The Department of Defense (DOD) has proposed an updated rule in the Defense Federal Acquisition Regulation Supplement (DFARS) to increase Buy American Act content thresholds for federal government contractors under DOD contracts. The new DFARS rule follows 2022's update to the Federal Acquisition Regulation (FAR) implementing Executive Order 14005, Ensuring the Future Is Made in All of America by All of America's Workers. This alert briefly presents the scope and requirements of the new DFARS rule and implications for federal government contractors.
Purpose and Scope of the New Rule
E.O. 14005, issued by President Biden during his first days in office, sought to "increas[e] the impact of the Buy American Act," primarily via "[a]n increase to the domestic content threshold, a schedule for future increases, and a fallback threshold that would allow for products meeting a specific lower domestic content threshold to qualify as domestic products under certain circumstances." Defense Federal Acquisition Regulation Supplement: DFARS Buy American Act Requirements, 88 FR 37942, Jun. 9, 2023. Whereas the FAR was amended to align with this purpose in 2022, the pre-E.O. 14005 Buy American requirements in the DFARS remained at their existing levels until now. The "proposed rule includes revisions to DFARS part 225 and the associated clauses to make conforming changes associated with implementation of E.O. 14005 that incorporate the DoD-unique requirements (e.g., inclusion of qualifying countries)." Id. Specifically, the proposed rule would change "the definitions of 'domestic end product,' 'qualifying country end product,' and 'domestic construction material' to address the scheduled increases to the domestic content threshold from 55 percent to 60 percent in calendar year 2023, then to 65 percent in calendar year 2024, and to 75 percent in calendar year 2029." Id. The stepladder percentage increases apply to contracts awarded within the respective time frames, and to items delivered under existing contracts in a given year. See id. For example, a contract awarded in 2023 would be subject to the 60 percent threshold; however, if that same contract continued and provided for deliverables in 2024, the applicable threshold would increase to 65 percent in 2024, and so on.
New DFARS Buy American Act Requirements
The hallmark of Buy American is the test for determining whether an item qualifies as a "domestic end product." Items that satisfy the test are free from Buy American restrictions applied to non-qualifying items under federal government procurements. The proposed DFARS rule would update the criteria of this decisive assessment for DOD contracts by incorporating the stepladder threshold increases discussed above, i.e., an item manufactured in the United States is a domestic end product if
The cost of its qualifying country components and its components that are mined, produced, or manufactured in the United States exceeds 60 percent of the cost of all its components, except that the percentage will be 65 percent for items delivered in calendar years 2024 through 2028 and 75 percent for items delivered starting in calendar year 2029.
88 FR at 37945.
The proposed rule also introduces a handful of new caveats and fallbacks aimed at easing contractors' and suppliers' transition to these new content thresholds, i.e., the stepladder thresholds apply "unless an alternate percentage is established for a contract in accordance with FAR 25.101(d); or award is made before January 1, 2030, for a foreign end product that exceeds 55 percent domestic content (see 225.103(b)(ii))." 88 FR at 37945 The first of these exceptions contains extensive directions on applicability at DFARS 225.101. Id. at 37945-46. The latter exception would seem to be aimed especially at easing the transition for domestic and international firms whose supply chains require long lead times to adapt and shift production from one source to another. In addition to these guidelines, the proposed rule makes extensive changes through DFARS Subpart 225 to explain the exact scope of when and how the new content thresholds and their exceptions take effect.
The proposed DFARS rule would bring more uniformity to the Buy American Act landscape, aligning DFARS-regulated contracts with FAR-regulated contracts in terms of the stepladder content thresholds. This also comes on the heels of proposed Buy American/Buy American updates to the Office of Management and Budget's Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Given this, it seems clear that domestic preference requirements were not only an initial focus of the current administration but are a continuing focus and aim of domestic policy. In light of the administration's ongoing efforts, contractors and suppliers should be equally focused on compliance, as one can imagine that this administration will not take kindly to those contractors and suppliers that ignore or skirt these rules. If you have questions about how to ensure that your business is ready to adapt to these evolving requirements and even increase opportunities, Venable stands ready to assist.