The Final Buy American Act Regulations Are Here: What Contractors Need to Know

On Monday, March 7, 2022, the Federal Acquisition Regulatory Council (“FAR Council”) published a final rule aimed at strengthening Buy American Act (“BAA”) domestic preferences in federal procurements. In particular, the final rule increases the numerical domestic content threshold for end products and construction materials and establishes a framework for providing further price preferences for items designated as “critical” products, materials, and components. The final rule will be effective October 25, 2022, so contractors have a short grace period to ensure compliance with the new requirements.

The rule responds to the Biden Administration’s direction in the January 2021 Executive Order 14005 to promote enforcement of the BAA, as well as Congress’s direction in the 2021 Infrastructure Investment & Jobs Act (“IIJA”). In particular, Section 8 of Executive Order 14005 directed the FAR Council to consider a final rule increasing both the numerical domestic content threshold under the BAA and the price preferences for BAA-qualifying domestic end products and domestic construction materials. Similarly, IIJA Section 70921(c) presented the “sense of Congress that the [FAR] Council should amend the FAR to increase the domestic content requirement for domestic end products and domestic construction material to 75 percent, or, in the event of no qualifying offers, 60 percent.”

The substance of the final rule hews closely to the proposed rule issued in July 2021. In particular, the final rule:

• Calls for an increase in the domestic content threshold from 55 percent to 60 percent in October 2022, with additional graduated increases to 65 percent in calendar year 2024 and 75 percent in calendar year 2029.
• Creates a “fallback threshold” that allows products meeting the current 55 percent domestic content threshold to qualify as domestic products until 2030 where the agency determines that products meeting a higher threshold are either not available or unreasonably expensive.
• Establishes a framework for higher price preferences for “critical” products, materials, and components, but reserves identification of these “critical” items and their associated price preferences for a future rulemaking.

But while the thrust of the final rule is consistent with last summer’s proposed rule, there are several key changes in implementation. Most notably, the final rule:

• Adopts a seven-month “grace period” before the increase to a 60 percent domestic content threshold takes effect in October 2022 (the proposed rule had contemplated that this initial increase would happen immediately).
• Creates an “alternate domestic content test” that, with high-level agency approval, would apply the domestic content threshold in effect at the time of award to the entire lifetime of the contract, notwithstanding scheduled threshold increases.
• Removes language that would have required post-award reporting regarding the specific percentage of domestic content in items and components designated as “critical” (though such a requirement may yet be imposed by the future rulemaking addressing “critical” items).

For now, 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 Executive Order 14005. However, this final rule is certainly not the last of regulatory changes in this area, and we expect to see significant rulemaking action in the coming year, including the proposed rule on the list of critical items and rules implementing sections of the IIJA. The final rule and the domestic preference-related provisions of the IIJA will be discussed further at a Covington webinar on March 23, 2022 (registration available here).

I. Increased Domestic Content Thresholds

Unless an exception applies, the BAA implements a procurement preference for “end products” that are “domestic.” For items that are not made predominantly of iron and/or steel, 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 domestic content threshold (unless the end product is a commercial off the shelf (“COTS”) item). For decades, the second prong—referred to as the “domestic content test”—required more than 50 percent of the product’s component costs to be attributable to components mined, produced, or manufactured in the United States. However, on January 19, 2021, the Federal government increased this threshold to 55 percent for most products.

The final rule now further increases the domestic content threshold from 55 percent to 60 percent effective October 25, 2022, while also requiring further increases to 65 percent in 2024 and 75 percent in 2029. In contrast to the proposed rule, which envisioned an immediate increase in the domestic content threshold, the final rule provides a short grace period to allow industry a limited window to prepare for the increased domestic content threshold.

In general, contracts with a period of performance that spans the schedule of domestic content threshold increases will be required to comply with each threshold increase. For example, if a contractor was awarded a five-year contract today, the contractor would be required to comply with the 60 percent increase in October 2022 and the 65 percent increase in 2024. (The new rule also may be applied to existing contracts at the discretion of contracting officers, though of course there must be “appropriate consideration” for such changes to existing contracts, in accordance with longstanding FAR principles.) As a result, offerors now will have to plan for future changes to the domestic content threshold during the period of performance of a contemplated contract.

To address concerns that compliance with increased thresholds would place significant burdens on contractors under certain types of agreements such as IDIQ contracts or long-term fixed-price contracts, the final rule creates a new process by which the contract may include an alternate domestic content test if authorized by the awarding agency. This alternate domestic content test would apply the domestic content threshold in effect at the time of contract award throughout the life of a contract, rather than requiring the contractor to comply with each subsequent increase. However, the alternate domestic content test applies only if authorized by an agency’s senior procurement executive, in consultation with The Office of Management and Budget’s Made in America Office.

Additionally, the final rule maintains the fallback threshold concept created under the proposed rule, which provides an exception to the increased content requirement until 2030 in limited situations. The fallback threshold allows end products that comply with the current 55 percent domestic content threshold to continue to be treated as “domestic” after scheduled threshold increases, but only if other end products that meet the new threshold are not available or are otherwise unreasonably expensive. The FAR Council noted that the fallback threshold is intended to prevent scheduled increases in the content threshold from taking work away from domestic suppliers that are actively adjusting their supply chains and to avoid unintentionally raising the foreign content of federal purchases through increased use of waivers.

With regard to reporting requirements, the proposed rule would have required offerors to identify which of their foreign end products and foreign construction materials meet the fallback threshold, but the final rule clarifies that this identification would be required only for end products and construction materials that rely upon the fallback procedures are used, i.e., for end products and construction materials that do “not consist wholly or predominantly of iron or steel or a combination of both” and are not COTS items. The final rule also clarifies that the nonavailability exception to the BAA is not required when the fallback procedures are used.

II. Enhanced Price Preferences for Critical Products and Components

The proposed rule outlined a framework that would provide for higher preferences for select domestic end products that are designated by the government as “critical items” or items containing “critical components.” Additionally, the proposed rule included two new clauses that would require contractors to submit post-award reports detailing the specific domestic content of critical items and items containing critical components that were awarded under a contract.

The final rule maintains the proposed framework for the application of an enhanced price preference for domestic products that are considered critical products or made up of critical components. However, the FAR Council, in response to commenters’ concerns, deferred the creation of the list of critical products and components and the associated post-award reporting requirements to a separate rulemaking. These sections of the FAR will not be operational until the FAR Council provides the list of items to which the framework applies.

The rule notes that the Government estimates that approximately 10 percent of the contract awards subject to the Buy American statute will be for critical products or components, though the basis for this estimate is unclear given that the Government has not yet identified a list of critical products or components. When the proposed rule regarding the list of critical products and components is released, the public will have another opportunity to provide feedback on the framework, the items identified as critical, and corresponding price preferences.

III. Next Steps in Implementing Buy American Preferences