President Biden signed an Executive Order (EO) on Monday, January 25, 2021, aimed at establishing heightened standards for compliance with various procurement laws that provide a preference for U.S. goods and services. These "Made in America" laws include the Buy America Act and Buy American Act (BAA), two distinct and separate laws, as well as other laws and regulations, such as the Jones Act which deals with maritime transport services.
To help American businesses and workers thrive, the goal of the EO is to maximize the use of products and materials produced in the U.S., and services provided by U.S. companies. To do this, the EO contemplates significantly revising how domestic content is measured and increasing the required thresholds for application of the various Made in America laws. The EO also calls for the creation of a new office within the Office of Management and Budget to oversee the waiver process under which some U.S. preference requirements were previously circumvented. To provide transparency into the waiver process, and in an effort to engage with small U.S. manufacturers, a public website will be created that will list all waiver requests. To this end, the EO also calls for agencies to partner with the Hollings Manufacturing Extension Partnership to conduct supplier scouting to identify more American companies, including small- and medium-sized companies, that are able to produce goods, products, and materials in the U.S. that meet federal procurement needs.
The EO did not direct an immediate change to any of the existing U.S. preference laws. The EO did, however, outline certain changes with respect to the BAA and directed the Federal Acquisition Regulatory Council to propose amendments to the applicable provisions in the Federal Acquisition Regulations (FAR) within 180 days of the EO. These regulatory changes are to include:
- replacing the "component test" in Part 25 of the FAR used to identify domestic end products and domestic construction materials 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;
- increasing the numerical threshold for domestic content requirements for end products and construction materials; and
- increasing the price preferences for domestic end products and domestic construction materials.
Until the regulations are published, the true impact of the EO on federal contractors is unknown. For example, the EO does not address if the changes to the BAA are meant to materially impact the application of the Trade Agreements Act which typically applies to procurements for goods and services valued over $182,000 in lieu of the BAA.
The EO comes shortly after publication of the January 19, 2021 Final Rule that implemented significant changes to the BAA procurement requirements in FAR Part 25. The Final Rule applies to all solicitations subject to the BAA that are issued on or after February 22, 2021, unless the BAA rules are revised as a result of the EO.
The Final Rule increased the BAA domestic component requirement for non-commercial off-the-shelf items from 50% to 55%. Presumably, the EO will seek to increase this threshold even more. The Final Rule also established a new, distinct threshold for end items and construction materials that are made "predominantly" of iron or steel. Under the Final Rule, "predominantly" means the iron or steel components in the item exceeds 50% of the total cost of all components in the item. For such items, the domestic component content threshold is set at 95%. Stated differently, for items made predominantly of iron or steel to be considered domestic, the items would need to be manufactured in the U.S. and the cost of the iron and steel content not produced in the United States cannot be more than 5% of the cost of all components or content of the material or end product.
In addition, the Final Rule increases the evaluation penalty applied during the evaluation phase of a BAA procurement. The BAA does not prohibit federal agencies from buying foreign products—it simply discourages their acquisition by adding an evaluation penalty to their cost. Before the Final Rule takes effect, a Contracting Officer evaluating offers for a civilian agency must add a 6% penalty to an offer of foreign-made products, or add a 12% evaluation penalty if the competing domestic vendor is a small business. Defense agencies must add a 50% penalty to the foreign offer. After adding the BAA penalties to the cost of the foreign goods, an agency could evaluate a domestic offer as being less expensive than the foreign offer and award to the company offering the domestic products domestic concern. Under the Final Rule, the penalties have been increased from 6% percent to 20% and from 12% to 30% (if the competing vendor is a small business). For Department of Defense procurements, the existing 50% price adjustment was not changed as part of the Final Rule, but the comments section of the Final Rule noted that changes would be made to the Defense Federal Acquisition Regulation Supplement in a separate rulemaking.
The take away from both the EO and the Final Rule is that federal contractors should carefully review new solicitations and the status of the regulations as applied to their contracts to ensure compliance with the evolving BAA requirements.
If you have any questions about this legal update or need assistance on implementation of the Final Rule please reach out to the Government Contracts group.