The Buy American Act (BAA) is a domestic preference law. When it applies to a procurement, the government must give a preference to supplies and construction materials that are "domestic end products." Prior to Jan. 19, 2021, a product would qualify as a "domestic end product" if it was manufactured in the U.S. and more than 50 percent of the cost of the components in the product was from components that were manufactured in the U.S. (i.e., cost of components test). The 50 percent cost of components test was waived for Commercially Available Off-the-Shelf (COTS) items. As such, a COTS item that was manufactured in the U.S. was also considered a domestic end product, regardless of the percentage of domestic components in that COTS item. The product was considered BAA compliant.
In addition, because the BAA is a domestic preference law, the government may purchase a "foreign end product" if it determines the lowest priced domestic end product offer is unreasonable. To assist in making this determination, before a federal agency can purchase a foreign end product, it applies a price "penalty" to it during proposal evaluation. If a domestic product offer was not the lowest offer, the agency added six percent to the proposed price of the foreign end product offer. The agency added 12 percent if the lowest priced domestic product offer was from a small business, and Department of Defense agencies added 50 percent, whether the domestic offer was from a large or small business. Doing so created new prices for each offer, based upon whether they were domestic or foreign end products, that the government used for purposes of evaluating the offers. The price of the domestic offer was considered reasonable if it did not exceed the evaluated price of the low foreign product offer, after the addition of the price penalty. In short, the government was willing to pay more to support U.S. businesses providing domestic end products, but only if it the prices for those products were deemed reasonable after adding the price penalty to the foreign end product offer.
Both former President Trump and President Biden have issued Executive Orders addressing Buy American requirements and preferences. This article summarizes the current status of each Executive Order.
President Trump's Executive Order
Determining compliance with the BAA changed on Jan. 19, 2021, when the Federal Acquisition Regulatory (FAR) Council issued a final rule implementing President Trump's Executive Order 13881, Maximizing Use of American-Made Goods, Products, and Materials (84 FR 34257, July 18, 2019). The final rule, which has already been implemented throughout FAR Part 25, made some significant changes to the BAA, changing both the domestic content requirements and the evaluation price penalties.
First, the domestic content threshold, measured by the cost of U.S. components in a manufactured end product or construction material, has increased from 50 percent to 55 percent. Although the BAA previously did not differentiate between manufactured end products and end products made of iron and/or steel, they are treated differently now. For end products or construction materials that consist wholly or predominantly of iron or steel, or a combination of both, the domestic content threshold has increased from 50 percent to 95 percent.
To assist contractors in determining whether their products consist wholly or predominantly of steel or iron, or a combination of both, the final rule - and the relevant FAR provisions - includes the following definition of "predominantly of iron or steel or a combination of both":
Predominantly of iron or steel or a combination of both means that the cost of the iron and steel content exceeds 50 percent of the total cost of all its components. The cost of iron and steel is the cost of the iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product and a good faith estimate of the cost of iron or steel components excluding COTS fasteners.
The Final Rule recognizes the difficulty in estimating the cost of foreign steel, so it permits contractors to use a good faith estimate. Companies should therefore ensure they have proper documentation, and be prepared to substantiate their estimates when submitting an offer on a procurement that includes the new revised FAR provision.
Second, the Final Rule changed the COTS exception - but only for iron and/or steel COTS products. It removed the waiver for iron or steel COTS products that are manufactured in the U.S., meaning, a COTS item manufactured in the U.S. is still considered a domestic end product unless it is a COTS item made predominantly of iron or steel. The Final Rule did leave a partial waiver in place for COTS iron and steel fasteners, as they are generally seen as too difficult to track and are largely interchangeable. The domestic content test excludes iron and steel fasteners which are defined as "a hardware device that mechanically joins or affixes two or more objects together" including "nuts, bolts, pins, rivets, nails, clips, and screws." Accordingly, COTS fasteners can be purchased without regard to their foreign iron or steel content, and their cost can be excluded from the good faith estimate of the cost.
