Scott Arnold, Justin A. Chiarodo, and Robyn N. Burrows
As directed in President Biden’s January 25, 2021, Executive Order we discussed six months ago, last week the FAR Council proposed increases to the Buy American Act (“BAA”) domestic content requirements, and previewed enhanced price preferences and reporting obligations for “critical” domestic products and components under the BAA.
The proposed rule, issued on July 30, 2021, contains three key elements: (1) Phased increases in domestic content thresholds from the current 55% to 75% by 2029, (2) enhanced price preferences for critical products and components, and (3) post-award reporting requirements for critical products and components.
A virtual public meeting to discuss the proposed rule will be held on August 26, 2021, and comments are due by September 28, 2021. The DAR Council also has an open DFARS Case relating to BAA provisions (2019-D045).
We provide an overview of the rule below along with practical takeaways for contractors to consider in light of these potentially significant changes.
Phased Increases in Domestic Content Thresholds from 55% to 75% by 2029
The proposed rule contains a plan for phased increases in the domestic content thresholds:
- Immediate increase to 60% (from current 55% threshold)
- 65% by 2024
- 75% by 2029
Contractors with periods of performance spanning this proposed timetable would be expected to comply with each increased threshold for the items in the year of delivery.
To help contractors during this transition period, the rule also proposes a temporary fallback threshold for end products and materials that do not consist wholly or predominantly of iron or steel, or a combination of both. End products or construction materials which do not currently meet the 60% threshold, but that exceed the prior 55% threshold, can still receive a price preference if no suppliers can meet the new threshold or end products and materials meeting the new threshold would be too expensive. The fallback expires in 2030, or one year after the increase to the 75% threshold.
Limited Impact on Contractors?
Though the FAR Council is open to suggested changes to the proposed thresholds and their timing, the rulemakers currently believe the rule as written will be unlikely to have a significant burden on contractors. The rule cites a study showing 82% of the value of U.S. manufacturing output is composed of domestic content, which the rulemakers interpret as indicating an immediate increase to 60% would not inflict additional burden. The FAR Council also observed that the recent increase from 50% to 55% did not appear to trigger an uptick in BAA waivers.
Enhanced Price Preference for Critical Products and Components
The proposed rule also includes an enhanced price preference for domestic products that are considered “critical” or that have “critical” components. A list of these products and components and their preference factors will eventually be added to a newly designated FAR 25.105, which will be updated at least once every four years. Offerors will be required to identify in their offers domestic end products that contain a critical component so that contracting offers may apply the higher price preferences.
The process for identifying critical items and components will be based on a prior Biden Executive Order, (EO 14017, America’s Supply Chains) and the National COVID-19 Strategy. The Office of Management and Budget will lead a subsequent assessment to further refine the list to those critical items that merit a price preference. A separate rulemaking will ultimately determine the products eligible to receive a price preference.
Post-Award Domestic Content Reporting Requirement
The final key feature of the proposed rule involves a post-award domestic content reporting requirement. Contractors would be required to provide the specific domestic content of critical items, domestic end products containing a critical component, and domestic construction material containing a critical component (exception for Commercial off the Shelf (“COTS”) items). This requirement would not go into effect until the separate rulemaking noted above for critical items and components is completed. The FAR Council believes this reporting requirement is necessary because contractors are currently only required to tell the government whether they meet the content threshold, rather than reporting the total domestic content in their products.
No Changes to the Component Test…Yet
Under the BAA, a “domestic end product” includes an end product manufactured in the United States if the cost of components mined, produced, or manufactured in the United States exceeds the applicable threshold. Although the January 25, 2021, Executive Order directed the FAR Council to consider replacing the BAA’s “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;” the proposed rule states that it is not seeking to replace the component test “at this time”. In fact, the FAR Council is seeking suggestions regarding alternative ways to measure domestic content.
- Expect the BAA domestic content requirements to increase from 55% to 60% later this year, or sometime in 2022. Contractors should plan for further increases likely later this decade and take steps to ensure sources of supply will allow compliance with the higher thresholds.
- The FAR Council is requesting feedback on the proposed changes and seeking information from industry to better inform future changes—consider providing feedback that may contribute to regulatory changes that are ultimately workable.