject to trade obligations?

Conclusion

Understandably, most government contractors have taken a “wait and see” approach since President Biden announced in January 2021 that the FAR’s BAA regulations would change. But now that the administration has laid its cards on the table in a proposed rule, the time for action has arrived. Contractors must immediately turn to evaluating the impact of the proposed rule on their business, supply chains, and compliance programs. They also should strongly consider weighing in on the proposed rule, either by attending the public meeting scheduled for August 26, 2021 or submitting comments to the FAR Council by September 28, 2021, or both. If you have questions about the proposed BAA rule or would like to become involved in the rulemaking process, please contact one of the Miller & Chevalier attorneys listed below:

Alejandro (Alex) L. Sarria, asarria@milchev.com, 202-626-5822

Jason N. Workmaster, jworkmaster@milchev.com, 202-626-5893

Richard A. Mojica, rmojica@milchev.com, 202-626-1571

Dana Watts, dwatts@milchev.com, 202-626-5875

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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.