Biden Administration Proposes Significant Changes to Buy American Act Regulations: What Contractors Need to Know

Biden Administration Proposes Significant Changes to Buy American Act Regulations: What Contractors Need to Know

August 2, 2021, Covington Alert

On July 30, 2021, the Biden Administration issued a proposed rule billed as “the most robust changes to the implementation of the Buy American Act in almost 70 years.”[1] Aimed at strengthening domestic content requirements and bolstering domestic procurement preferences, the proposed rule comes on the heels of several other actions by the Biden Administration to limit reliance on foreign sources of critical components and promote greater economic and national security by supporting domestic manufacturing. In doing so, the proposed rule implements provisions of President Biden’s January 2021 Executive Order 14005 (“EO 14005”) on Ensuring the Future Is Made in All of America by All of America’s Workers (a previous client alert on EO 14005 is available here), which, among other things, directed the Federal Acquisition Regulatory Council (“FAR Council”) to strengthen regulations implementing the Buy American Act (“BAA”).

As relevant here, the Notice of Proposed Rulemaking (“NPRM”) proposes three major changes to existing BAA regulations:

• Higher Domestic Content Threshold: Consistent with EO 14005, the NPRM would initially increase the domestic content threshold for determining whether an item qualifies as “domestic end product” or “domestic construction material” from 55% to 60%. It also proposes to increase the threshold to 65% in two years, and to 75% five years after the second increase. Critically, suppliers holding a contract with a period of performance that spans the schedule of threshold increases would be required to comply with each step increase for the items in the year of delivery (in other words, they would not be “grandfathered in” under a lower threshold). However, there is a “fallback threshold” exception that would allow end products—other than certain iron and steel products—that meet the current 55% threshold to qualify as “domestic” when other products that meet the higher thresholds are unavailable or unreasonably expensive.
• Enhanced Price Preferences for “Critical” Items and Components: The NPRM outlines a framework for enhanced price preferences for certain “critical items” and “critical components” manufactured in the United States. Notably, the proposed rule does not designate any specific articles as “critical”; instead, the list of “critical” items and associated preference factors would be set forth in a separate rulemaking. The NPRM notes that this list will be updated periodically and will be published in the Federal Register to allow for public comment.
• New Domestic Content Reporting Requirements for “Critical” Items and Components: The NPRM also sets forth new domestic content disclosure requirements for “critical items” and end products containing “critical components.” Contractors that supply these items would be required to submit a post-award disclosure to the newly established Made in America Office identifying (1) the percentage of domestic content in each critical product; and (2) the percentage of domestic content in each domestic end product they supply that includes a critical component.

If implemented without revision, this proposed rule has the potential to alter the contracting landscape in several important ways. The immediate increase to a 60% domestic content requirement—and the phased increase to 65% and then 75%—represents a significant departure from the traditional BAA regime. The impact of the other two changes related to “critical” items and components will turn largely on the products that receive this designation. But the enhanced price evaluation preferences may result in significant competitive advantages for certain domestic manufacturers, while the new reporting requirements would add to contractors’ existing administrative burdens and highlight when components are being sourced from countries of concern to the government.

Nonetheless, it is worth emphasizing that the changes contemplated in the proposed rule are not as sweeping as they might have been. For now, at least, the FAR Council has proposed to retain the “cost of component” test used to determine the percentage of domestic content, in lieu of a new “value added” test that was suggested in EO 14005. Moreover, the “fallback threshold” exception—depending on how it is implemented—could play an important role as supply chains adapt to the new, higher thresholds.

Of course, the proposed rule is not the end of the road for this rulemaking effort. Comments on the proposed rule may be submitted until September 28, 2021, and the government plans to hold a “virtual public meeting” on August 26, 2021 to further discuss the proposal. Given the implications for industry, we foresee significant interest in—and likely changes to—the rule before it is finalized, and we will continue to closely track these developments as they unfold. For now, the proposed rule serves as a further reminder that the Biden Administration is fully committed to emphasizing and enforcing domestic sourcing requirements.

We’ve provided more detail about each of the major changes below, along with an analysis of the FAR Council’s questions for industry and the public.

In addition to posing a series of questions about the proposed FAR changes discussed above, the NPRM also includes several other broadly worded questions and requests for feedback. These questions suggest that in addition to the changes proposed at this time, the government also is considering more far-reaching changes related to the following subjects:

I. Proposed Changes to the FAR

A. Raising the Domestic Content Threshold

Unless an exception applies, the BAA implements a procurement preference for “end products” that are “domestic.” The implementing regulations in FAR Part 25 institute a two-part test for determining whether an end product qualifies as “domestic”: the end product must (1) be manufactured in the United States; and (2) meet a specified percentage of domestic component parts (determined by the cost of the components).

