On July 30, 2021, the Federal Acquisition Regulation (FAR) Council issued a proposed rule to amend the FAR to implement Section 8 of President Biden’s “Made in America” executive order, EO 14005, and strengthen the Buy American Act (BAA) requirements. The proposed rule advances the Biden administration’s agenda to strengthen the use of federal procurement to support American manufacturing and bolster critical supply chains. Characterized as “the most robust changes to the implementation of the Buy American Act in almost 70 years,” the proposed rule follows the Administration’s January 2021 “Made in America” Executive Order and the February 2021 Executive Order on America’s Supply Chains and is expected to be the first of several proposed reforms to procurement policy.
Accordingly, government contractors should begin to evaluate their current supply chains and assess the practical limitations on meeting the requirements set forth in the proposed rule. Comments are due by September 28, 2021.
What is Included in the Proposed Rule?
Increased Domestic Content Threshold
The rule proposes to incrementally increase the domestic content threshold over time; initially increasing the amount from 55% to 60%, then increasing the threshold to 65% in two years, and finally increasing the threshold further to 75% in five years after the second increase. The proposed rule notes that a contractor holding a contract with a period of performance that spans the schedule of threshold increases will be required to comply with each increased threshold for the items in the year of delivery. For example, 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.
Notably, the “Made in America” executive order required the FAR Council to consider amending the FAR to replace the component test used to identify domestic end products and construction material with a test under which domestic content is measured by the value added to the product through U.S.-based production or U.S. job-supporting economic activity. Although the proposed rule focuses on increased domestic content and does not seek to replace the component test, the FAR Council seeks public comment regarding the strengths and shortcomings of the “component test” as currently structured and how domestic content might be better calculated to achieve the underlying goals of BAA reform.
Critically, it is important to note that the proposed changes such as the increased domestic content threshold and the post-award reporting requirement will not generally apply to commercially available off-the-shelf (COTS) items, as COTS items are not subject to the component test.
This rule also proposes to implement a temporary fallback threshold allowing federal agencies to accept 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. For example, if the government determines that a domestic end product that exceeds the 60 percent domestic content threshold is an unreasonable cost after application of the price preference, then for evaluation purposes, the government will treat an end product that is manufactured in the U.S. and exceeds 55 percent domestic content, but not 60 percent domestic content, as a domestic end product.
The purpose of this temporary fallback threshold is twofold. First, the fallback seeks to help prevent scheduled increases in the content threshold from taking work away from domestic suppliers who are actively adjusting their supply chains. Second, the fallback will ideally avoid unintentionally raising the foreign content of federal purchases through increased use of waivers while domestic suppliers adjust. This fallback threshold would last until one year after the 75% domestic content threshold takes effect.
Enhanced Price Preference for Critical Products and Critical Components
The proposed rule creates a framework for higher price preferences for end products and construction material considered to be critical or made up of critical components. The primary goal of the enhanced price preference for critical items and components is to provide a steady demand for domestically produced critical products. The process for identifying these critical items and critical components would use the Critical Supply Chain review instituted under EO 14017 and the pandemic supply chain strategy. The Office of Management and Budget will also conduct an assessment to further refine the list of products designated as critical. The FAR Council will undertake a separate rulemaking to add the list of critical products and components to the FAR and to establish the associated preferences. Once the list is established in the FAR, it will be published in the Federal Register for public comment at least once every four years.
Enhanced Transparency and Reporting Requirements
The proposed rule requires contractors to report the specific domestic content of critical items, domestic end products containing a critical component, and domestic construction material containing a critical component. Currently, contractors tell the government if they meet the content threshold rather than reporting the total domestic content in their products. By imposing these new reporting requirements, the administration seeks to increase BAA compliance and gain insight into the actual domestic content of products sold to the government in an effort to support its broader supply chain security initiatives.
What Does This Mean for Government Contractors?
The proposed rule represents the next step in the Biden administration’s effort to invest in American manufacturing and infrastructure. Government contractors need to start assessing the practical limitations on meeting the newly proposed requirements, including not only the increased thresholds, but also the challenges inherent in ascertaining the exact domestic content of manufactured goods.
Given the potential impact the proposed rule could have on supply chains moving forward, federal contractors and other industry partners should consider submitting comments on the rule to the FAR Council by September 28, 2021, as well as participating in the FAR Council’s upcoming virtual public meeting on August 26, 2021. The FAR Council has specifically indicated that it wants to better understand: (1) whether products provided to the federal government currently meet the increased domestic content thresholds; (2) whether contractors would be willing and able to adjust their supply chain to comply with the revised thresholds within the provided timeframe; (3) what challenges contractors may face; (4) the costs and benefits associated with making supply chain adjustments; (5) the effectiveness of current price preferences and the anticipated effectiveness of providing enhanced price preferences; (6) what factors to consider in the process of identifying critical items and components; and (7) what steps the federal government should take to maximize the opportunities for small and disadvantaged businesses and avoid unintended barriers to entry. The FAR Council also has indicated it will consider both smaller and larger increases in the domestic content threshold as well as differently timed increases in the final rule.
Faegre Drinker will continue to monitor new developments related to the Buy American Act. For more information regarding the proposed rule and its potential impact on your operations, please reach out to any of the team members listed below.