October 25, 2022 Effective Date Provides A “Grace Period” To Affected Industries To Come Into Compliance With Stricter Non-Iron/Non-Steel Domestic Content Standards In Federal Procurement
On March 7, 2022, the Department of Defense (“DoD”), National Aeronautics and Space Administration (“NASA”), and General Services Administration (“GSA”) published a Final Rule to amend certain Federal Acquisition Regulation (“FAR”) provisions that implement the Buy American Act (“BAA”).1Federal Acquisition Regulation: Amendments to the FAR Buy American Act Requirements, 87 Fed. Reg. 12780 (Mar. 7, 2022).
By way of background, the BAA requires public agencies to procure domestic products – meaning articles, materials, and supplies that were mined, produced, or manufactured in the United States, substantially all from domestic components – subject to exceptions for nonavailability of domestic products, unreasonable cost of domestic products, or in situations when the purchase of domestic products would not be in the public interest. Additional exceptions include acquisitions subject to certain international trade agreements and purchases below certain dollar-thresholds (i.e., micro-purchases).
When it takes effect on October 25, 2022, the recently published Final Rule will make important changes to the application of the FAR BAA provisions. As outlined below, these final modifications are expected to impose material changes on contractor supply chains and the way in which companies do business with the federal government in the future. Significant changes include:
- Increasing the domestic content threshold for non-iron/non-steel products (initially from 55 to 60 percent, with staged increases to 75 percent in 2029) in order to qualify as domestic products and receive preferences under the BAA;
- Creating a “Fallback Threshold” (i.e., use of the current 55 percent domestic content threshold) in cases where the purchasing agency finds that no end products or construction materials meet the new higher standard, or where such products would be of unreasonable cost; and
- Setting the stage for a future rulemaking to create an enhanced price preference for “critical” end products and construction material (or such products and materials that are made with “critical components”).
CURRENT DOMESTIC CONTEnT TEST
Under current law, a two-part test is used to determine whether a manufactured end product or construction material qualifies as “domestic.” First, the end product or construction material must be manufactured in the United States. Second, a minimum percentage of all component parts (determined by cost) must also be mined, produced, or manufactured in the United States. This is known as the “domestic content test,” and different thresholds apply depending on whether the end product consists wholly or predominantly of iron or steel (or a combination of both). For an end product that does not consist wholly or predominantly or iron and/or steel, the cost of domestic components must exceed 55 percent of the cost of all components (i.e., the components test). For an end product that consists wholly or predominantly of iron and/or steel, the cost of foreign iron and steel must constitute less than 5 percent of the cost of all components. That iron and steel threshold is not waived for commercially available off-the-shelf (“COTS”) items, except for COTS fasteners.
phased increase to the Domestic content threshold for non-iron/non-steel products and construction materials
The new Final Rule primarily focuses on tightening the standards relating to non-iron/non-steel products and construction materials. It will gradually increase the domestic content threshold for end products and construction materials from the current rate of 55 percent to 75 percent by 2029. The first increase (to 60 percent) will take place on October 25, 2022. The Federal Register notice characterizes this as a “short grace period during which contractors and the workforce prepare for the increase[.]” Thereafter, the domestic content threshold will be stepped up twice more:
- 60 percent (for items delivered in calendar years 2022 and 2023)
- 65 percent (for items delivered in calendar years 2024 through 2028)
- 75 percent (for items delivered starting in calendar year 2029)
A “TIME OF CONTRACT AWARD” DOMESTIC CONTENT RULE MAY BE AVAILABLE IN CERTAIN MULTI-YEAR CONTRACT SITUATIONS
The Final Rule includes an important provision that may apply in situations where a supplier’s contract term is covered by multiple domestic content thresholds (e.g., 60 percent in 2023 and 65 percent in 2024). The default rule will be that the contractor must “comply with each increased threshold for the items in the year of delivery.” For example, the Final Rule intends that a supplier awarded a contract in 2023 must meet the 60 percent domestic content threshold for any deliveries in that year; under the default rule, any deliveries in 2024 must then meet the increased 65 percent domestic content threshold that also takes effect in 2024. In response to comments on the Proposed Rule, however, the Final Rule authorizes an agency's “senior procurement executive to allow the application of an alternate domestic content test” (i.e., the domestic content threshold that applies at the time of the contract award) throughout the life of the contract. The Final Rule explains that any such action only may be taken “after consultation with the Office of Management and Budget’s Made in America Office (“MIAO”). To implement this exception, the Final Rule requires MIAO to “work with the agencies to develop an appropriate process for consultation.” This provision has the potential to provide enhanced business continuity and supply chain certainty to suppliers operating under multi-year contracts, but we anticipate that this could become a contentious “flashpoint” for some stakeholders (which will range from the affected agencies to domestic producers).
