Overview
On July 15, 2019, the President issued an Executive Order (EO) (No. 13881) on Maximizing Use of American-Made Goods, Products, and Materials. This is the third Buy American EO issued by President Trump, but unlike the two earlier EOs – EO 13788 issued in February 2017 and EO 13858 issued in January 2019, this one focuses specifically on procurement contracts and directs the Federal Acquisition Regulatory (FAR) Council to consider changes in the FAR's Buy American Act (BAA) regulations. (Our advisory on the 2017 Executive Order can be found here).
The EO reemphasized the policy to "buy American and to maximize, consistent with law, the use of goods, products, and materials produced in the United States." It directed the FAR Council to review and revise the FAR, as appropriate, "to most effectively carry out the goals of the Buy American Act and [the current] Administration's policy of enforcing the Buy American Act to its maximum lawful extent."
The BAA restricts, but does not prohibit, the acquisition of supplies that are not "domestic end products." See FAR 25.101(a). Where the BAA applies, it restricts the purchases of items that are not domestic end products by applying a price evaluation penalty to competing offers of foreign end products. (This price evaluation penalty is 6% for most civilian agency purchases and 50% for DoD purchases). For supplies, the FAR's BAA provisions currently use a two-part test to determine whether a manufactured end product is "domestic:" (1) the end product must be "manufactured" in the United States and (2) the "cost of its components" produced or manufactured in United States must exceed 50% of the cost of all components. FAR 25.101 (a)(1) & (2); see also FAR 25.003 (defining "component" and "cost of 'component'"). As the EO notes, the 50% cost of component test dates back to the Eisenhower Administration.
The recent EO directs the FAR Council to evaluate the BAA rules in two areas: (1) the foreign content used in determining whether an end product is "domestic" and (2) certain exceptions to applying the BAA's price evaluation penalty – the "unreasonable cost" and "public interest" exceptions.
Foreign Origin
With respect to the "foreign origin" test for the BAA, the EO directs the FAR Council to consider, within 180 days, proposed amendments to the FAR to increase the percentage of domestic content required to qualify as a "domestic end product." Specifically, the FAR Council is directed to consider changes to provide that iron and steel end products would be considered to be of "foreign origin" if "the cost of foreign iron and steel used in such iron and steel end products constitutes 5 percent or more of the cost of all the products used in such iron and steel end products." The FAR does not currently include a separate "cost of component" test for iron and steel end products. The EO also recommends that other end products would be considered to be of "foreign origin" if "the cost of the foreign products used in such end products constitutes 45 percent or more of the cost of all the products used in such end products."
The FAR also generally requires the use of "domestic construction materials" in construction contracts performed in the US, and currently applies a 50% cost of component test in defining "domestic construction materials." See FAR 25.003; 25.201. However, since the EO refers only to the content of "end products," it is not clear whether the EO's direction contemplates possible changes to the cost of components test for construction material. The EO also does not appear to affect Commercial Off the Shelf (COTS) items, which are not subject to the "cost of component" requirements in FAR 25.1 and 25.2 (but must be manufactured in the United States). See FAR 25.101(a)(2); 25.200(a)(3); see also FAR 25.003 (defining "domestic construction material" and "domestic end product").
Unreasonable Cost and Public Interest Exceptions
With respect to the "unreasonable cost" and "public interest" exceptions to the BAA under FAR 25.103(a) & (c) & 25.202(a)(1) & (3), the EO's direction, if implemented in the FAR, would require agencies to apply price evaluation adjustment to the "offer or offered price of materials of foreign origin" of 20% (for other than small businesses) or 30% (for small businesses). The FAR currently provides that where a domestic offer is not the low offer, the agency must apply a price evaluation factor of 6% to competing offers of foreign end products, to determine the price reasonableness of the price for the domestic end product, and a higher price evaluation penalty of 12% to the competing offers of foreign end products where the domestic end product is offered from a small business; it also provides for applying a price evaluation adjustment of 6% to offers for foreign construction material. See FAR 25.105; 25.502; 25.504-1; 25.204(b). Presumably the changes in the price evaluation factors contemplated by the EO would primarily affect civilian agency procurements, as the DoD currently provides for application of a 50% evaluation factor for foreign end products in DOD procurements of supplies. See DFARS 225.105. The FAR does not currently expressly provide for the application of price evaluation factors in making public interest determinations see FAR 25.103(a), so it remains to be seen whether and how the FAR Council revises the regulations regarding that exception.
Additional Changes Are Possible
The EO also directs the Secretary of Commerce and the Director of the Office of Management and Budget, in consultation with the FAR Council and various other offices, to report to the President within 180 days on any other changes to the FAR that the FAR Council should consider relating to enhanced enforcement of the BAA, and on "whether and when to further decrease, including incrementally," the proposed 45% cost of components threshold for determining whether an end product is "foreign" to 25%; in other words, increasing the domestic content requirement under the BAA to 75%. In addition, that report is to include "recommendations based on the feasibility and desirability of any decreases in foreign content, including the timing of such decreases."
Intersection with the Trade Agreements Act (TAA) and Qualifying Countries
Finally, the EO directs that it is to be "implemented consistent with applicable law." Accordingly, the practical effect of the changes proposed by the EO to the percentage of cost of foreign "components" under the BAA is unclear because the BAA does not apply to acquisitions to which the TAA applies. See FAR 25.402; 25.502(b).
Pursuant to the TAA, the US government has waived the BAA and other discriminatory provisions for certain products and services in acquisitions covered by the WTO Agreement on Government Procurement (and other free trade-related agreements). In practice, because the TAA applies to procurements above a certain dollar threshold, most acquisitions of supplies are likely subject to the TAA rather than the BAA. Further, the TAA, unlike the BAA, does not apply a strict "cost of component" test in determining country of origin, but it rather looks to where "substantial transformation" occurred. See FAR 52.225-5.
Similarly, the EO does not appear to have an impact on certain waivers of the BAA applied by the DoD pursuant to reciprocal defense agreements with allies of the United States. Those countries are referred to as "Qualifying Countries" under FAR. Qualifying countries are those countries that have a reciprocal defense procurement agreement with DoD where both countries agree to remove barriers to purchases of defense-related services and supplies produced in the other country.
Conclusion
The EO sends another signal that compliance with domestic preferences applicable to federal procurements continues to be an area of increased emphasis. Contractors will need to be alert for any proposed changes to Buy American regulations in the FAR arising out of the EO and be prepared to assess the impact of those changes on their supply chains and the products they sell to the Government.