The second requirement—referred to as the “domestic content test”—originally required more than 50% of the component parts to be mined, produced or manufactured in the United States. On January 19, 2021, the government increased this threshold to 55% for most products, though steel and iron products must be composed of 95% domestic steel and iron.

The proposed rule takes this another step forward and proposes to immediately increase the generally applicable threshold from 55% to 60%. It also proposes to increase the threshold to 65% in 2024 (two years after adoption of a final rule) and to 75% in 2029 (five years after the second increase). Entities that hold multi-year contracts that span the schedule of threshold increases would be required to comply with each increase. Thus, a contractor could be required to supply goods that are 65% domestic in one year, and to supply goods that are 75% domestic in the following year.

The NPRM contemplates an exception to the increased content requirement, however. For a period that will last for one year after the increase to 75% (i.e., until 2030), end products that comply with the current 55% domestic content threshold may be treated as “domestic” if end products that meet the new threshold are not available or are otherwise unacceptably expensive. For example, when the 60% threshold is in place, the government would apply the price preference for a product that is 55% domestic, if no other products exceeding the 60% threshold are available at a reasonable cost. This “fallback threshold” exception does not apply to certain steel or iron end items.

Importantly, the FAR Council also declined at this time to adopt another measure suggested by EO 14005: replacing the “cost of components” test with a brand new test that considers “the value that is added to the product through U.S.-based production or U.S. job supporting economic activity.” This was a potentially seismic change, as the “valued added” test had the potential to introduce significant uncertainty into supply chain planning for global companies that sell into the federal market. For now, the FAR Council has left the door open to adopting a value added test in the future, as it has elected to solicit public comment on the feasibility of such a test and the strengths and weaknesses of the current cost of component test.

B. Enhanced Price Preference for Critical Products and Components

The BAA encourages the use of domestic end products by imposing a price preference: currently, large businesses offering domestic end items receive a 20% price preference, and small businesses receive a 30% price preference.

The proposed rule outlines a framework that would allow for higher preferences for domestic end products that are either on the government’s list of “critical items” or contain domestically sourced “critical components.” These preferences would be in addition to the existing preferences. Thus, for example, if the preference factor for a critical item is 5% and the lowest domestic offer for that critical item is from a small business, the government would be required to add a total of 35% to the price of the lowest, non-domestic offer.[2]

The proposed rule would require offerors to identify in their offer any domestic end products that contain a critical component, so that contracting officers can apply the higher price preferences when appropriate. However, the list of critical products and components has not yet been defined. Instead, the NPRM envisions a multiple-step regulatory process for identifying such items.

Items on the list first would have to be designated “critical” during the quadrennial supply chain review instituted pursuant to Executive Order 14017 on America’s Supply Chains (a previous client alert on this Executive Order is available here) or under the National COVID Strategy.[3]

However, not all of the products identified during the supply chain review would qualify for a price preference. Instead, the proposed rule envisions that the Office of Management and Budget (“OMB”)—and presumably the Made in America Office within OMB—would lead a “subsequent assessment to further distill the list of products designated critical to those products for which procurement is likely to make a meaningful difference toward strengthening U.S. supply chains.” This process would also assign a specific enhanced price preference to each critical item or end product with critical components.

After this process is complete, the government would issue a separate rulemaking that identifies the products and their corresponding preference factors in FAR 25.105. This list would also be published in the Federal Register at least once every four years to reflect any changes to the list. In other words, the list will resemble the current list of “nonavailable articles” set forth in FAR 25.104.

Because the government has not yet completed its process for identifying the critical items, it is uncertain as to which industries or materials stand to benefit most. What is certain, however, is that the list will be subject to considerable public interest and comment, as the government will have put itself in the position of identifying which products and industries warrant additional preferential treatment.

C. Additional Reporting Requirements

The proposed rule also contemplates a greater reporting burden on contractors. It lays out a framework that would require contractors to identify, within 15 days of receiving an award, the exact percentage of domestic content of any critical items they supply, as well the exact percentage of domestic content of any end products they supply that include one or more critical components. Although this would be a post-award requirement rather than a mandatory element of a bid, contractors still would need to have the relevant information readily at hand at the time of award (if not before) given the short submission window. (As drafted, the proposed clause in the NPRM requires only an initial disclosure within 15 days of award; it does not impose a requirement to update that disclosure if the domestic content of critical components change.)

