Biden Administration Increases Domestic Content Requirements under Buy American Act, Enhances Price Preferences for Domestic “Critical” Goods

On March 7, 2022, the Federal Acquisition Regulatory Council (FAR Council) published a final rule that increases domestic content requirements for Federal government procurements governed by the Buy American Act (BAA).  The FAR Council issued the final rule pursuant to President Biden's Executive Order of January 25, 2021 (EO 14005), which outlined the Biden Administration's policy that US government procurement should "maximize the use of goods, products, and materials produced in, and services offered in, the United States."¹  The final rule also establishes enhanced price preferences under the BAA for domestic goods that the Federal government designates as "critical" to US supply chains.  This change is intended to align Federal procurement policy with the Biden Administration's recently published strategy to improve supply chain resiliency in critical sectors, such as information and communications technology (ICT), clean energy, defense, public health, agriculture, and transportation.  This alert provides an overview of the final rule.

Background

The Buy American Act requires the federal government to buy domestic "articles, materials, and supplies" when they are acquired for public use, subject to exceptions for nonavailability of domestic products, unreasonable cost of domestic products, acquisitions subject to certain trade agreements, and situations where it would not be in the public interest to buy domestic products.² For purposes of the BAA, goods are domestic if they are "such unmanufactured articles, materials, and supplies as have been mined or produced in the United States" or "such manufactured articles, materials, and supplies as have been manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured, as the case may be, in the United States."³

Domestic content thresholds under the BAA

The implementing regulations for the BAA are set out in the Federal Acquisition Regulation (FAR).⁴  The FAR sets forth rules for determining whether solicited "construction material" or "end products" are "domestic" – that is, whether they were mined, produced, or manufactured in the United States, substantially all from components mined, produced, or manufactured in the United States.  The FAR uses a two-part test to determine whether a manufactured end product or construction material is domestic:⁵

• The end product or construction material must be manufactured in the United States; and
• A certain percentage of all component parts (determined by the cost of the components) must also be mined, produced, or manufactured in the United States (a requirement known as the "component test" until early 2021, when it was redesignated the "domestic content test").  For an end product or construction material that does not consist wholly or predominantly of iron or steel or a combination of both, the cost of domestic components must exceed 55 percent of the cost of all components.⁶ For an end product or construction material that consists wholly or predominantly of iron or steel or a combination of both, the cost of foreign iron and steel must constitute less than 5 percent of the cost of all the components.⁷ The domestic content test is waived for acquisitions of commercially available off-the-shelf (COTS) items, but not if they are iron or steel products (unless they are COTS fasteners).⁸

Price preferences for domestic goods under the BAA

The BAA does not prohibit the purchase of foreign end products or use of foreign construction material.  Instead, it encourages the use of domestic end products and construction materials by imposing a "price preference" for such goods, applied when the procuring agency assesses the "reasonableness" of the cost of domestic offers.⁹ Where a domestic offer is not the low offer, the procuring agency applies the price preference by adding a specified percentage to the price of the foreign low offer, inclusive of duty.¹⁰  The price of the domestic bid is deemed reasonable if the bid price does not exceed the price of the low offer with the addition of the price preference.¹¹ Under the current FAR, large businesses offering domestic supplies receive a 20 percent price preference, and small businesses offering domestic supplies receive a 30 percent price preference.¹²

Trade agreements

Under the WTO Agreement on Government Procurement (GPA) and certain US free trade agreements, the United States has assumed obligations to afford non-discriminatory treatment to goods from participating foreign countries when it conducts procurements covered by the agreement.  This obligation is implemented in US law through the Trade Agreements Act of 1979, which limits the Buy American Act's applicability by requiring US government procurements to treat as if they were domestic those materials originating in a country with which the United States has a covered trade agreement.¹³

Final rule amending the FAR Buy American Act requirements

The FAR Council's final rule retains the core elements of the proposed rule issued on July 30, 2021, with some minor adjustments.¹⁴  The key elements of the final rule are (1) an increase of the domestic content thresholds for domestic end products and construction materials; and (2) the establishment of enhanced price preferences for goods that OMB will designate as "critical" to US supply chains in a future rulemaking.

Increased domestic content thresholds 

Consistent with the proposed rule, the final rule will gradually increase the domestic content threshold for end products and construction materials to 75 percent (from the current rate of 55 percent) over a period of several years.  The current 55 percent threshold will remain in effect until October 25, 2022 (the effective date of the final rule), in order to provide a "grace period" for industry to adjust to the higher threshold.  Once the final rule takes effect, the domestic content threshold will increase gradually according to the following schedule:

• 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)

Under the final rule, a supplier holding a contract with a period of performance that spans the schedule of threshold increases will normally be required to comply with each increased threshold for the items in the year of delivery.  For example, a supplier awarded a contract in 2023 will have to comply with the 60 percent domestic content threshold initially, but in 2024 will have to supply products with 65 percent domestic content.  However, in response to comments on the proposed rule, the final rule authorizes an agency's senior procurement executive to allow a supplier to comply with the domestic content threshold that applies at the time of the contract award for the entire period of performance for that contract.  The procuring agency must consult with OMB's "Made in America Office" (MIAO) before exercising this authority.

Consistent with the proposed rule, the final rule establishes a "fallback" threshold that will apply in instances where goods that meet the new, higher domestic content threshold are not available or are of unreasonable cost.  In these circumstances, the rule would allow for the acceptance of the former, lower domestic content threshold of 55 percent.  For example, if a domestic end product that exceeds the 60 percent domestic content threshold is determined to be of unreasonable cost after application of the price preference, the government will treat an end product that is manufactured in the United States and exceeds 55 percent domestic content (but not 60 percent) as a domestic end product for purposes of the BAA.  The fallback threshold would cease to apply one year after the domestic content threshold increases to 75 percent, in order to "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."

