President Trump has made “buy American and hire American” a key goal for his administration. To that end, the President has signed three executive orders to impose stricter enforcement of the Buy American Act (BAA), the latest of which was issued on July 15, 2019. While this new Executive Order on Maximizing Use of American-Made Goods, Products, and Materials (the Executive Order) does not have any immediate effect on federal procurements, it proposes significant changes to the Buy American requirements, and government contractors would be wise to keep abreast of the changes which could be implemented as soon as the spring of 2020.
The BAA does not prohibit the use of foreign products but rather provides for preferential treatment of domestic end products in federal government purchases. Currently, to be considered a domestic end product, the product must be manufactured in the U.S. and the cost of its components manufactured in the U.S. must exceed 50% of the cost of all of its components. Thus, the foreign components used in the product must make up less than 50% of the total cost of the product’s components. During the government’s evaluation process, a preference is given to domestic end products through a price evaluation adjustment which adds either 6% or 12% to a low offer for a foreign end product (depending on whether the competing domestic end product is a large or small business, respectively). And, for Department of Defense acquisitions, an offer for a foreign end product will include a 50% increase to the offered price for evaluation purposes.
President Trump’s latest Executive Order directs the Federal Acquisition Regulatory (FAR) Council to consider tightening the foreign component thresholds. Specifically, the Executive Order proposes reducing the maximum cost of foreign components from 50% to less than 45% of the cost of all components for a product to still be considered a domestic end product. The Executive Order proposes a much steeper reduction in the use of foreign iron and steel: for iron and steel domestic end products, the new rules would require that the cost of foreign iron and steel must constitute less than 5% of all of the products used in such end products.
The Executive Order also directs the FAR Council to consider changes to the price evaluation adjustment to further favor domestic products. Instead of increasing a low offer of a foreign end product by 6% or 12% as currently required, the adjustment would inflate an offer for a foreign end product by 20% if the competitor offering a domestic end product is a large business, or 30% if the competitor offering a domestic end product is a small business. In effect, this means foreign end products must be at least 20-30% cheaper than domestic alternatives to be considered for award.
The Executive Order requires the FAR Council to consider issuing a proposed rule with these changes within 180 days of the order’s issuance date, which would be in January 2020. A final rule, following public comment on the proposed rule, could be issued as soon as the spring of 2020. Further, the Executive Order requires a report within 180 days on the feasibility, desirability, and potential timing for reducing the foreign component threshold percentage from the proposed 45% to 25%, indicating even tighter restrictions looming ahead.
With these significant restrictions on the use of foreign products on the horizon, contractors should take steps to prepare for the potential changes. At a minimum,
- contractors should be cognizant of which of their contracts are subject to the BAA as opposed to the Trade Agreements Act, the latter of which imposes a different set of standards and is not impacted by the Executive Order, and
- contractors also should reassess their supply chains to determine whether any products are above the proposed foreign component threshold of 45% (5% for iron and steel components) and may require adjusting to ensure compliance once the new rules are implemented.