Raising the Stakes: New Buy American Act Regulations Up the Ante for U.S. Government Contractors
The Federal Acquisition Regulation (FAR) Council published a long-anticipated final rule implementing major changes to the FAR's Buy American Act (BAA) provisions on March 4, 2022. The final rule conforms largely to an earlier proposed version, though the FAR Council delayed the rule's effective date until later this year and sidestepped several issues of great significance to federal contractors. Below we summarize the origins of the final rule, explain how the rule changes the FAR's BAA provisions, and identify key BAA provisions that remain unchanged for now.
How Did We Get Here?
President Biden signed the Executive Order on Ensuring the Future is Made in All of America by All of America's Workers in January 2021, launching a government-wide initiative to "strengthen the use of Federal procurement to support American manufacturing." Pursuant to the executive order, the FAR Council published a proposed rule July 30, 2021 to amend the FAR's BAA provisions, discussed here. Then, on November 15, 2021, the president signed into law the Infrastructure Investment and Jobs Act (Public Law 117-58) (IIJA), which commits $1.2 trillion to fund new public infrastructure projects throughout the United States. While the IIJA did not amend the BAA, it reflects Congress's support for several of the BAA-related changes announced in the January 2021 executive order.
The main focus of all these efforts was the BAA's two-part test for determining if an offeror's proposed supplies or construction material qualify as "domestic" in contract competitions subject to the BAA. This determination is significant because an offeror's domestic end products and construction material will benefit from a price preference that improves its chances of being selected for award. Large businesses offering domestic supplies receive a 20 percent price preference, while small businesses receive a 30 percent price preference. The Department of Defense (DoD) applies a 50 percent price preference.
Prior to the March 2022 final rule, the BAA regulations stated that a manufactured end product or construction material (not consisting wholly or predominantly of iron or steel (or both)) qualified as domestic if:
- It is manufactured in the United States; and
- At least 55 percent of the cost of all its components are mined, produced, or manufactured in the United States
The second element of this two-part test, historically referred to as the "component test," is waived for the acquisition of commercial-off-the-shelf (COTS) items. A manufactured end product or construction material consisting wholly or predominantly of iron or steel (or a combination of both): (1) must be manufactured in the United States, and (2) the cost of foreign iron and steel must be less than five percent of the cost of all components. This version of the component test is not waived for COTS items, except for COTS fasteners. Acquisitions for commercial information technology (IT) are exempt from all BAA requirements.
What Changed in the BAA Final Rule?
While the final rule largely tracks the requirements outlined in the proposed rule, the new rule introduces several important regulatory changes. These changes include:
- A Slight Delay to Gradual Increases to the BAA's Domestic Content Threshold: The final rule adopts the proposed rule's schedule for increases to the BAA's domestic content threshold, with one significant modification. Rather than implement an immediate increase from 55 percent to 60 percent domestic content as originally proposed, the final rule adopts a "grace period" that delays the first increase until October 25, 2022. Thereafter, the threshold will increase to 65 percent by 2024 and to 75 percent by 2029.
- A "Fallback Threshold" for Domestic Content Through 2030: The final rule adopts a "fallback threshold" of 55 percent that will remain in effect through 2030. This allows federal agencies to purchase end products or construction material with at least 55 percent domestic content if products or materials meeting the then-current threshold are not available or are too expensive. According to the final rule, "if a domestic end product that exceeds the 60 percent domestic content threshold is determined to be of unreasonable cost after application of the price preference, then for evaluation purposes the Government will treat an end product that is manufactured in the United States and exceeds 55 percent domestic content, but not 60 percent domestic content, as a domestic end product."
The fallback threshold will apply to "construction material that does not consist wholly or predominantly of iron or steel or a combination of both and that are not COTS items, as well as to end products that do not consist wholly or predominantly of iron or steel or a combination of both and that are not COTS items." To implement the requirement, offerors will be required to identify in their proposals the proposed foreign end products and construction material exceeding 55 percent domestic content. Procuring agencies are not required to make a formal nonavailability determination to rely on the fallback threshold.
- Domestic Content Increases on Multi-Year Contracts: For contracts spanning multiple years with differing content requirements, contractors will be expected to "comply with each increased threshold for the items in the year of delivery." The final rule adds a process by which an agency, after consulting with the Made in America Office (MIAO), may "allow for application of an alternate domestic content test." If such an alternate domestic content test is allowed, contractors would have to comply with the "domestic content threshold in effect at time of contract award for the entire life of the contract."
- Enhanced Price Preference for Critical Products and Critical Components and Post-award Reporting: The proposed rule introduced the possibility of an enhanced price preference and post-award reporting requirement in procurements for "critical products," domestic end products containing a "critical component," and domestic construction material containing a critical component they will deliver under the contract. The final rule partially implements these requirements by establishing a framework for applying higher price preferences. Before these provisions are used in practice, however, the administration must finalize a separate rulemaking that will (1) establish a definitive list of critical items, critical components, and their associated price preferences; (2) identify the pertinent "enhanced price preferences"; and (3) define contractors' post-award reporting obligations.
What Did Not Change in the BAA Final Rule?
While the final rule makes several significant changes to the FAR's BAA regulations, contractors also should take stock of the BAA elements that currently remain intact. This includes:
- The component test for end products and construction material consisting wholly or predominantly of iron or steel (or a combination of both), which requires the cost of foreign iron and steel to be less than five percent of the cost of all components.
- The component test waiver for: (1) COTS end products and construction material not consisting wholly or predominantly of iron or steel (or a combination of both) and (2) COTS fasteners in items consisting wholly or predominantly of iron or steel (or a combination of both).
- The price preferences of 20 percent (non-small business set aside procurements) and 30 percent (small business set aside procurements) for non-critical products and products or materials that do not contain critical components.
- The exception for acquisitions of commercial IT.
- The waiver for acquisitions covered by the Trade Agreements Act (TAA).
The current administration has signaled that even these BAA rules are on the table for reconsideration. As such, contractors must watch for the forthcoming changes involving critical products and components and postaward reporting, as well as future rulemakings that could challenge the continuing viability of the COTS and TAA waivers and the commercial IT exception.
The final rule answers many questions about the Biden administration's plans for the BAA, while leaving several other questions to be addressed another day. Many contractors are well-positioned to comply with the new regulations by October 25, 2022, but some may find themselves scrambling over the next several months to overhaul manufacturing, supply chains, and other business processes. Only time will tell which companies will gain or lose the most as a result of these changes. One point, however, is now abundantly clear: increasingly robust BAA regulations in federal procurements are here to stay and contractors must act now if they intend to compete for BAA-covered contracts in the future.
If you have questions about the final rule or how it impacts your company, please contact one of the Miller & Chevalier attorneys listed below
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