Scott Arnold and Ustina M. Ibrahim*
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On March 7, 2022, the FAR Council published the final rule containing changes to Buy American Act (“BAA”) domestic preference requirements.
This final rule is a significant step towards implementation of a policy to enhance domestic preferences announced by President Biden in E.O. 14005 just a few days after taking office. You may recall that the FAR Council previously issued a proposed rule that contemplated (1) phased increases in domestic content thresholds, (2) enhanced preferences for critical products and components, and (3) post-award reporting requirements for critical products and components. See our prior posts addressing President Biden’s E.O. 14005 and the proposed rule.
The final rule retained most of what the FAR Council initially proposed, but there are a few changes that we discuss below. We also point out some aspects of the new policy that remain to be fleshed out in future rulemaking.
Increased Domestic Content Thresholds
The proposed rule contemplated increasing the current domestic content threshold from 55 percent to 60 percent, with subsequent increases to 65 percent and 75 percent beginning in calendar years 2024 and 2029, respectively. The final rule retains these increases but allows for a longer period than typically provided before the first increase to 60 percent becomes effective. The 60 percent threshold will take effect October 25, 2022—over six months after publication, rather than the customary 30 or 60 days after publication. Thus, contractors and agencies have several more months to plan for the new threshold.
The final rule will require contractors to comply with increases to the domestic content threshold when the contract period of performance spans more than one threshold. In other words, contractors will need to meet the threshold applicable in the year of delivery. However, the final rule provides an exception to this requirement if a senior procurement executive determines it would not be feasible to comply with the changing thresholds. It appears that such determinations, which are nondelegable and must be discussed beforehand with the Office of Management and Budget’s Made in America Office, are contemplated to be made on a pre-award basis, as the exception would entail use of an alternate version of the FAR clause addressing changing thresholds.
The proposed rule provided a fallback domestic content threshold of 55 percent for agencies to use when (1) there are no end products or construction materials that meet the new domestic content threshold, or (2) those products are of unreasonable cost. Pursuant to the proposed rule the fallback threshold will be operative until 2030—one year after the domestic content threshold increases to 75 percent. The final rule maintains the fallback threshold until 2030, but the final rule also emphasizes that contractors should begin their product and supply chain planning to meet the higher thresholds immediately.
Enhanced Preferences for Critical Products and Components
Currently the BAA implementing regulations require the following evaluation penalties when foreign products are less expensive than domestic content products:
- 20 percent is added to foreign-end products competing against large businesses;
- 30 percent is added to foreign-end products competing when competing against small businesses; and
- 50 percent is added in U.S. Department of Defense (“DoD”) procurements.
The proposed rule did not change this basic framework but did indicate that there will be enhanced preferences introduced for domestic products considered “critical” or that have “critical” components. This general approach is maintained in the final rule, but the final rule still does not define how the preferences will be enhanced, and a list of products and components that will qualify for enhanced preferences remains to be published.
Similarly, although the proposed rule contemplated requirements that would require contractors to report the specific domestic content of certain critical items, the FAR Council explained in issuing the final rule that any specific reporting requirements will be defined in a separate rule, perhaps when the list of critical products and components is published.
Domestic Content Test
As we noted last year, the Biden administration directed the FAR Council in E.O. 14005 to consider amending the domestic content test from a “component test” to one “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 did not contain changes to the domestic content test and, unsurprisingly, neither does the final rule. Developing a workable construct to measure domestic content beyond component content is undoubtedly very difficult.
Increases to domestic content requirements in procurements covered by the BAA are being implemented gradually, but the schedule for the increasingly demanding requirements is now clear. Contractors need to plan accordingly, and stay tuned for further developments.
*Ustina Ibrahim is a law clerk in Blank Rome’s Government Contracts practice group.