On January 25, 2021, President Biden signed an Executive Order titled “Ensuring the Future Is Made in All of America by All of America’s Workers” (Executive Order). As PilieroMazza previously explained, the Executive Order directed that a number of actions be taken in furtherance of the Biden administration’s overarching policy to maximize the procurement of goods, products, and materials from sources that will help American businesses compete in strategic industries and help American workers thrive. This included a direction for the Federal Acquisition Regulation (FAR) Council to consider regulatory revisions to strengthen the impact of the Buy American Act (BAA). Specifically, the Executive Order required the FAR Council to consider amending the FAR to:
- replace the component test 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 threshold for the domestic content requirement; and
- increase the price preferences for domestic end products and domestic construction materials.
On July 30, 2021, the FAR Council issued a proposed rule which addresses each of these issues and threatens to create a heavy burden on government contractors. Below we examine six key takeaways from the proposed rule.
- No Replacement for Component Test . . . Yet
As a refresher, under the current BAA regulations, in order for a manufactured end product to be considered domestic, two requirements must be met: (a) it must be manufactured in the U.S., and (b) a certain percentage of all component parts (determined by cost of the components) must be manufactured in the U.S. The second part of the test is known as the “component test,” though it was redesignated the “domestic content test” to be consistent with terminology used in a Trump-era executive order.
The proposed rule does not recommend a replacement for the component test/domestic content test. Instead, it seeks public comment on the strengths and shortcomings of the component test, and “how domestic content might be better calculated to support America’s workers and businesses, strengthening our economy, workers, and communities across the country.” So, while the method for determining domestic end products will stay the same for now, the potential for a major shift remains on the horizon depending on stakeholder input.
- Increase to the Domestic Content Threshold
Though the proposed rule does not seek to change the method for determining whether an end product is domestic, it recommends major changes to the domestic content threshold required for an end product to be considered domestic.
The domestic content threshold was just increased via a final rule issued January 19, 2021 (Final Rule), right before the Executive Order was issued. The Final Rule increased the domestic content requirement from 50% to 95% for iron and steel, and it increased the requirement from 50% to 55% for other end products and construction materials, meaning the cost of domestic components must exceed 95% or 55%, respectively, of the cost of all components.
The proposed rule intends to increase the domestic content threshold for non-steel and iron products even further. Upon implementation, the threshold would increase from 55% to 60%, then increase to 65% in two years, and finally increase to 75% five years after the second increase. Contractors would be required to comply with different thresholds on the same contract if the period of performance spans the schedule of threshold increases. For instance, the proposed rule explains, “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.”
This could impose a heavy burden on contractors not only in terms of potential significant changes to their supply chains in order to meet the increased domestic content thresholds, but also in terms of keeping track of which threshold applies to a given contract over time—an answer that may vary for each contract depending on the contract’s period of performance. However, the FAR Council apparently believes the impact on contractors “could be small, if not de minimis.” In this regard, the proposed rule notes that “some, if not many, contractors may already be able to comply with the higher domestic content requirement[.]” And, because the BAA does not impose a prohibition on foreign end products but rather provides a price preference for domestic end products, “[t]hose offerors that make a business decision not to modify their supply chains over time to comply with the scheduled increases to the domestic content threshold will still be able to propose an offer for Federal contracts but will generally no longer enjoy a price preference.”
- Fallback Threshold If Domestic End Products Are Unreasonably Priced
Recognizing that companies may have difficulty adjusting their supply chains in time to meet the increased thresholds, the rule “proposes to allow, until one year after the increase of the domestic content threshold to 75 percent, for the acceptance of the former domestic content threshold in instances where end products or construction materials that meet the new domestic content threshold are not available or are of unacceptable cost.” This means that if a domestic end product that exceeds the 60% 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 exceeds 55% domestic content (but not 60% domestic content), as a domestic end product entitled to a price preference. Contractors would have to track, and indicate in their offers, which of their foreign end products exceed 55% domestic content.
- Enhanced Price Preference for Critical Products and Critical Components
The Executive Order called for the FAR Council to consider increasing the price preference for domestic end products. However, the price preference was significantly increased in the January 19 Final Rule from 6% to 20% for large business suppliers of domestic end products, and from 12% to 30% for small business suppliers of domestic end products. Likely due to the recent increase, the proposed rule does not include another increase to the price preference at this time.
Instead, the rule proposes “a framework through which higher price preferences will be applied for end products and construction material deemed to be critical or made up of critical components.” Critical items and components initially would be identified through the quadrennial critical supply chain review instituted in Executive Order 14017, “America’s Supply Chains” (March 1, 2021), as well as the National COVID Strategy. The Office of Management and Budget (OMB) would lead a further assessment to limit “critical” products to “those products for which procurement is likely to make a meaningful difference toward strengthening U.S. supply chains.” The proposed rule states that the “process for determining critical products will also determine the enhanced price preference for each critical item or end product with critical components.” The list of critical items would be determined in a separate rulemaking, and the list would be subject to changes at least every four years.
- Post-Award Reporting Requirement for Contractors
The proposed rule points out that the government currently has little data on the actual level of domestic content of the items it buys, since It generally only tracks whether or not the content meets the required threshold. The rule seeks to change this by requiring contractors “to provide the specific domestic content of critical items, domestic end products containing a critical component, and domestic construction material containing a critical component, that were awarded under a contract.” This requirement would not apply for commercially available off-the-shelf (COTS) items.
Since specific critical items or critical components would not be identified and added to the FAR until separate rulemaking occurs, this reporting requirement would not be implemented until finalization of that separate rule.
The proposed rule explains that this reporting requirement would help the government make “more informed decisions in this arena, e.g., how and when to increase domestic content thresholds, what enhanced price preference level for critical items is most efficient, etc.”
- Request for Public Comment
The FAR Council requests industry feedback on the proposed rule, including (a) ability and willingness to meet the increased domestic content thresholds, (b) utility of the fallback threshold, (c) whether and how to change the price preference, (d) how to identify “critical” items and components, (e) whether and how to replace the component test with a “value added” test, (g) impact of the domestic content reporting requirement, and (g) ways to maximize opportunities for small and disadvantaged businesses and avoid unintended barriers to entry as the government works to strengthen the impact of the BAA. Although outside the scope of this rulemaking, the proposed rule also seeks feedback on issues pertaining to other aspects of the Executive Order, including the treatment of commercial IT and COTS items under the BAA, how to limit the use of waivers and exceptions to the BAA, and the impact of trade agreements on domestic manufacturing. Comments must be submitted on or before September 28, 2021.
The FAR Council and the OMB’s Made in America Office are co-hosting a virtual public meeting on August 26, 2021, to discuss the proposed rule and obtain stakeholder input. Interested parties can learn more here.