DOD Issues Final DFARS Rule Implementing Increased Buy American Restrictions for Defense Procurements

On February 15, 2024, the Department of Defense ("DOD") issued a final rule that increases the domestic content requirements for defense procurements.

The new rule amends the Defense Federal Acquisition Regulation Supplement ("DFARS") to implement Executive Order 14005 ("EO"). The EO was intended to strengthen the requirements of the Buy American Act ("BAA") by, among other things, directing the FAR Council to issue new rules increasing the domestic content threshold for determining whether a product qualifies as a domestic end product.

Although the FAR Council issued a final rule implementing the EO on March 7, 2022, the BAA requirements for defense procurements remained unchanged. The new DOD rule aligns the DFARS BAA provisions with the FAR revision implemented in 2022.

The new rule (1) increases the applicable domestic content threshold for domestic end products, and (2) creates a framework for the application of an enhanced price preference for domestic products that are considered critical products or are made up of critical components.

Higher Domestic Content Threshold

Previously, the cost of domestic components had to exceed 55 percent of the cost of all components in order for a product to qualify as a domestic end product. Under the new rule, the domestic content threshold is 65 percent in calendar years 2024 through 2028. Beginning in calendar year 2029, the threshold will be 75 percent. The increased threshold modifies the DFARS definitions for domestic end product, qualifying country end product, and domestic construction material.

To help contractors transition to the increased domestic content requirements, the new rule includes exceptions for awards made prior to January 1, 2030. First, there will be a 55 percent fallback threshold for situations where domestic products at a higher threshold are not available or the cost to acquire them would be unreasonable. Second, an alternate domestic content threshold may be applied at the discretion of an agency senior procurement executive in instances where it is not feasible to meet the increasing threshold, e.g., under an indefinite-delivery, indefinite-quantity contract. Under the alternate domestic content threshold, the threshold in effect at the time of contract award would apply to the entire period of performance.

Enhanced Price Preferences for Critical Items and Components

Under the new rule, domestic end products containing a critical component or item are eligible for an enhanced price preference. The rule relies on FAR 25.105 for its definition of "critical item" and "critical component." For now, FAR 25.105 itself has only a placeholder for the list of critical items and components. The list will be populated in a separate rulemaking.

Under the new framework, contractors must meet additional reporting requirements for certain products. Defense contractors must identify all domestic end products containing a critical component or item. They must also identify all foreign end products and indicate whether each foreign end product exceeds 55 percent domestic content. Commercially available off-the-shelf ("COTS") items are exempt from the enhanced reporting requirements.

The new rule also maintains certain domestic content provisions that are unique to defense procurements. For example, the rule defines domestic content to include components that are mined, produced, or manufactured not only in the U.S., but also in qualifying countries - countries with reciprocal defense procurement memoranda of understanding or international agreements with the U.S. in which both countries agree to remove certain barriers to the purchase of supplies.

Defense contractors should be prepared to comply with the now-effective increased domestic content threshold and make plans for how they will eventually meet the 75 percent threshold before it is implemented in 2029. Further, contractors should continue to monitor additional developments in this area, as policymakers on both sides of the aisle are increasingly focused on expanding domestic content requirements and incentivizing enforcement.

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