The third significant change pertains to the price "penalty" applied to foreign end product offers during proposal evaluation. To determine if the price of a domestic end product offer is unreasonable, federal agencies must now add 20 percent (up from six percent) to the price of the foreign end product offer if the potential awardee offering domestic end products is a large business; or 30 percent (up from 12 percent) if the potential awardee offering domestic end products is a small business. Department of Defense agencies still add 50 percent to the price of the foreign end product offer. So now, the government is willing to pay even more to support U.S. businesses providing domestic end products, as long as the price is considered reasonable after the higher price penalty is added to the foreign end product offer.
As noted above, the relevant FAR clauses have already been revised to reflect these changes. Contractors should start seeing the updated FAR clauses in new solicitations and contracts starting on Feb. 22, 2021.
President Biden's Executive Order
President Joe Biden issued Executive Order 14005 (EO), Ensuring the Future Is Made in All of America by All of America's Workers, on Jan. 25, 2021. The EO directs agencies to maximize their use of domestic products and services, and gives the FAR Council 180 days to consider new rules for increasing domestic content requirements and price preferences, and to consider ways to eliminate constraints on Buy American rules as they apply to commercial information technology items.
Although President Biden's EO order repeals several BAA executive orders issued by the Trump administration, it does not repeal EO 13881 and the new Final Rule summarized above. Instead, it retains those requirements of EO 13881 that are consistent with the new EO. Any new FAR Council rules resulting from President Biden's EO will likely build upon the changes already made by the new BAA Final Rule.
The first thing to note about the EO is its use of the term "Made in America" rather than Buy America/American. "Made in America" is a standard administered by the Federal Trade Commission. It requires manufacturers to meet the "all or virtually all" standard if they want to promote their products as being "Made in USA." It is different from the various domestic preference laws (i.e., Buy American Act, Buy America, Berry Amendment) most government contractors are used to seeing incorporated into their contracts. But for purposes of the EO, these domestic preference laws are considered part of the "Made in America" laws. The EO defines "Made in America Laws" as:
[A]ll statutes, regulations, rules, and Executive Orders relating to Federal financial assistance awards or Federal procurement, including those that refer to "Buy America" or "Buy American," that require, or provide a preference for, the purchase or acquisition of goods, products, or materials produced in the United States, including iron, steel, and manufactured goods offered in the United States.
One key aspect of the EO is the creation of a Made in America Office. The Director of the Office of Management and Budget (OMB) is tasked with creating a Made in America Office which will be run by a Made in America Director. This office will be responsible for reviewing all federal agency requests to grant a waiver to a Made in America Law. Agencies will have to submit a detailed justification for any waiver to the Made in America Director, who will determine whether the waiver will be granted. According to the EO, it will be much more difficult to obtain a waiver, and they will only be granted for emergency needs.
Another aspect of the EO is its discussion of the BAA cost of components test. The EO requests that the FAR Council look into replacing the cost of components test with a test that measures domestic content based on the value added to the product through U.S.-based production or U.S. job-supporting economic activity. As previously noted, the EO does not repeal the new BAA Final Rule summarized above. It also does not make adjustments to any trade agreements. For example, procurements covered by the Trade Agreements Act ((generally procurements for supplies valued above $182,000 (i.e., the WTO GPA) and construction valued above $7,008,000)) will not be impacted by the EO's changes to the BAA.
The EO also attempts to help small- and medium-sized businesses. To facilitate domestic manufacturers in becoming more competitive, the EO requires agencies to use the Manufacturing Extension Partnership, a program run by the National Institute of Standards and Technology. Agencies are directed to use this program specifically to look for new small- and medium-sized suppliers.
The EO includes several other policy changes not summarized in this article and it can be viewed in its entirety here. We will provide updates as the various aspects of this EO are implemented.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.