A “FALLBACK” THRESHOLD MAY BE AVAILABLE UNTIL 2030 IN CASES WHERE NO END PRODUCTS OR CONSTRUCTION MATERIALS MEET THE HIGHER STANDARDS, OR WHERE SUCH PRODUCTS ARE OF UNREASONABLE COST
The Final Rule will implement a “Fallback Threshold” (i.e., application of the current 55 percent domestic content requirement) in cases where the bidding agency does not receive any offers that meet the higher domestic content standards or where use of such domestic end products would be of unreasonable cost. The Final Rule provides an example with respect to a “domestic end product that exceeds the 60 percent domestic content threshold.” In such a case, “the Government will treat an end product that is manufactured in the United States and exceeds 55 percent domestic content, but not 60 percent domestic content, as domestic end product.” The Fallback Threshold requires “offerors to indicate which of their foreign end products exceed 55 percent domestic content” and only applies to construction material and end products that “do not consist wholly or predominantly of iron or steel or a combination of both” and that are not COTS items.
The Fallback Threshold will be available until January 1, 2030. Importantly, the Final Rule acknowledges that, while Section 70921 of the Infrastructure Investment and Jobs Act (“IIJA” or “Bipartisan Infrastructure Law”) “envisions use” of a 60 percent fallback threshold, that level is not a legal requirement because it was “simply offered as a ‘sense of Congress.’” Accordingly, the Final Rule continues to utilize a 55 percent fallback threshold, as originally proposed. The Final Rule explains that the 55 percent standard gives affected companies time to “adjust their supply chains to meet the higher content requirements” and that “sunsetting the fallback [in 2030] will send a clear signal to the Federal marketplace that the Federal Government is fully committed to suppliers who increase their reliance on domestic supply chains.”
enhanced price preferences for YET-TO-BE IDENTIFIED “critical products” and “critical components”
The Final Rule retains the framework for applying a higher price preference for “critical products and critical components” as contemplated by E.O. 14017. For products made up of “critical components,” the Final Rule requires that contractors identify their domestic products that contain a “critical component” when making offers to the federal government so that contracting officers know that the domestic product contains the “critical component.” Importantly, however, the Final Rule confirms that a separate rulemaking will be initiated in the future in order to develop the list of critical items and critical components that will be subject to enhanced price preference(s).
This is consistent with a recent White House announcement that the Office of Management and Budget will soon propose a new Buy American rule that will create a new category of critical products that will be eligible for enhanced price preferences. This new rule will allow the federal government to pay an “additional premium for critical domestic-made products and components essential to the Administration’s supply chain resiliency strategy,” thereby creating a “steady source of demand that will help catalyze domestic production and bolster thin supply chains.” Companies with supply chains that may be impacted by a “critical” product or component designation should consider actively participating in the forthcoming rulemaking process.
The FAR Council also deferred action on previous proposals that would have required contractors to provide postaward reporting on the specific domestic content of critical end products, construction material, or components receiving any price preference. This will be the subject of the forthcoming rulemaking to establish the “definitive list” of critical items and critical components.
The Final Rule takes effect on October 25, 2022 and implements several proposals that are designed to ensure the application of stricter BAA requirements in federal procurement. This sends another clear signal to affected companies about the U.S. government’s policy commitment to increased use of domestic supply chains when spending federal procurement dollars. While the Final Rule provides a “grace period” for compliance, there is a clear expectation that companies should redouble their efforts “to secure adequate domestic suppliers and make the requisite changes to their supply chains” in order to meet the higher domestic content thresholds.
For more information about this and other key domestic preference/government procurement and supply chain developments, please visit King & Spalding’s Buy American and Supply Chain webpage.