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.

Photo of Michael Wagner Michael Wagner

Mike Wagner helps government contractors navigate high-stakes enforcement matters and complex regulatory regimes.

Combining deep regulatory knowledge with extensive investigations experience, Mr. Wagner works closely with contractors across a range of industries to achieve the efficient resolution of regulatory enforcement actions and government…

Mike Wagner helps government contractors navigate high-stakes enforcement matters and complex regulatory regimes.

Combining deep regulatory knowledge with extensive investigations experience, Mr. Wagner works closely with contractors across a range of industries to achieve the efficient resolution of regulatory enforcement actions and government investigations, including False Claims Act cases. He has particular expertise representing individuals and companies in suspension and debarment proceedings, and he has successfully resolved numerous such matters at both the agency and district court level. He also routinely conducts internal investigations of potential compliance issues and advises clients on voluntary and mandatory disclosures to federal agencies.

In his contract disputes and advisory work, Mr. Wagner helps government contractors resolve complex issues arising at all stages of the public procurement process. As lead counsel, he has successfully litigated disputes at the Armed Services Board of Contract Appeals, and he regularly assists contractors in preparing and pursuing contract claims. In his counseling practice, Mr. Wagner advises clients on best practices for managing a host of compliance obligations, including domestic sourcing requirements under the Buy American Act and Trade Agreements Act, safeguarding and reporting requirements under cybersecurity regulations, and pricing obligations under the GSA Schedules program. And he routinely assists contractors in navigating issues and disputes that arise during negotiations over teaming agreements and subcontracts.

Photo of Robert Huffman Robert Huffman

Bob Huffman counsels government contractors on emerging technology issues, including artificial intelligence (AI), cybersecurity, and software supply chain security, that are currently affecting federal and state procurement. His areas of expertise include the Department of Defense (DOD) and other agency acquisition regulations governing…

Bob Huffman counsels government contractors on emerging technology issues, including artificial intelligence (AI), cybersecurity, and software supply chain security, that are currently affecting federal and state procurement. His areas of expertise include the Department of Defense (DOD) and other agency acquisition regulations governing information security and the reporting of cyber incidents, the proposed Cybersecurity Maturity Model Certification (CMMC) program, the requirements for secure software development self-attestations and bills of materials (SBOMs) emanating from the May 2021 Executive Order on Cybersecurity, and the various requirements for responsible AI procurement, safety, and testing currently being implemented under the October 2023 AI Executive Order. 

Bob also represents contractors in False Claims Act (FCA) litigation and investigations involving cybersecurity and other technology compliance issues, as well more traditional government contracting costs, quality, and regulatory compliance issues. These investigations include significant parallel civil/criminal proceedings growing out of the Department of Justice’s Cyber Fraud Initiative. They also include investigations resulting from False Claims Act qui tam lawsuits and other enforcement proceedings. Bob has represented clients in over a dozen FCA qui tam suits.

Bob also regularly counsels clients on government contracting supply chain compliance issues, including those arising under the Buy American Act/Trade Agreements Act and Section 889 of the FY2019 National Defense Authorization Act. In addition, Bob advises government contractors on rules relating to IP, including government patent rights, technical data rights, rights in computer software, and the rules applicable to IP in the acquisition of commercial products, services, and software. He focuses this aspect of his practice on the overlap of these traditional government contracts IP rules with the IP issues associated with the acquisition of AI services and the data needed to train the large learning models on which those services are based. 

Bob writes extensively in the areas of procurement-related AI, cybersecurity, software security, and supply chain regulation. He also teaches a course at Georgetown Law School that focuses on the technology, supply chain, and national security issues associated with energy and climate change.

Photo of Catherine Wettach Catherine Wettach

Catherine Wettach is an associate in the firm’s Washington, DC office. She is a member of the Government Contracts and White Collar Defense and Investigation Practice Groups.