The domestic content thresholds set forth in the final rule will not apply to end products or construction materials that consist wholly or predominantly of iron or steel or a combination of both.  Such items will continue to be classified as domestic for purposes of the BAA only if the cost of foreign iron and steel constitutes "less than 5 percent of the cost of all the components used" in the end product or construction material.  The fallback threshold described above also would not apply to such items.

Increased price preferences for "critical" products and components 

Consistent with the proposed rule, the final rule requires procuring agencies to apply higher price preferences to end products and construction materials that OMB deems to be "critical" to US supply chains or made up of "critical components[.]"  This change will take effect on October 25, 2022.  The White House has indicated that OMB will soon publish a final rule establishing the list of critical products and components in the FAR, and the level of additional price preference for such items.¹⁵  The White House contends that, by allowing the Federal government to pay an additional premium for critical items made domestically, the enhanced price preferences "will create a steady source of demand that will help catalyze domestic production."¹⁶ This is a core objective of the Biden Administration's new supply chain strategy, which Federal agencies unveiled last month pursuant to President Biden's Executive Order of February 24, 2021 (EO 14017).

The supply chain reviews that Federal agencies conducted pursuant to EO 14017 will inform OMB's forthcoming list of critical items.  The reviews sought to identify supply chain vulnerabilities, including critical products and components for which the United States lacks domestic production capacity, in six sectors: (1) information and communications technology (ICT); (2) energy; (3) agriculture; (4) public health; (5) defense; and (6) transportation.¹⁷  Several of the reviews, including those of the ICT, energy, and transportation sectors, recommended the use of Federal procurement preferences to stimulate demand for critical products made domestically.

After OMB finalizes the list of critical items, it will publish the list in the Federal Register for public comment no less frequently than once every four years.  The final rule provides that "unsolicited recommendations for deletions from this list may be submitted at any time and should provide sufficient data and rationale to permit evaluation[.]"

Potential replacement of the "component test"

In EO 14005, President Biden directed the FAR Council to consider proposing regulations that would replace the "component test" (described above and now called the "domestic content test") with a test under which domestic content "is measured by the value that is added to the product through U.S.-based production or U.S. job-supporting economic activity," rather than the cost of components.  The FAR Council did not include this change in the proposed rule or the final rule.  Instead, the FAR Council's Federal Register notice on the proposed rule sought public comments regarding "the strengths and shortcomings of the ‘component test,' as currently structured," as well as "how domestic content might be better calculated to support America's workers and businesses[.]"  The preamble to the final rule states that the FAR Council and the MIAO will consider the public comments received on this and other topics "as well as related initiatives to strengthen domestic supply chains."

In EO 14005, President Biden directed the FAR Council to consider proposing regulations that would replace the "component test" (described above and now called the "domestic content test") with a test under which domestic content "is measured by the value that is added to the product through U.S.-based production or U.S. job-supporting economic activity," rather than the cost of components.  The FAR Council did not include this change in the proposed rule or the final rule.  Instead, the FAR Council's Federal Register notice on the proposed rule sought public comments regarding "the strengths and shortcomings of the ‘component test,' as currently structured," as well as "how domestic content might be better calculated to support America's workers and businesses[.]"  The preamble to the final rule states that the FAR Council and the MIAO will consider the public comments received on this and other topics "as well as related initiatives to strengthen domestic supply chains."

Outlook

The increased domestic content thresholds established by the final rule may require some companies to alter their sourcing and manufacturing practices in order to continue benefiting from domestic preferences under the BAA.  The enhanced price preferences for domestic "critical" goods will also make it more difficult for foreign suppliers to compete for certain US government contracts, though the impact of this change will depend on the magnitude of the enhanced preferences and the breadth of the list of critical products.  Companies should carefully assess the impact of these changes, including whether existing trade agreements such as the GPA or the USMCA entitle their goods to non-discriminatory treatment in Federal government procurement.

The final rule can be viewed here. 
 

_{1 For an overview of EO 14005, please refer to the W&C US Trade Alert dated February 1, 2021.
2 See generally 41 U.S.C. §§ 10a-10d.
3 41 U.S.C. § 10a.
4 48 C.F.R. Part 25.
5 48 C.F.R. §§ 25.003, 25.101(a), and 25.201(b).
6 48 C.F.R. § 25.003, 25.101(a)(2)(i), and 25.201(b)(2)(i).
7 48 C.F.R. § 25.003, 25.101(a)(2)(ii), and 25.201(b)(2)(ii).
8 48 C.F.R. § 25.001(c)(1).
9 48 C.F.R. § 25.105.
10 48 C.F.R. § 25.105(b).
11  48 C.F.R. § 25.105(c).
12 48 C.F.R. § 25.105(b)(1) and (2).
13v19 U.S.C. § 2511(a).
14 For an overview of the proposed rule, please refer to the W&C US Trade Alert dated August 5, 2021.
15 "The Biden-⁠Harris Plan to Revitalize American Manufacturing and Secure Critical Supply Chains in 2022," The White House, February 24, 2022. 
16 Id.
17 The reviews were conducted by the Departments of Commerce, Homeland Security, Energy, Agriculture, Health and Human Services, Defense, and Transportation.  The findings of the reviews are available here}.    

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