Key Details: Earlier this year, the Department of Defense (DOD) issued a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to implement Executive Order (EO) 14005, which addresses domestic preferences within DOD procurement. This final rule was effective on February 15, 2024. Contractors are encouraged to understand the alignment of DFARS Part 225 with Federal Acquisition Regulations (FAR) Buy American Act (BAA) requirements.
Background on the Final Rule
On June 9, 2023, the DOD published a proposed rule that amended the DFARS to supplement the FAR implementation of EO 14005. EO 14005, Ensuring the Future is Made in All of America by All of America’s Workers, provided financial assistance awards and procurements to federal agencies to maximize their use of goods and services produced in the United States. This EO strengthened the requirements of the BAA and directed the FAR council to issue new rules that increased the domestic content threshold. However, the BAA requirements for defense procurements did not change despite issuing a final rule to implement EO 14005 in 2022.
This new DOD final rule amends the DFARS and aligns it with the BAA provisions in the FAR rule implemented in 2022. The update increases the applicable domestic content threshold for domestic end products. It establishes a structure for implementing price preferences for domestic products that are critical or comprise critical components.
What is the Buy American Act?
The BAA requires federal agencies to utilize and procure domestic materials, products, and services under two conditions:
- The procurement is intended for public use in the United States;
- The items procured or the materials manufactured must be in sufficient commercial quantities in the United States.
The BAA provides preference to domestic supplies or end products and domestic construction materials during federal procurement. Contractors should be aware that the Buy American Act is different from the Buy America requirements. Buy American applies to direct federal procurement while Buy America applies to certain federal financial assistance programs.
Requirements of the Buy American Act and the Final Rule
Increased Domestic Content Thresholds
The final rule updates the percentage of the cost of domestic components required to qualify as a domestic end product. Originally, the cost of domestic components must be greater than 55% of the total cost of components to qualify. The final rule updates this threshold to 65% for 2024 through 2028. This threshold is further increased to 75% beginning in 2029.
The DFARS rule also provides contractors with a fallback provision that allows certain contractors to use the old 55% threshold until 2020. This applies if contractors cannot procure domestic products at a higher threshold or if the cost to acquire domestic goods is unreasonable.
Enhanced Price Preferences
The final rule provides enhanced price preferences for items considered critical or critical components. Contractors should note that this price preference will not be in effect until the FAR provides definitions for critical items and critical components. Contractors would be required to provide additional reports and information for certain covered products. This means defense contractors would need to identify all domestic end products that contain a critical item or critical component.
Contract Thresholds
Contractors with contracts whose performance periods span a change in domestic content thresholds must use the updated threshold during contract performance. Contractors are encouraged to review their performance periods to ensure applicable and correct domestic content thresholds are used.
Conclusion and Action Plan
The DFARS final rule aligns with the FAR requirements for the BAA. Defense contractors may experience increased reporting requirements due to the new domestic content thresholds and enhanced price preferences. As such, defense contractors are encouraged to perform the following actions to stay ahead:
- Carefully review and understand the updated requirements under the DFARS final rule.
- Analyze existing contracts with your legal counsel to determine the applicability of the BAA and related requirements.
- Check your contract clauses and North American Industry Classification System (NAICS) code to determine if you provide supplies or construction materials.
- Perform a self-evaluation to test compliance with domestic content requirements.
- Maintain records and calculations relating to domestic content compliance.
- Communicate with subcontractors and gain their certifications regarding BAA compliance to meet flow-down requirements.
- Meet with your finance team to update forecasts due to the revised thresholds.
For more information and expertise, contact Ryan & Wetmore today.
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