Analysis of FAR Part 25 - Foreign Acquisition

Overview

FAR Part 25 establishes the policies and procedures for the acquisition of foreign supplies, services, and construction materials, as well as the management of contracts performed outside the United States. It primarily implements the Buy American statute (41 U.S.C. chapter 83) and various international trade agreements, balancing a preference for domestic products with U.S. international trade obligations.

Key Rules

• The Buy American Statute: Generally restricts the purchase of supplies and construction materials that are not "domestic" for use within the U.S. A foreign product can only be purchased if the domestic price is unreasonable, the item is not available domestically, or it is in the public interest.
• Domestic Content Test: For an item to be "domestic," it must be manufactured in the U.S. and meet a component cost threshold. The current requirement is 60%, increasing to 65% for items delivered between 2024–2028, and 75% starting in 2029.
• Iron and Steel Rule: For products consisting predominantly of iron or steel, the cost of foreign iron and steel must be less than 5% of the total component cost to qualify as domestic.
• COTS Item Exception: Commercially Available Off-the-Shelf (COTS) items are generally exempt from the domestic component content test, unless they are predominantly made of iron or steel.
• Trade Agreements (Substantial Transformation): When a trade agreement (like the WTO GPA) applies, the "substantial transformation" test replaces the component cost test. If an item is substantially transformed in a "designated country," it is treated as "eligible" and receives equal evaluation with domestic offers.
• Prohibited Sources: Federal agencies are strictly prohibited from contracting with entities from sanctioned countries (e.g., certain restrictions related to Iran and Sudan) or those on the Department of the Treasury’s prohibited lists.
• Price Evaluation: When comparing foreign and domestic offers under Buy American, Contracting Officers apply a price differential (penalty) to the foreign offer to determine if the domestic price is "unreasonable."

Responsibilities

• Contracting Officers (COs):
  • Determining which trade agreements apply based on the acquisition's dollar value.
  • Evaluating offers using the complex price differential formulas in Subpart 25.5.
  • Processing "non-availability" determinations and other exceptions.
  • Ensuring the correct solicitation provisions and clauses are included.
• Offerors/Contractors:
  • Certifying the country of origin for all end products.
  • Tracking and documenting the cost of components to prove domestic status.
  • Ensuring "substantial transformation" occurs in designated countries when trade agreements are invoked.
• Program Managers: Identifying requirements early that may only be satisfied by foreign sources and providing technical justifications for non-domestic procurements.

Practical Implications

• Supply Chain Planning: Contractors must monitor their supply chains closely due to the incremental increase in domestic content requirements (moving to 75% by 2029). A product that qualifies as domestic today may not qualify in three years.
• Threshold Awareness: The applicability of trade agreements is tied to specific dollar thresholds. A small change in a contract's estimated value can shift the procurement from "Buy American" (strict) to "Trade Agreements" (more flexible).
• Infrastructure Specifics: Construction contractors must be particularly careful with iron and steel, as the 5% foreign threshold is much more stringent than the general component test.
• Global Operations: For contracts performed outside the U.S., contractors must comply with Subpart 25.3, which covers everything from private security functions to the legal status of personnel supporting diplomatic missions.