Proposed Amendments to the FAR
The notice proposes three distinct changes to the FAR:
- To maintain the “domestic content test,” formerly the “cost of components test,” used to identify domestic end products and domestic construction materials, but increase the domestic content threshold from 60% to 75% over an eight-year period, as well as provide a lower fallback threshold to allow products with less than the required domestic content to nevertheless qualify as domestic end products or domestic construction materials for up to one year following the final threshold increase to 75%
- To create a mechanism to increase the price preference for domestic end products and construction materials that are critical items or are made from critical components
- To implement a postaward domestic content reporting requirement
These changes would apply to supply and construction contracts (other than those subject to the Trade Agreements Act), including contracts at, or below, the simplified acquisition threshold, and contracts for commercial items, but would not apply to commercially available off-the-shelf (COTS) items.
Increase of Domestic Content Threshold and Fallback Threshold
Under the Buy American Act, products solicited by the federal government for public use must, with few exceptions, be mined or produced in the United States or manufactured in the United States substantially all from articles, materials, or supplies that are mined, produced, or manufactured in the United States. 41 U.S.C. § 8302. For manufactured articles that do not consist wholly or predominantly of iron or steel or a combination of both,3 this statutory requirement is implemented in the FAR as a two-part test applied to determine whether a product is a “domestic end product” or a “domestic construction material.” First, the end product or construction material must be manufactured in the United States. Second, either the item is a COTS item, or the cost of components mined, produced, or manufactured in the United States must exceed 55% of the cost of all components in the end product or construction material (i.e., the domestic content threshold). The latter part of the second prong is known as the “domestic content test” or “cost of components test” and is subject to change under the proposed rule. Though Executive Order 14005 directed the FAR Council to consider eliminating the domestic content/cost of components test in favor of a test that would measure domestic content based on value added to an end product or construction material by means of U.S.-based production or U.S. job-supporting economic activity, the proposed rule focuses, for now, on retaining the domestic content/cost of components test and increasing the domestic content threshold.
The proposed rule would increase the domestic content threshold from 55% to 60% of all components in an end product or construction material in 2022 through 2023. Two years following this initial increase, the rule would further increase the domestic content threshold to 65%. This second increase would take effect in 2024 and last through 2028. Five years after the implementation of the second increase, or in 2029, the domestic content threshold would increase once more to 75%.
The phased increase is designed to give businesses an opportunity to adjust their supply chains gradually over time to meet the new requirements. The government’s view is that the immediate increase from 55% to 60% will have minimal effect on contract bidders and that some may already be able to supply end products or construction materials that meet or exceed the 60% domestic content requirement. To avoid a temporary increase in foreign content of federal procurements while domestic suppliers adjust their supply chains to meet the proposed increases, the rule would establish a fallback threshold. The fallback threshold would operate by allowing end products or construction materials (other than those that do not consist wholly or predominantly of iron or steel or a combination of both) that do not meet the new domestic content threshold to qualify as domestic end products or construction materials if they meet or exceed the former domestic content threshold. The fallback threshold will apply, however, only when either no domestic end products or construction materials meeting the current domestic content threshold are available or when those available are of unreasonable cost after application of the price preference. Contract bidders that choose to take advantage of the fallback threshold would need to report which of their foreign end products exceed the 55% domestic content threshold.
The second proposed amendment to the FAR would increase the price preference applied to end products and construction materials deemed to be critical products or components. A critical component would be defined as one mined, produced, or manufactured in the United States and deemed critical to the U.S. supply chain. A critical item would be defined as a domestic end product or construction material deemed critical to the U.S. supply chain. The determination of what constitutes a critical product or component is to be determined in a subsequent rulemaking by reference to the quadrennial critical supply chain review outlined in Executive Order 14017 and the National COVID strategy.
Buy American price preferences are applied when the lowest domestic offer is outbid by an even lower nondomestic offer. In such situations, the FAR require that the lowest nondomestic bid be increased by a percentage evaluation factor (i.e., 20% where the lowest domestic offer is from a large business concern and 30% where the lowest domestic offer is from a small business concern). The bids are then compared again, and if the domestic offer is now the lowest offer, it can be accepted.
