Proposed Changes to Buy American Thresholds Could Create Supply Chain Headaches

4 min

On July 15, 2019, President Trump issued an executive order on Maximizing Use of American-Made Goods, Products, and Materials, which is the administration's third executive order relating to the Buy American Act. Unlike previous executive orders, this one proposes changes to the Buy American Act that could result in significant changes for contractors and their supply chains.

The Buy American Act establishes a preference for American-made products in federal procurements. The administration's previous Buy American executive orders focused on enforcing existing rules. Specifically, its first executive order regarding "Buy American and Hire American" directed agencies to "scrupulously monitor, enforce, and comply with" existing Buy American requirements. In January of 2019, the administration issued an executive order on "Strengthening Buy-American Preferences for Infrastructure Projects," which sought to maximize domestic sourcing in federal infrastructure projects.

The president's latest executive order, however, calls for two substantive changes to the existing Buy American rules. First, it directs the FAR Council to "consider" changing the standard for determining whether a product is "domestic" or "foreign." Under the FAR implementing regulations, a product is considered a domestic product if it was manufactured in the United States and more than 50 percent of the component parts (by cost) are of U.S. origin. The component part threshold has been more than 50 percent since the 1950s. The president's new executive order proposes that the U.S. origin percentage be increased to 55 percent and directs the FAR Council to consider increasing the percentage incrementally to 75 percent. Furthermore, it proposes a separate standard for "iron and steel end products," requiring such products to contain 95 percent U.S.-made materials. Put simply, the executive order proposes making it more difficult for products containing foreign components to qualify as domestic under the Buy American Act.

Recognizing that this may increase the cost of acquiring domestic end products, the executive order directs the FAR Council to consider increasing the price evaluation preference under the Buy American Act. Though the Buy American Act restricts the acquisition of "foreign" end products, there are exceptions, including unreasonable cost. The unreasonable cost exception is implemented through the use of an evaluation factor. Under current regulations, if there is a domestic offer that is not the low offer, the contracting officer must determine the reasonableness of that offer. If the lowest domestic offeror is a large business, the contracting officer adds 6 percent (12 percent if it is a small business) to the price of the low offeror. If the lowest domestic offeror's price is still higher than the evaluated low offer, then it is considered unreasonable. President Trump's order directs the FAR Council to increase these percentage adjustments from 6 percent to 20 percent and from 12 percent to 30 percent. Thus, the executive order not only proposes to increase the threshold for qualifying as a domestic product; it also gives contractors offering domestic end products a significant advantage over their competitors that offer cheaper foreign end products.

Last, the executive order directs the secretary of commerce and the director of the Office of Management and Budget, in consultation with various other federal entities involved in procurement policy, to prepare a report on any other changes the FAR Council should consider "in order to better enforce the Buy American Act."

Takeaways

While these proposed changes seem simple in concept, they will likely have significant impacts on contractors' supply chains. Furthermore, there are a number of open questions that contractors should be on the lookout for if the FAR Council proposes a rule for notice and public comment. For example, the FAR Council will need to carefully determine the timing of when the rule takes effect. In other words, contractors have built their supply chains based on a policy that has been unchanged for decades. Thus, the FAR Council will need to consider how quickly contractors, large and small, can establish supply chains that will enable companies to comply with this change. Additionally, while the executive order created a new treatment category for "iron and steel end products," it did not define it. Rather, the FAR Council will have that responsibility.

This executive order, coupled with the administration's previous executive orders directing agencies to increase enforcement of the Buy American Act, indicates that contractors should expect greater scrutiny of their supply chains.