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April 09, 2024 - Acquisition Regulations, Defense, Domestic Preferences

DFARS Realigns with FAR Buy American Requirements

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For the second time in as many years, the Department of Defense (DOD) has issued a final rule that brings its Buy American Act (BAA) requirements into alignment with the Federal Acquisition Regulation (FAR). The final rule amends the Defense FAR Supplement (DFARS) Part 225 to introduce a stepwise increase in the percentage of domestic components needed for manufactured end products to qualify as domestically manufactured. The rule leaves untouched the higher threshold for products composed wholly or predominantly of iron or steel. As under the FAR rule, offerors unable or unwilling to meet the increased domestic content threshold remain eligible for award but must compete against the price preference given to domestic end products.

New DOD contracts that are subject to the Buy American Act will require components from domestic or qualifying countries to make up at least 65% of a manufactured end product’s cost for the end product to qualify as “domestically manufactured” if delivered between 2024 and 2028. The threshold rises to 75% domestic or qualifying country components for manufactured end products delivered in 2029 and beyond. Previously, a domestic end product needed to contain only 55% domestic components to meet the definition of “domestically manufactured.”

The final rule brings the DFARS into alignment with the regulations that apply to non-DOD procurements for the first time since October 2022, when a FAR rule took effect that introduced the same stepwise increase in domestic content thresholds.  For contractors that sell to both the DOD and civilian agencies, the new alignment between the FAR and DFARS will make BAA requirements more consistent but may make compliance more expensive, given that stricter requirements now apply across the board.

The new DFARS rule makes the following changes to BAA requirements for covered DOD contracts:

  • Domestic end products must contain at least 75% domestic components, calculated by the value of components, beginning in calendar year 2029.  For calendar years 2024 through 2028, only 65% domestic components are required.  These thresholds replace the 55% threshold for domestic components that was set in a June 2022 final rule.  An earlier Obama-era rule had set the domestic component threshold at 50%.
  • The DFARS rule contains a fallback provision that will allow some contractors to wait until 2030 to comply with the new requirements, just as the FAR rule does.  Contractors may qualify for the 55% fallback rule if no domestic products are available at a higher threshold or if the cost to acquire compliant goods would be unreasonable.
  • The new DFARS rule provides for enhanced price preferences for critical items and critical components; however, the enhanced price preferences cannot take effect until the FAR defines which items and components are critical.  Once that list has been defined at FAR 25.105, the enhanced price preference rule will increase reporting requirements for interested contractors.
  • One difference between the DFARS and FAR Buy American requirements remains in place: components produced in more than two dozen qualifying countries outside the United States count towards qualifying as a domestic end product. In addition, end products from qualifying countries count as domestic end products. Thresholds for qualifying country end products will increase according to the same schedule as for domestic end products. Qualifying countries include those with a reciprocal defense procurement memorandum of understanding or another international agreement with the United States.

Domestic sourcing requirements have become more difficult to navigate following repeated amendments over the last several years.  A single DOD contractor selling the same product might have to up to three versions of the Buy American rule across otherwise equivalent contracts.  The rule change applies only to new contracts; older versions of the Buy American clauses in existing contracts will remain in effect.  As a result, contractors should carefully monitor the requirements that apply to each contract—and each performance year in each contract—and prepare to comply with the 75% threshold.

Contracts with a period of performance that spans a change in content threshold will require a change in domestic content during the contract’s performance.  That is, if a three-year contract begins in 2028, those manufactured end products delivered in 2028 must have at least 65% domestic content, but then must increase to at least 75% domestic content if delivered in 2029 and after. The DOD recognized that some contractors, especially those with indefinite-delivery, indefinite-quantity (IDIQ) contracts, might be unable to meet changing domestic content thresholds throughout the performance of a contract.  Alternate domestic content tests will be available for those contracts.  Contractors who receive the alternate test, with permission of the senior procurement executive, will only have to meet the domestic component threshold that applied at award of the IDIQ contract.

The following DFARS clauses are amended by the new rule:

  • DFARS 252.225-7000 Buy American—Balance of Payments Program Certificate
  • DFARS 252.225-7021 Trade Agreements
  • DFARS 252.225-7035 Buy American—Free Trade Agreements—Balance of Payments Program Certificate
  • DFARS 252.225-7036 Buy American—Free Trade Agreements—Balance of Payments Program
  • DFARS 252.225-7044 Balance of Payments Program—Construction Material
  • DFARS 252.225-7045 Balance of Payments Program—Construction Material Under Trade Agreements

Updated versions of each clause are dated February 2024.

The rule does not alter the exception to the component test for commercially available off-the-shelf (COTS) end products from the United States or qualifying countries. Similarly, the rule does not alter the higher threshold for end products that consist wholly or predominantly of iron or steel: 95% of the components in those end products, as measured by the cost of components, must be manufactured in the United States or qualifying countries.

The new domestic content requirements and enhanced price preferences are likely to increase reporting requirements for defense contractors.  We will continue to watch for updates, including the definitions of critical items and components for which the enhanced price preference will apply.

Ethan Sterenfeld, a Law Clerk, contributed to the writing of this post.