Proposed Buy American Act Rules Impose Stricter Domestic Sourcing Requirements on Government Contractors
On September 14, 2020, the Federal Acquisition Regulation (FAR) Council finally issued its proposed rule to implement the Buy American Act (BAA) requirements of last year’s Executive Order 13881, “Maximizing Use of American-Made Goods, Products, and Materials.” If adopted, the rule would amend FAR Part 25 to substantially increase the domestic component percentage of qualifying end products under the BAA — resulting in a significant shift in the BAA regulatory framework for certain federal contracts.
The Shifting Landscape of the BAA
The proposed FAR rule is the latest development in the Trump administration’s efforts to expand domestic sourcing requirements. Executive Order 13881 directed specific expansions of the domestic preference for goods, products and materials. Previously, President Trump had issued two additional Orders to promote greater enforcement of the Buy American statutory landscape — Executive Order 13788, “Buy American and Hire American” (April 18, 2017), and Executive Order 13858, “Strengthening Buy-American Preferences for Infrastructure Projects” (January 31, 2019). Our team’s insights on these prior actions can be read here.
The BAA (found in FAR Part 25) establishes a preference for the federal procurement of domestic materials. The BAA analysis is a two-prong test to determine whether an end product or construction material qualifies as domestic. The domestic requirement is satisfied where: (i) the end product is mined, produced or manufactured in the United States; and (ii) more than 50% of the component parts of the end product (calculated as a percentage of cost) is also mined, produced or manufactured in the United States. Currently, commercially available off-the-shelf (COTS) end products must only satisfy the first prong of this analysis.
New BAA Requirements Under the Proposed FAR Rule
While the proposed FAR rule does not read the Executive Order as broadly as it could have, it would increase both the BAA domestic content requirement and the domestic product price preference, as well as implement new requirements applicable to end products or construction material composed predominantly of iron or steel. The proposed rule would impose the following significant changes:
Non-COTS Domestic End Products Not Predominantly Composed of Iron or Steel: Increases the current domestic 50% content requirement for components of non-COTS domestic end products or construction materials that are not predominantly composed of iron or steel. Domestic components must, under the new rule, exceed 55% of the cost of all components for the end product in order to qualify as domestic. COTS end products (except those that are predominantly composed of iron or steel or a combination of both) continue to qualify as domestic if manufactured in the United States.
Domestic End Products Predominantly Composed of Iron or Steel: Increases the domestic content requirement for domestic end products or construction material (to include COTS items but excluding fasteners) composed predominantly of “iron or steel or a combination of both” from 50% to 95%. Thus, to certify such end products or construction materials as domestic, offerors must make a good-faith estimate that the cost of the iron or steel content not produced in the United States is less than 5% of the total cost of all components of the end product or material. The proposed rule defines “predominantly” to mean the total cost of iron and steel content in the item must exceed 50% of the cost of all components. This change effectively removes “predominantly” iron and steel products from the COTS exemption for content testing.
Increased Price Evaluation Percentages: Increases the price preference applied to all foreign end products from 6% to 20% for large businesses, and from 12% to 30% for small businesses. For foreign construction material, the price preference increases to 20%. Thus, for example, if a domestic offer is not the lowest offer received, the agency must now apply a price evaluation penalty of 30% to the competing foreign offer where the domestic offer was made by a small business. This change promotes greater domestic sourcing by agencies, while expanding existing small business protections from lower cost foreign products in the affected categories.
Given the significant changes this rule would impose on the existing regulatory framework, we strongly encourage all impacted government contractors to express any concerns during the comment period. Comments on the proposed rule should be submitted no later than November 13, 2020.