Buy (More) American: Final Rule Falls Short of Major Changes Previewed Last Summer

What Is the Current Landscape, and What Key BAA Elements Are Not Changed in the New Final Rule

The Trade Agreements Act (TAA), which implements trade agreements (such as the World Trade Organization Government Procurement Agreement and various free trade agreements (FTAs) into which the U.S. has entered) that guarantee nondiscriminatory treatment to signatory countries for government procurement activities conducted in those signatory countries, requires (subject to some relatively narrow exceptions) that TAA-covered procurements be sourced from TAA-eligible countries. Additionally, the TAA permits the President to waive domestic content requirements imposed under the BAA for TAA-covered procurements, including for products and construction materials. In effect, this means that products and construction materials from TAA-eligible countries will be treated as U.S. domestic products or materials when the TAA applies to a procurement (usually because it exceeds a specified dollar threshold applicable to the TAA or FTAs). Even though the proposed rule sought comments regarding the TAA, the final rule did not implement related changes, and as a result, the TAA’s coverage and applicability to federal procurements remain unchanged.

Additionally, the proposed ruled sought comments about whether to eliminate the commercially available off-the-shelf (COTS) exception that eliminates the need to determine the value of U.S. content in a product covered by the BAA as long as it is manufactured in the U.S.⁴ However, the final rule does not include any changes regarding the COTS exception.

The BAA applies price preferences when the lowest domestic offer is outbid by a nondomestic offer. In such situations, the FAR and the DOD FAR supplement 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, 30% where the lowest domestic offer is from a small business concern, and 50% for DOD procurements). The bids are then compared again, and if the domestic offer is now the lowest evaluated offer, it can be accepted. These are also not changed by the new final rule.

Finally, the final rule does not change the test applicable to articles made wholly or predominantly of iron or steel or a combination of them. Thus, the threshold question to determine compliance with the BAA (when the TAA does not apply) will continue to be whether an article consists wholly or predominantly of iron or steel or a combination of them. If the answer to that threshold question is yes, such articles will qualify as domestic end products or construction materials only if they are manufactured in the United States and the cost of foreign iron or steel (except for COTS fasteners) does not exceed 5% of the total cost of all components used to manufacture the article.

What Did the Final Rule Do? It Increased the Domestic Content Threshold and Implemented a Fallback Threshold

The Proposed Rule

The proposed rule called for a phased increase to the domestic content threshold from 55% to 75% over a period of several years, with an initial increase to 60% occurring in 2022. The Government says that this process was designed to give businesses the opportunity to adjust their supply chains gradually over time, and the Government chose the first increase based on its anticipated minimal effect on contract bidders, many of whose products may already meet a 60% threshold. Additionally, in an attempt to avoid a temporary increase in foreign content of federal procurements while domestic suppliers adjust their supply chains, the proposed rule called for a fallback threshold. With some limitations regarding availability of reasonably priced domestic alternatives that meet the applicable threshold, this 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 them) 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 of 55% and are still the lowest price evaluated offer after application of the BAA price preference factors of 20%, 30%, or 50%.

The Final Rule

The final rule implements the phased increase in the domestic content requirement (unless the product is a COTS item). Specifically, the domestic content threshold will increase to 60%, effective in October 2022, then to 65% in 2024, and finally to 75% in 2029.⁵ The delayed effective date of the 60% threshold is a change from the proposed rule, which envisioned immediate implementation of the 60% threshold, and the Government says that is intended to allow industry time to adjust supply chains in advance of the effective date. The phased increase is also consistent with the Infrastructure and Jobs Act,⁶ which includes a “sense of Congress” that the FAR be amended to increase the domestic content requirements for domestic end products and domestic construction material to 75%. Notably, supplier contracts with a performance life spanning the increases must abide by the increased thresholds applicable to the year of delivery.⁷

The final rule also implements a new fallback threshold. Specifically, a 55% domestic content threshold will apply (i.e., the threshold in effect prior to the effective date of the final rule) for up to one year after implementation of the 75% threshold but only in instances in which an agency determines that there are no end products or construction materials that meet the new domestic content threshold or that such products are unreasonably expensive.⁸ As with the proposed rule, 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 final rule clarifies that such identification would only be required for end products and construction material where the fallback procedures may be used, that is, for end products and construction material that do “not consist wholly or predominantly of iron or steel or a combination of both” and are not COTS items. Importantly, however, the final rule neither dealt with a new category of “critical items and critical components” addressed in the proposed rule nor included any details about how a fallback threshold for such items will be structured. All of this is now expected to be addressed in a future rulemaking.

Put more simply, the final rule allows a consistent 55% threshold that is available until 2030 for use where domestic products at a higher threshold are not available or the cost to acquire them would be unreasonable. The Government says it believes that this approach best balances the needs of smaller suppliers in adjusting their supply chains while rewarding industry-leading suppliers who adopt higher content levels. The sunset provision for the fallback threshold is also meant to signal to industry the seriousness with which the Government views the new thresholds.

What Did the Final Rule Exclude? A Good Deal More

As noted above, the final rule did not change any element relating to the applicability of the TAA, did not eliminate the COTS exception, and did not address any aspect of the new category of critical items and critical components. Also, while the proposed rule required postaward reporting on the specific amount of domestic content in critical end products, construction material, or components receiving the enhanced price preference, the final rule defers this requirement to a later rulemaking, which will establish the critical products and components list. The Government appears to want further industry input regarding the scope and scale of the reporting requirements.

Taking all of the above together, it is clear that the new final rule avoids dealing with key elements of current U.S. Buy National–related international obligations, laws, and regulations, despite the Government’s having sought comments on many of these through the proposed rule process. This doubtless reflects significant difficulties in attempting to implement policies through executive orders and regulations that require more extensive negotiations with international trade partners and the enactment of new laws. For these reasons, it is not clear when, if ever, such changes can reasonably be anticipated.

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 Federal Acquisition Regulation: Amendments to the FAR Buy American Act Requirements, 87 Fed. Reg. 12780 (March 7, 2022).

⁴ COTS means any item of supply, including construction materials, that is (1) a commercial product; (2) sold in substantial quantities in the commercial marketplace; and (3) offered to the government, under a contract, without modification, in the same form in which it is sold in the commercial marketplace. 48 C.F.R. § 2.101.

⁵ See FAR 25.101(a)(2)(i) and 25.201(b)(2)(i).

⁶ Pub. L. 117-58, Nov. 15, 2021.

⁷ However, in instances where compliance with this requirement would not be feasible, FAR 25.101(d) and 25.201(c) allow a senior procurement executive to apply an alternate domestic content test in defining “domestic end product” or “domestic construction material” after consultation with the Office of Management and Budget’s Made in America Office (MIAO). This process is new to the final rule and is intended to introduce more flexibility.

⁸ See FAR 25.106(b)(2) and (c)(2), and 25.204(b)(1)(ii) and (b)(2).