Proposed Rule Portends Increased Contractor BAA Obligations

Scott Arnold and Carolyn Cody-Jones

On September 14, 2020, the FAR Council published a proposed rule, Case 2019-016 “Maximizing Use of American-Made Goods, Products, and Materials,” 85 FR 56558, which proposes certain increased and new thresholds for contractors subject to the Buy American Act (“BAA”). The proposed changes implement Executive Order 13881 (July 15, 2019). There is a November 13, 2020, deadline for interested parties to submit written comments for consideration in the final rule.

The key proposed changes are as follows:

    1. Items subject to a minimum domestic component test would need to meet a new threshold of 55 percent, an increase of five percent from the current 50 percent threshold. Domestic end items and construction materials would need to be manufactured in the United States, and would need to be manufactured from components which, based on cost, are over 55 percent domestic (components mined, produced, or manufactured in the United States).
    2. A new, distinct threshold would be created for end items and construction materials that are made predominantly of iron or steel or a combination of both—meaning that the iron and steel content of the item exceeds half of the total cost of all components in the item. For such items, the domestic component content threshold would be 95 percent. In other words, for items made predominantly of iron or steel to be considered domestic, they would need to be manufactured in the United States and contain less than 5 percent non-domestic components by cost. This is a significant change; currently these items are subject to a much lower domestic content requirement—anything over 50 percent.
    3. The commercially available off-the-shelf (“COTS”) exception to the cost of component requirements would still apply to end items and construction materials that are not made predominantly of iron or steel. In other words, such COTS items would need to be mined, manufactured, or produced in the United States, but there would be no requirement that any portion of the components of such COTS items be domestic.
    4. The COTS exception to the cost of component requirements would not apply to end items and construction materials that are made predominantly of iron or steel. The rule set forth in (2) above would apply—to be considered domestic, such COTS items would need to be manufactured in the United States and contain less than five percent non-domestic components by cost.
    5. However, the rule set forth in (4) above would not apply to fasteners—hardware devices that mechanically join or affix two or more objects together—such as nuts, bolts, pins, rivets, nails, clips, and screws. Fasteners, even if made predominantly of iron or steel, would still fall within the COTS exception in (3) above, such that they only need to be manufactured in the United States. The source of components would not matter.
    6. Price evaluation adjustments made to bids for non-domestic items would increase from six percent to 20 percent (if bidder is not small) and from 12 percent to 30 percent (if bidder is a small business). For Department of Defense procurements, the existing 50 percent price evaluation adjustment applied to offers of non-domestic items would still apply.

Notwithstanding the potential for these proposed changes to be incorporated into a final rule, the changes will only impact contractors if the basic BAA rules are not overridden by the Trade Agreements Act (“TAA”) or Balance of Payments Program. The BAA only applies to purchases over the micropurchase threshold and under the threshold for TAA applicability, which is currently $182,000 for supply contracts and $7,008,000 for construction contracts. That said, even when a contract exceeds the TAA threshold, the BAA still applies to certain categories of acquisitions, including, but not limited to, sole source awards, small business set-asides, and certain national security or national defense purchases.

Takeaways

    • Contractors should analyze how these proposed BAA revisions in the Federal Acquisition Regulation would apply to their products supplied in contracts covered by the BAA. The proposed changes, if adopted in the final rule, have the potential to impact entire supply chains subject to the BAA, and affected prime contractors will need to flow down domestic content requirements to subcontractors providing components or materials for the prime contractor’s end product.
    • As these are proposed changes, the government is expressly seeking industry feedback on how they would impact contractors. 85 FR 56561-62. To the extent the changes would create a hardship, it may be worth commenting by the November 13, 2020 deadline.

We will provide updates as the rulemaking process continues—stay tuned.