Earlier this week, the FAR Council issued a proposed rule to implement President Trump’s Executive Order 13881. The Executive Order called for the expansion of the preference for domestic goods, products, and materials – particularly domestic iron and steel – in Federal procurements. If the rule is finalized, it will amend the FAR’s implementation of the Buy American Act (BAA).
Current State of the BAA
The BAA has been around since the Great Depression. In its current regulatory implementation, found in FAR Part 25 and its associated provisions and clauses, the BAA requires offerors on Federal procurements covered by the BAA to certify whether all of the “end products” they offer are domestic. For many procurements, the BAA is not applicable, and the Trade Agreements Act (TAA) applies instead.
The heart of the BAA analysis of whether an end product is domestic is currently a two-prong test: (1) was the end product mined, produced, or manufactured in the United States; and (2) are more than 50% of the component parts of the end product (calculated as a percentage of cost) also mined, produced, or manufactured in the United States? If the answer to both questions is “yes,” the end product is domestic. For Commercial Off-the-Shelf (COTS) end products, the BAA currently requires only the first part of the analysis: if a COTS end product was mined, produced, or manufactured in the United States, it is considered a domestic product without the need to calculate component costs.
FAR 25.502(c) establishes a special price evaluation factor (rather than a prohibition) for BAA-covered procurements when both domestic and foreign end products are offered and eligible for award, and the domestic offer does not have the lowest price. In those cases, the agency must take the price of the non‑domestic end product and add 6% if the lowest-price domestic offer is from a large business or 12% if the lowest-price domestic offer is from a small business; the Defense Department applies a 50% preference in all covered procurements. The agency then uses this adjusted price for evaluation purposes. FAR 25.502(a)(3). The agency also uses this approach for determining the price reasonableness of domestic end products when an eligible offer for foreign end products is the lowest price. FAR 25.105. Thus, the BAA does not require offerors to propose only domestic end products, but simply requires them to certify whether the end products are domestic and applies a price handicap to those end products that are not. The BAA’s focus on lowest price offers comes from the days when sealed bidding – with award to the lowest-price, responsive bid from a responsible bidder – was the rule.
We have a handy infographic that walks through the current BAA and TAA rules here. It looks as if we may have to change it, assuming this week’s proposed rule makes it into the FAR.
New Restrictions in the Proposed Rule
If finalized, the proposed rule would make four main changes to the way the Government applies the BAA to covered procurements (without altering the fact that the BAA does not apply to a procurement if the TAA does instead):
1. Iron and Steel: The biggest change is the special treatment given to end products or construction materials that consist wholly or predominantly of iron or steel or a combination of both. “Predominantly” is defined to mean that iron or steel constitutes at least 50% of the total cost of all of the components of the item. Under the proposed rule, the offeror may certify these particular end products or construction materials to be domestic only if, in the offeror’s good-faith estimate, the cost of the iron and steel content not produced in the United States is less than 5% of the cost of all components or content of the material or end item. That is, the component prong of the BAA test for these particular end products and construction materials is now a “content test” and requires at least 95% domestic iron/steel content for the item to qualify as domestic (in addition to meeting the domestic manufacture prong of the test). The allowance for a good-faith estimate at least recognizes the practical difficulty of calculating an exact percentage, but it may be difficult even to reach a good-faith estimate of the total cost of foreign iron/steel content with any reasonable accuracy.
2. Partial Revocation of the COTS Waiver for Iron and Steel Products and Construction Materials: The FAR Council proposes to require both prongs of the BAA test to be applied to COTS construction materials and end products that are made wholly or predominantly of iron or steel. This partially reverses the current rule that, if an item is a COTS item, one need only determine that it was mined, produced, or manufactured in the United States, without having to calculate the value of its foreign components or content. The FAR Council reasoned that, because many or most of the iron and steel goods the Government buys are COTS items, the existing COTS waiver would render much of the Executive Order’s fixation on domestic iron/steel content meaningless. The waiver of the component test remains in place for COTS iron/steel fasteners (e.g., nails, screws, rivets, clips, etc.) and for all other COTS end products that are not predominantly composed of iron or steel.
3. End Products Not Predominantly Composed of Iron or Steel: The proposed rule slightly increases the domestic content requirement for components of non-COTS end items that are not predominantly composed of iron or steel. The cost of the end product’s domestic components now must exceed 55% for the end product to qualify as domestic (in addition to meeting the domestic manufacture prong of the test). Components of unknown origin are deemed to be foreign.
4. Increased Price Preferences/Handicaps: The proposed rule increases the price evaluation factor percentages applied to foreign end products to 20% if the potential awardee with domestic end items is a large business and 30% if it is a small business. The way the price factor would apply to construction materials is less clear, as there generally are not specific line items for these materials. For construction materials, the FAR Council states: “The foreign material is evaluated on the basis of market research, not a specific competing offer. Thus, only the 20 percent factor would be applied to construction material.”
The FAR Council seeks public comments on the proposed rule by November 13, 2020. The proposed rule, like the Executive Order, has no effect on existing procurements or contracts, and it is not clear what would happen to this particular policy change if the elections on November 3 result in a change in administrations. Thus, it is not at all clear what the final rule will look like – or whether there even will be one. Stay tuned.