The proposed rule would increase the percentage evaluation factor for domestic end products and construction materials that are either critical items or contain critical components by an additional percentage unique to the critical item or component identified by the offeror, which is designed to give them a heightened competitive advantage over products or construction materials with lower domestic content. Note that the offeror would be required to identify domestic end products that contain a critical component to enable the contracting officer to apply the appropriate price preference. Where there is no domestic offer or domestic offers are determined to be unreasonable costs, the contracting officer would then treat the lowest foreign offer that is manufactured in the United States and exceeds 55% domestic content as a domestic offer (application of the fallback threshold) and would determine the reasonableness of this offer by applying the percentage evaluation factor applicable to the critical item or critical component, in addition to the underlying percentage evaluation factor of 20% or 30%. These unique percentages will also be determined in the subsequent rulemaking to identify the critical items and components, though the government notes that not all critical items and critical components will necessarily qualify for the price preference.
Postaward Reporting Requirements
The final proposed amendment would require contractors to provide the specific domestic content of critical items, domestic end products containing a critical component, and domestic construction materials containing a critical component supplied under an awarded contract. COTS items would be excluded from this postaward reporting requirement. The requirement would not take effect until the separate rulemaking to identify critical items and critical components is finalized.
Request for Comments — Contemplated Changes Not Yet Proposed
The notice requests that interested parties submit comments no later than September 28, 2021. Interested parties are also invited to attend a virtual public meeting held on August 26, 2021, for which registration is required.
In addition to seeking comments addressing the specific proposed changes, such as firms’ willingness/ability to meet the new domestic content thresholds or the effectiveness of price preferences at strengthening domestic economic activity, among others, the notice also requests comments on important changes contemplated by Executive Order 14005 that are outside the scope of the proposed rule. Some of these changes and the requested information are discussed below.
Elimination of Commercial Information Technology Exception
In 2005, commercial items of information technology were excepted by statute from the Buy American restrictions in the FAR. The government now seeks comments regarding the extent to which the original purpose of this exception continues to be relevant, whether the exception should be lifted or narrowed, particularly for specific products or certain market segments, and potential effects of such action.
Elimination of COTS Exception
In 2009, the Office of Federal Procurement Policy exempted COTS items from the government content/cost of components test to reduce the burden of federal procurement restrictions pursuant to 41 U.S.C. § 1907. The government now seeks input from interested parties as to whether the COTS exception has benefited domestic firms and employees, whether marketplace conditions merit the elimination or narrowing of the exception, whether data collection relating to COTS items is warranted, and other recommendations to increase domestic production of COTS items.
Impact of Trade Agreements
Finally, the government requests comments on the effect of U.S. trade agreement obligations on opportunities for American businesses. The proposed rule does not apply to contracts subject to the World Trade Organization Government Procurement Agreement and the Trade Agreements Act (TAA), as acquisitions covered by those agreements are exempt from the Buy American Act requirements.
Nevertheless, the government seeks information concerning the effect of these agreements due to their different standards and the likelihood that products acquired pursuant to them have far less domestic content compared to products acquired under the Buy American statute. The TAA applies to both U.S.-made and designated country end products. The test to determine whether a product is a U.S.-made end product is the substantial transformation test, which requires transformation into a new and different article of commerce with a name, character, or use distinct from that of the articles from which it was made. Interested parties are asked to provide comments on the types of products sold to the federal government as U.S.-made end products under the TAA, whether the substantial transformation test is useful to promote domestic jobs and manufacturing, steps the government can take to acquire useful information about the content of goods procured pursuant to trade agreements, and recommendations to increase domestic production in critical industries subject to trade obligations.
1 The Notice of Proposed Rulemaking addresses specifically Section 8 of Executive Order 14005, Ensuring the Future Is Made in All of America by All of America’s Workers, 86 Fed. Reg. 7475, 7477 (Jan. 28, 2021).
2 Federal Acquisition Regulation: Amendments to the FAR Buy American Act Requirements, 86 Fed. Reg. 40980 (July 30, 2021).
3 The test applicable to articles wholly or predominantly of iron or steel or a combination of both is distinct from that applicable to other articles and will not be changed by the proposed rule. Thus, the threshold question to determine compliance with the Buy American statute is whether an article consists wholly or predominantly of iron or steel or a combination of both. Articles made wholly or predominantly of iron or steel or both will qualify as domestic end products or construction materials only if manufactured in the United States and the cost of foreign iron or steel (excluding COTS) does not exceed 5% of the total cost of all components used to manufacture the article.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
Attorney Advertising—Sidley Austin LLP, One South Dearborn, Chicago, IL 60603. +1 312 853 7000. Sidley and Sidley Austin refer to Sidley Austin LLP and affiliated partnerships, as explained at www.sidley.com/disclaimer.
© Sidley Austin LLP