The FAR Council recently published its proposed rule to implement a part of President Biden’s January 28, 2021 Executive Order No. 14005 (EO 14005), which dictated certain revisions to the Buy American Act (BAA) regulations. As discussed in our previous blog post, Section 8 of EO 14005 directed the FAR Council to consider the following:

• Replacing the “component test” at FAR Part 25.
• Increasing the threshold for domestic content.
• Increasing price preferences for domestic end products.

The proposed rule addresses Section 8 of EO 14005 by proposing to do the following:

• Increase the domestic content threshold instead of replacing the domestic content test (at least for the time being), with scheduled increases.
• Permit a limited period during which U.S.-made end products meeting the current domestic content threshold (greater than 55%) will be considered “domestic end products” under certain circumstances.
• Establish a list of critical products and critical components subject to additional price preferences and post-award reporting requirements.

Domestic Content Test (Formerly “Component Test”)

The use of the domestic content test remains, although the FAR Council invites comments on the efficacy of the current framework. As a reminder, the current threshold requires the domestic content of an end product to exceed 55% of the cost of all components. The FAR Council proposes to increase the domestic content thresholds again, on the following schedule:

60% “initial” increase → 65% in 2024 → 75% in 2029

However, if a contract awarded during one threshold period continues through the next threshold period, the contractor will be required to meet the new threshold. For example, if a contractor is awarded a five-year contract in 2022 with the 60% threshold, its deliveries beginning in 2024 must meet the 65% threshold. It is unclear how or if this will impact contracts and solicitations pending as of the date the final rule is issued.

The FAR Council will consider larger or smaller increases in the content threshold as well as differently timed increases in the final rule.

Note: The threshold for end products that consist wholly or predominantly of iron/steel has not changed—foreign iron/steel must constitute less than 5% of the cost of all components.

Fallback Threshold

If it is determined that domestic end products that meet the increased thresholds are (1) not available; or (2) of unreasonable cost, the government will treat an end product meeting the previous >55% threshold as a domestic end product. Offerors must indicate which of their foreign end products exceed 55% domestic content. The effect of this fallback threshold is the addition of another “tier” of evaluation in the existing price preference framework.

That is, U.S.-made end products that meet the current >55% threshold will be given preference over U.S.-made end products that do not meet the current threshold, although by definition both end products fail to meet the definition of “domestic end product”. The current framework treats offers the same regardless of whether one offer is a U.S.-made end product with 49% domestic content versus a U.S.-made end product with 51% domestic content.

To illustrate:

Offer A	$100	Domestic end product (meets % threshold)
Offer B	$70	U.S.-made end product (56% domestic content)
Offer C	$60	U.S.-made end product (54% domestic content)

Offer C is the low offer from a large business, and a 20% price preference is applied to Offer C for an evaluated price of $72. Offer C’s price remains lower than Offer A, the domestic offer, after the price preference. Therefore, Offer A’s price is unreasonable.

Offer A	$100	Domestic end product (meets % threshold)
Offer C	$72	U.S.-made end product (54% domestic content)
Offer B	$70	U.S.-made end product (56% domestic content)

Offer B is then treated as a domestic offer because it is a U.S.-made end product that meets the previous threshold of >55% domestic content. Because Offer B is lower than Offer C’s adjusted price, Offer B is determined reasonable and an award will be made to Offer B.

Note: The fallback threshold is only available until January 1, 2030 (1 year after the 75% increase takes effect).

Critical Products/Components

According to the critical supply chain review required by EO 14017, a separate rulemaking will identify certain critical products and critical components that will be added to the FAR and reviewed every four years. The identification of critical products/components will be used as follows:

• To apply an additional price preference on top of the existing 20% for large businesses and 30% for small businesses. Offerors are required to identify domestic end products that contain a “critical component” so contracting officers can apply the enhanced price preferences.
• Implementation of a new post-award reporting requirement identifying the amount of domestic content in each critical item and each domestic end product containing a critical component.

The supply chain risk review currently includes semiconductor manufacturing, high-capacity batteries, critical minerals and “other identified strategic materials,” and pharmaceuticals. However, the review will also consider “other essential goods and materials,” which is broadly defined as “goods and materials that are essential to national and economic security, emergency preparedness, or to advance the policy set forth in section 1 of [EO 14017], but not included within the definition of ‘critical goods and materials.’”

Next Steps

The proposed rule does not address the commercial IT or COTS exceptions, although it invites comments on these topics. In addition, the proposed rule makes no changes to the applicability and requirements of the Trade Agreements Act (“TAA”), which is beyond the scope of the rulemaking, but it does invite comments on TAA-related issues. The TAA is an exception to the BAA that applies to most procurements over the TAA threshold, which is currently $182,000. The proposed rule discussed above concerns procurements in which the BAA applies, which are those below the TAA threshold and above the micro-purchase threshold.

A virtual public meeting will be held on August 26, 2021, from 9 a.m. to 3 p.m. ET to discuss the proposed rule and other open issues.

If you have questions about the new proposed rule, please contact the authors.