This disclosure requirement represents a significant increase in administrative burden as compared to the existing rules, which require that the contractor represent only whether its end product exceeds the applicable domestic content threshold. This burden may be felt more by some contractors than others, as determining the exact domestic content percentage may be particularly challenging for certain categories of products. Although the current NPRM does not contemplate that the post-award content disclosure would be accompanied by an express certification, contractors still may need to undertake a detailed analysis to provide the specificity that the rule would require. Moreover, information about a contractor’s sources may be proprietary. In these instances, contractors will need to appropriately mark their submissions in the hopes of ensuring the confidentiality of their disclosure.

Fortunately for contractors, this new post-award disclosure requirement would not apply to commercially available off-the-shelf (“COTS”) items (even if the COTS item includes a critical component), consistent with the existing exception to the domestic content requirement for COTS items. Ultimately, the burden associated with this requirement is necessarily tied to the scope of the government’s list of critical items: the more products and components on the list, the more information that contractors will be required to track and provide.

II. Further Changes Ahead?

• Commercial IT & COTS Exceptions: The government has waived application of the BAA to commercial information technology, and has likewise waived the BAA component test for COTS items. Picking up on a theme from EO 14005, the NPRM solicits input from the public as to whether these waivers should be narrowed or lifted, which indicates a potential willingness to significantly increase the BAA’s reach to favor domestic manufacturers.
• Valued Based Calculation: As noted above, the FAR Council has declined, for now, to implement a new “value based” test in lieu of the cost of components test. But the issue still appears to be under consideration, as the NPRM includes several questions on this subject, including (a) how such value could be calculated to promote U.S.-based production; (b) whether a “value added” calculation would be superior to the current cost-of-components approach; and (c) whether approaches other than a “value added” calculation should be employed to achieve the goals of EO 14005, such as a change to the current FAR definition of “cost of components.”
• Trade Agreements: The Trade Agreement Act (“TAA”) applies to most non-Department of Defense (“DoD”) acquisitions of supplies over $182,000 and to DoD acquisitions of supplies exceeding this threshold that also involve end products in specified product services groups set forth at DFARS 225.401-70.[4] The TAA includes two disjunctive tests for compliance: (1) a product must be either manufactured in the United States or “wholly manufactured” in a designated country; or (2) the product must be “substantially transformed” within the United States or in a designated country. The NPRM observes that “a substantially transformed U.S.-made product may have far less domestic content when compared to a domestic end product acquired under the Buy American statute.” But while the government cannot change trade policy through FAR regulations, the NPRM nevertheless poses a series of questions designed to collect more information “about the impact of the substantial transformation test and potential lost opportunities for American workers.” This suggests at least some willingness to revisit the ways in which the FAR implements the TAA to ensure that domestic industry is being protected. Any such change would have to be part of a separate rulemaking, however, as the NPRM expressly states that U.S. trade policy is beyond its scope.

III. Concluding Thoughts

The NPRM represents the latest, and perhaps most significant, regulatory development in support of the Administration’s “Made in America” agenda, and companies engaged in the federal marketplace would be well-advised to monitor the rulemaking process.

Most obviously, the higher domestic content thresholds would have an immediate impact on suppliers to the government. Prior to 2021, the 50% domestic content threshold had been in place for nearly 70 years, and many contractors had built their supply chains around that requirement, engaging in costly analyses of bills of materials and shifting sources of supply around the world to maintain compliance. The increase to 55% in January 2021 already required many contractors to analyze and make changes to their supply chains, and the prospect of a further jump up to 75%—even on a phased-in basis—may present a significant challenge for companies with global supply chains. The NPRM appears to recognize this potentially disruptive effect, as it invites public comment on whether contractors would be “willing and able to adjust your supply chain to meet the proposed new thresholds,” but our expectation is that the government will remain committed to these enhanced thresholds.

Meanwhile, the ultimate impact of the new preferences and reporting requirements associated with critical items is harder to estimate at this time, though we can be sure that the separate rulemaking identifying “critical” items and components will be the subject of intense interest. Indeed, the NPRM already requests public comment on “what specific items or components . . . should receive an enhanced price preference and why,” so we expect industry to be particularly engaged on this issue from the outset.

Finally, it is no coincidence that the recent focus on new BAA standards has coincided with a marked increase in enforcement activity in this area. In the past 18 months, we have seen a clear uptick in enforcement actions—both civil and criminal—based on alleged noncompliance with the BAA and other domestic sourcing requirements. Given the government’s increasing concern with the security of its supply chain and its appetite for pursuing investigations in this space, contractors should carefully consider how these latest proposed changes would affect their internal processes for tracking their sources of supply, making required certifications, and obtaining certifications from their suppliers.

There is much more to come on this issue. We will continue to monitor this space closely and provide additional updates on future developments.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Government Contracts practice.