Proposed FAR changes to the purchase of American law increase competition for federal contracts and the supply chain
August 11, 2021
Husch Blackwell LLP
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A proposed amendment to the Federal Acquisition Regulations (“FAR”), released July 30, 2021, will “amplify the effects of the Buy American Act” (“BAA”) over the next eight years, according to the Federal Register. Federal contractors and subcontractors were informed of impending proposed changes in January when President Biden issued Executive Order (“EO”) 14005 that revoked or replaced several EOs issued by the Trump administration. The proposed rule, which results from Section 8 of EO 14005, would change existing requirements of the BAA and build on them. The proposed rule includes immediately higher thresholds for domestic content that will increase over time, price preferences for “critical” items, and reporting of domestic content by contractors within 15 days of the award to the newly created “Made in America” office of the Office of Management and Budget (“OMB”). The new proposed Buy American restrictions do not apply to acquisitions that are subject to various trade agreements under the Trade Agreements Act.
Comments on the proposed rule and other EO 14005 issues are due 09/28/2021 A virtual public session will take place on August 26, 2021. We summarize the main proposed changes below.
Domestic content pricing preferences will increase to 60% in 2029 and eventually to 75%
According to the BAA, contractors are granted “price preferences” if they deliver items or materials with a minimum proportion of domestic content. Currently, the BAA’s “Unit Test” (also known as the “Domestic Content Test”) requires that the cost of household components of most end products that are non-commercially available off-the-shelf items (“COTS”) be 55 percent of the total cost of the item to the supplier to receive a price preference. Once triggered, the price preference adds 20 percent to the non-BAA-compliant low offer price if the “domestic” offer is reasonably priced, or 30 percent if the domestic provider is a small business.
The proposed rule would increase the threshold required to qualify as a “domestic end product” or “domestic building material” to 60 percent immediately, with an increase to 65 percent in 2024 and 75 percent in 2029. in order to comply with the later increased thresholds (e.g. items that are delivered for a three-year contract from 2023 must comply with the 60 percent threshold in 2023 and then the 65 percent threshold in 2024-2025). A so-called “fallback threshold” is to be introduced by 2029, which will enable contract agents to prevent perverse outcomes where the new rules could lead to more foreign procurement, not less. Iron and steel end products that already have to exceed a domestic share of 95% in order to receive a price preference are not affected by the proposed regulation.
“Advanced” price preferences are applied to “critical” items
The Biden administration has made strengthening America’s supply chains a top priority for the executive (see our blog posts here, here, and here). We are beginning to understand how this initiative will affect federal contractors. In addition to the already existing 20 and 30 percent price preferences (as described above), end products and building materials from within Germany that are classified as “critical” or made up of “critical” components are exposed to even more dramatic price preferences. The four-year supply chain review initiated in EO 14017 will reveal the scope of possible “critical” end products, materials and components, and the OMB will further determine for which of these critical items state price preferences make a significant difference in strengthening the supply chain. The final listing is then given in FAR 25.105 along with the additional price preference that applies to each item. None of these “critical” items have been identified yet, so contractors should continue to monitor government progress in assessing critical supply chains and be ready to provide input if the items they are supplying are likely to be affected. Department of Defense contractors should note that the proposed rule does not address the 50 percent preference for Department of Defense procurement, which remains in place.
Two new FAR clauses will provide OMB Postaward data on “critical” articles
The proposed rule publishes two new clauses that oblige contractors to report percentage information on the domestic content of “critical” articles supplied in federal contracts (except COTS articles) to OMB within 15 days of the award. The clauses give OMB the ability to verify that the FAR changes and related changes to the Buy American Waiver process due to EO 14005 are actually increasing domestic sourcing.
Opportunity to comment includes other sections of EO 14005
Finally, the proposed rule also requires comments from the public on other EO 14005 issues:
- Commercial information technology (“IT”) is exempt from the BAA;
- The COTS exemption from the BAA;
- Federal Government Promotion of Made in America Services; and
- Whether there are ways to comply with the Trade Agreements Act (“TAA”) while continuing to promote critical US supply chains.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.
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