75% domestic requirement takes effect in 2029
On March 7, the Federal Acquisition Regulatory (FAR) Council issued a final rule changing the “Buy American” requirements for federal contractors. The final rule is very similar to the proposed rule published in July 2021 and it materially changes the regulations at FAR Part 25, which implements the Buy American Act (BAA). These changes come more than a year after President Joseph Biden issued Executive Order 14005 – Ensuring the Future Is Made in All of America by All of America’s Workers, which provided that U.S. government procurement should “maximize the use of goods, products, and materials produced in, and services offered in, the United States.”
Passed by Congress and signed by President Herbert Hoover in 1933, the BAA requires the federal government to purchase domestic “articles, materials and supplies” when procured for public use. The FAR implements the BAA and outlines how procuring agencies can determine whether solicited materials or products are “domestic.” According to the FAR, goods are considered “domestic” if they are “such unmanufactured articles, materials, and supplies as have been mined or produced in the United States,” or “such manufactured articles, materials, and supplies as have been manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured, as the case may be, in the United States.” Exceptions to the BAA include instances where the cost of the items is determined to be unreasonable, instances where it would not serve public interest to purchase the products domestically, instances where the products are not available domestically, and instances in which an acquisition is subject to a specific trade agreement.
On July 30, 2021, the FAR Council published a proposed rule revising the regulations and calling for increases in domestic content requirements, enhanced price preference for select critical products, and new domestic content report requirements. Although the final rule largely mirrors the proposed rule, businesses should be aware of a few material changes.
The final rule
The final rule will impact companies performing federal contracts that are subject to the BAA. These include contracts that fall below the current trade agreement thresholds of $183,000 for supply contracts, $7.03 million for construction contracts, and other contracts exempt from trade agreements.
Consistent with the proposed rule, the final rule increases the percentage of domestic content necessary for a product from 55% to 60% (effective Oct. 25, 2022), followed by additional increases to 65% in 2024 and 75% in 2029. Under the final rule, a supplier that holds a contract with a period of performance spanning the time where percentage threshold increases will take place, will generally be required to comply with each increase for the items to be delivered in that year. But there is a process by which the procuring agency, in consultation with the recently established Made in America Office, may allow a supplier to comply with the thresholds in place when the contract was awarded.
As an example, if a U.S. company manufactures items containing 60% domestic components, such items would qualify as “domestic” under the BAA in 2023. However, these same products would no longer qualify as “domestic” in 2024 because of the threshold increase to 65% domestic components. Ultimately, unless the increasing threshold requirements are waived, companies will need to evaluate, and in many cases change, how they manufacture and source their products, if they want to continue benefitting from the domestic preferences outlined in the BAA.
The final rule also implements a “fallback threshold” that will apply when goods that meet the new domestic content threshold are not available or are only available at an unreasonable cost. In these circumstances, the rule permits federal agencies to accept goods that comply with the former, lower domestic content threshold of 55% percent. This threshold provision will expire in 2030 to allow time for the supply chain to adjust to forthcoming changes.
Notably, end products or construction materials that consist wholly or predominantly of iron and or steel, and that are not commercially available off-the-shelf items, are not subject to the content thresholds or “fallback threshold” outlined in the final rule.
In another provision that takes effect Oct. 25, 2022, the FAR Council will enact higher price preferences for certain construction materials and end products that the Office of Management and Budget (OMB) classifies as “critical” products and components (critical items). While this change may make it more difficult for non-U.S. based suppliers to compete for certain U.S. government contracts, the overall impact will likely depend on the severity of the enhanced preferences and the FAR Council’s list of critical items. The White House has announced that OMB will publish a list in the Federal Register detailing the critical items and their relevant price preferences.
Business entities and suppliers involved in federal contracts that are subject to the BAA should understand that this final rule will significantly impact their ability to source and supply foreign products and component parts. As such, affected companies should review their supply chains to assess potential impacts.