VIEWPOINT: Pentagon Brings Clarity to Buy American Requirements

By Cara Wulf and Marcos Gonzalez

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On Feb. 15 the Defense Department issued a final rule amending the Defense Federal Acquisition Regulation Supplement to implement Executive Order 14005, “Ensuring the Future is Made in All of America by All of America’s Workers.”

This followed a final rule issued by the Federal Acquisition Regulatory Council updating Part 25 of the FAR and related clauses to address the executive order requirements, which became effective Oct. 25, 2022. Since that time, there has been a disconnect between the Buy American requirements in the FAR and DFARS; for example, the two notably required different percentages of domestic content for an end product to qualify as a “domestic end product.”

The update should eliminate that disconnect and the confusion that resulted from the application of different domestic content thresholds in the two rules. The department’s changes to the DFARS track most of the FAR changes, with some notable differences.

For example, the DFARS addresses qualifying country end products and components. Its definition adopted the amounts and timing of the threshold increases in the FAR; however, its definition of “domestic end product” allows components “mined, produced or manufactured” in qualifying countries to count toward the domestic thresholds.

Thus, for a manufactured end product that does not consist wholly or predominantly of iron or steel or a combination of both to qualify as “domestic” under the new rule, it must be both manufactured in the United States and the cost of its qualifying country components and its components that are mined, produced or manufactured in the United States must exceed 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.

The definition of “qualifying country end product” in the revised DFARS utilizes the same thresholds that apply to non-iron and steel domestic end products when determining whether the item is produced in a qualifying country. For a manufactured end product to be considered a “qualifying country end product,” it must both be manufactured in a qualifying country and the cost of components mined, produced or manufactured in a qualifying country or the United States must exceed 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.

The DFARS implements the FAR fallback threshold, allowing for industry transition to the higher domestic content percentages by allowing agencies to use the 55 percent domestic content threshold until Jan. 1, 2030 — one year after the 75 percent threshold comes into effect.

This fallback threshold may be used where domestic products at a higher threshold are not available or where the cost of such compliant domestic products would be unreasonable.

Unlike the FAR 52.225-1 clause, the revised regulation clause incorporates the fallback threshold into the definition of “domestic end product,” specifying that the increasing domestic content requirements apply “unless an alternate percentage is established for a contract in accordance with FAR 25.101(d) or award is made before Jan. 1, 2030, for a foreign end product that exceeds 55 percent domestic content.” See DFARS 225.103(b)(ii).

The changes in the DFARS also created a framework — which is yet to be implemented — for applying an “enhanced price preference” for domestic end items considered to be critical items or that contain critical components.

Accordingly, the changes update all applicable Buy American DFARS clauses to include definitions of “critical items” and “critical components” that match the definition at FAR 25.003 and include a reference to 25.105, “Critical Components and Critical Items.”

A “critical item” is defined as a “domestic construction material or domestic end product that is deemed critical to the U.S. supply chain,” and a “critical component” is a component that is “mined, produced or manufactured in the United States and deemed critical to the U.S. supply chain.” The rule identifying critical products and the use of enhanced price preferences is still pending and can be tracked by following FAR Case 2022–004, “Enhanced Price Preference for Critical Items.”

The final rule resulted in clause-level changes to the clauses related to the Buy American Act. These new clauses are effective as of Feb. 15.

Thus, contractors should expect to see the updated clauses in new contracts. Contractors should also be prepared to assess the impacts of the changes and forthcoming enhanced price preference on supply chain for items that may be deemed critical, as the heightened evaluation preference in the pipeline may put offerors using foreign sources for those items at a disadvantage.

Although the DFARS final rule is effective immediately, with no transition period to implement the domestic content increases, these increases have been in effect since October 2022 in the FAR clauses.

Therefore, contractors are likely already in the process of making and should continue to make adjustments to their supply chains to continue supplying “domestic end products” to the government. ND

Cara Wulf is a partner and Marcos Gonzalez an associate at McCarter and English LLP.

Topics: Global Defense Market, Defense Contracting