DoD Issues Proposed Rule to Address Domestic Preferences for Defense Contracts

With David Yang

On June 9, 2023, the Department of Defense ("DoD") issued a proposed rule to address domestic preferences – the Buy American Act – in DoD procurements. The proposed rule follows updates to the Federal Acquisition Regulation ("FAR") that implemented Executive Order ("EO") 14005, Ensuring the Future Is Made in All of America by All of America's Workers, by addressing DoD-unique requirements.

The FAR final rule, Amendments to the FAR Buy American Act Requirements (effective October 25, 2022), which we previously covered here, implemented a portion of EO 14005 to provide the following:

• An increase to the domestic content threshold with a future threshold increases in certain years;
• A "fallback threshold" that permits products to meet a specified lower domestic content threshold to qualify as domestic products; and
• A framework regarding an enhanced price preference for a domestic product that is considered a critical item or that is made up of critical components.

Through the proposed revisions to the Defense Federal Acquisition Regulation Supplement ("DFARS"), DoD will supplement the FAR by making conforming changes for DoD-unique requirements. In so doing, the proposed rule amends DFARS Part 225 and the related contract clauses under DFARS Part 252.

Domestic and Qualifying Country Content Thresholds

The proposed rule revises certain definitions to address the scheduled domestic and qualifying country content threshold increases from 55 percent to 60 percent (2023), then to 65 percent (2024), and to 75 percent (2029) for end products that do not consist wholly or predominantly of iron or steel or a combination of both in the case of domestic end products and for all end products in the case of qualifying country end products. Commercially available-off-the-shelf ("COTS") end products remain exempt from the content requirements for these foregoing end product types. As with the FAR updates, where a DoD contractor is awarded a contract with a period of performance that spans the foregoing schedule increases, the contractor is required to comply with each domestic content threshold increase in the year of delivery. For example, where a contractor is awarded a contract that spans five years beginning in 2027, the contractor would be subject to the 65 percent threshold for items delivered in calendar years 2027 and 2028, and it would be subject to the 75 percent threshold in 2029, unless the alternate domestic content test has been authorized.

Alternate Domestic Content Test

Given the potential challenges for contractors to comply with escalating content percentages during performance, and to mitigate any resulting project disruptions, DoD has proposed to adopt the "alternate domestic content" implemented under the FAR. Under this approach, where it is not feasible for a contractor to meet changing content threshold(s) during performance, the alternate domestic content test enables contractors to comply with the domestic content threshold applicable at the time of contract award for the entire period of performance of the contract. However, given the shifting priorities to Buy American and the perhaps significant relief that may be afforded, this alternate test should not be construed as routine, as it may only be authorized by a senior procurement executive after consultation with Office of Management and Budget's ("OMB") Made in America Office ("MIAO").

Fallback Thresholds

The proposed rule also provides "fallback thresholds" in certain circumstances, which will enable contractors to use the 55 percent domestic content threshold until one year after the increase of that threshold to 75 percent, where a procuring agency has determined that there are no end products or construction materials that meet the new domestic content threshold requirement or where the products are of unreasonable cost. For example, if a domestic product that exceeds the 60 percent threshold is found to be of “unreasonable cost” (after application of the price preference), then DoD will treat an end product that is manufactured in the United States or a qualifying country and exceeds 55 percent domestic content as a qualifying domestic end product (i.e., instead of 60 percent).

Notably, the "fallback threshold" requires offerors to indicate which of their foreign end products exceed a 55 percent domestic content and only applies to: (1) construction material that does not consist wholly or predominantly of iron or steel (or a combination of both) and that are not COTS items, and (2) end products that do not consist wholly or predominantly of iron or steel or a combination of both and that are not COTS items.

Price Preferences

The proposed rule also amends the DFARS to implement the enhanced price preference framework. Briefly, this framework adds the requirement to “list each domestic end product with critical components or critical items and for foreign end products that exceed the required 55 percent (except COTS items), for foreign end products that do not consist wholly or predominantly of iron or steel or a combination of both; and adds a table for the listing of critical components and critical items as applicable.”

Takeaway

The DoD’s proposed rule aligns the important supply chain sourcing, compliance, and monitoring changes and considerations that have taken, and will undoubtedly continue to take, center stage in civilian procurements in connection with defense procurements. Buy American issues are serious matters that require thoughtful attention from contractors doing business within the U.S. government supply chain, as they can impact procurements at all stages, ranging from source selection decisions to contract administration matters, including required replacements of non-compliant products and even contract terminations, to enforcement actions in the event of a Buy American misrepresentation. In addition, with the periodic escalation requirements for content percentages being proposed, and the potential difficulty in being able to employ the alternate domestic content test, contractors may need to plan well in advance of a procurement to ensure that their supply chains are sufficiently flexible to allow them to meet escalating requirements for long term contracts, which are particularly common in construction or other infrastructure improvement or remediation projects that may take many years to complete.

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