New Executive Order Proposes Changes to Strengthen "Buy American" Rules

Summary of the EO

The EO directs the FAR Council to consider amending the FAR’s provisions defining “domestic end product.” Under current FAR provisions, a product is considered a domestic end product if it is manufactured in the United States and the cost of domestic components in the end product exceeds 50% of the cost of all components.¹ As an exception, commercially available off-the-shelf (COTS) items are not subject to the 50% domestic component requirement. COTS items are considered domestic end products if they are manufactured in the United States. The EO proposes to change the decades-old 50% domestic component requirement, directing the FAR Council to consider increasing the percentage of required United States components to 95% for iron and steel end products and 55% for all other end products. The EO also directs the FAR Council to consider whether and when to further raise the threshold for all other end products to 75% to qualify as “domestic.” Notably, the EO does not appear to address COTS items. Because COTS items are not currently subject to the domestic component requirement, the EO’s proposed changes to the domestic component requirement do not appear to affect the domestic status of COTS items that are manufactured in the United States.

The EO also directs the FAR Council to consider increasing the price evaluation penalty that serves as an incentive for the United States government to purchase domestic end products. Under the current regulations, when the BAA applies, where a foreign offer is the low offer, the contracting officer is required to increase the evaluated price of the low (foreign) offer by 6% (12% if the domestic offeror is a small business) to provide an evaluation preference for domestic end products.² The EO directs the FAR Council to consider increasing the price evaluation penalty against foreign end products from 6% to 20% (when the lowest domestic offer comes from a large business) and from 12% to 30% (when the lowest domestic offer comes from a small business). This penalty is used only for evaluation purposes; the price paid by the government is the price as proposed.

The Proposed Changes Could Significantly Affect Contractors and Their Supply Chains

If implemented, the EO’s proposed changes could have significant consequences for government contractors and their supply chains. The proposed changes to the threshold of the domestic component requirement would make it substantially more difficult for products containing foreign components to qualify as domestic end products. As a result, government contractors whose products contain more than 45% (or, for iron and steel, 5%) foreign components would need to reevaluate their supply chains or resource components and/or change manufacturing locations to comply with the new domestic component requirement under the EO. Further, the proposed changes to the price evaluation penalty against foreign end products would make domestic end products more likely to be the low offer than had previously been the case. This would create substantially increased competitive advantages for contractors offering domestic end products in government procurements.

Whether and When the Proposed Changes Will Occur Remains Unclear

The EO directs the FAR Council to “consider proposing for notice and public comment” the aforementioned changes within the next 180 days. The EO thus does not mandate that the FAR Council definitely propose the aforementioned changes for notice and comment. Even if the FAR Council decides to publish the proposed changes for notice and comment, it would still need to go through the rulemaking process, which can take many months or even longer. Thus, while the proposed changes, if fully implemented, would have potentially dramatic consequences for government contractors and their supply chains, whether and when such changes will occur remains an open question.

Department of Defense Procurements Are Unlikely to Be Affected

The proposed changes to the price evaluation penalty against foreign end products do not on their face appear to affect procurements by the United States Department of Defense (DoD), though the EO does state that all agencies should consider appropriate adjustments to their regulations as well. For DoD procurements, the price evaluation penalty against foreign end products is 50%, regardless of whether the domestic offeror is a small business or a large business.³ Because the price evaluation penalty for DoD procurements is already much more substantial than what the EO proposes, it appears unlikely that the EO’s proposed changes to the price evaluation penalty would affect DoD procurements, and almost certainly not in the near term.

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In sum, if implemented, the EO’s proposed changes to the FAR may have a significant effect on government contractors and their supply chains. However, whether and when such changes will occur remains unclear. If the FAR Council publishes the proposed changes for notice and comment, contractors and other interested parties affected by these changes would be well advised to make their voices heard during the comment period. We will continue to monitor this issue and will provide additional alerts as the rulemaking progresses.

 ¹ 48 C.F.R. § 25.003.

² 48 C.F.R. § 25.105.

³ 48 C.F.R. § 225.105(b).