On July 15, 2019, United States President Donald Trump signed Executive Order (EO) 13881 addressing domestic preferences in government procurement. Unlike Executive Order 13788 (signed April 18, 2017) and Executive Order 13858 (Jan. 31, 2019), which had no substantive effect on existing domestic preference statutes and regulations, this one does. EO 13881 calls for the Federal Acquisition Regulatory (FAR) Council to make two significant changes to FAR clauses implementing the Buy American Act. The first increases the domestic content requirements for items to comply with the Buy American Act, and the second increases the price preference for domestic products.
Increased Domestic Content Requirements
The key Buy American Act Clauses [FAR 52. 225-1 (Buy American Act – Supplies) and FAR 52. 225-9 (Buy American Act – Construction Materials)] impose a two-part test for items to qualify as a domestic end item or construction material:
- The item/material must be manufactured in the U.S.
- The cost of components mined, produced or manufactured in the U.S. must exceed 50% of the cost of all components.
Under EO 13881, the domestic content requirement for iron and steel end products increases to 95%. For everything else, the requirement increases from 50% to exceed 55% of the cost of all components. The EO leaves open the possibility that the domestic content requirement will increase in the future.
It’s worth noting that EO 13881 creates a separate, higher domestic content standard for iron and steel end products. This distinction does not currently appear in the FAR clauses implementing the Buy American Act. But it has been around for many years in domestic preference requirements governing federal grant programs, such as the Federal Transit Administration’s (FTA’s) Buy America regulations applicable to FTA grantees.
Increased Preference for Domestic Offers
The Buy American Act does not prohibit the purchase of foreign end products. Instead, it encourages the use of domestic end products by imposing a price preference for qualifying end products. Under current Buy American Act regulations, large businesses receive a 6% price preference. Small businesses get a 12% price preference.
For Department of Defense (DOD) procurements, the price preference for both large and small businesses is 50%. EO 13881 increases the price preference from 6% to 20% for large businesses and from 12% to 30% for small businesses. The EO does not address the 50% preference for DOD procurements.
EO 13881 leaves open a number of questions that presumably will be answered when the FAR Council publishes proposed regulations. The following are some of the key questions that regulations will need to address.
Will the COTS Exception Remain?
Under existing Buy American Act regulations, the component test does not apply to items that qualify as commercially available off-the-shelf (COTS) items. COTS items thus qualify as domestic end products if they are manufactured in the U.S., regardless of the origin of their components.
A significant amount of the supplies purchased by the federal government and virtually all construction materials qualify as COTS items. If the COTS exception remains (and we expect it will), the practical effect of EO 13881 will be significantly blunted.
What Is an ‘Iron & Steel End Product?’
Is an air-handling unit an iron and steel end product? This term is not defined in the EO. Because of the heightened component test applicable to such iron and steel end items under the EO, much will ride on how the forthcoming regulations define this term.
What About Trade Agreements?
The Buy American Act is waived in situations where the U.S. has reciprocal trade agreements, including the World Trade Organization Agreement on Government Procurement. The FAR clauses implementing the Trade Agreements Act allow the government to purchase end items that are “substantially transformed” in countries that are parties to such trade agreements without regard to the source or cost of the components.
On contracts governed by the Trade Agreements Act, end products that are “substantially transformed” in the U.S. are also considered domestic. EO 13881 does not address whether the heightened domestic content requirements will apply to such products.
Does EO 13881 Even Matter?
The current FAR clauses implementing the Buy American Act apply to a narrow set of procurements. For supply contracts, the Buy American Act does not apply to contracts of $25,000 or less. Under the Trade Agreements clauses, the Buy American Act is waived for contracts of $180,000 for supply contracts and $6,932,000 or more in the case of construction contracts.
The number of Goldilocks procurements large enough to clear the $25,000 threshold but small enough to avoid the Trade Agreements threshold is undoubtedly a fraction of government purchases. And to the extent the COTS exception remains in place after the EO is implemented—as we expect it will—the heightened domestic content requirements will not be applicable.
What Should Contractors Do?
Domestic preferences/requirement regimes are complicated. While this piece focuses on the Buy American Act and Trade Agreement FAR clauses, there are other regimes that apply to different federal agencies and different programs, including the Federal Transit Administration (FAA), the Federal Highway Administration, the Environmental Protection Agency and the FAA. An item that complies under one set of requirements may not under another. Wondering how to navigate these waters? The following are a few things to do:
- Understand the source of the domestic preference requirements. Prime contractors need to understand which regime applies and communicate the correct requirements to their subcontractors and suppliers. Subcontractors and suppliers should not rely on boilerplate flow-down clauses used by many government contractors to accurately reflect the current and correct requirements applicable to the prime contract.
- Do your diligence. Determining the origin of components and their costs and understanding what constitutes manufacturing or substantial transformation is complex and fact-intensive. Require the appropriate certifications from subcontractors or suppliers furnishing end items or construction materials.
- Seek waivers early. There are exceptions to the Buy American Act and other domestic preference regimes. If a potential waiver applies, government contractors should seek those waivers from the government before award.
- Pay attention. In light of EO 13881, the FAR clauses implementing the Buy American Act will be changing in the near future. A certification of Buy American Act compliance for an item under the old rules will need to be revisited after the new rules become effective.