1.5 Foreign Acquisition, Buy American & Trade Agreements (FAR Part 25)

1.5 Foreign Acquisition, Buy American & Trade Agreements (FAR Part 25)

Federal policy mandates favoring domestic end products and domestic construction materials while adhering to international trade agreements negotiated by the United States. FAR Part 25 (Foreign Acquisition) establishes rules governing foreign procurement, implementing two primary statutes: the Buy American Act and the Trade Agreements Act.

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The Buy American Act (BAA - FAR Subpart 25.1 & 25.2)

The Buy American Act (41 U.S.C. chapter 83) applies to supply acquisitions exceeding the Micro-purchase Threshold ($15,000) and construction contracts up to the Trade Agreements Act threshold. BAA creates a preference for domestic end products and domestic construction materials.

Two-Part Test for Domestic End Products (FAR 25.101)

An unmanufactured end product is domestic if it has been mined or produced in the U.S. A manufactured end product qualifies as domestic only if it satisfies a strict two-part test:

1. Manufacturing Location: The end product must be manufactured in the United States; AND
2. Component Content Threshold: The cost of domestic components must exceed 65% of the total cost of all components (phased content requirement under Executive Order 14005, set at 65% for 2024–2028, and rising to 75% in 2029).

• COTS Exception: For Commercially Available Off-The-Shelf (COTS) items, the 65% component test is waived, and the item qualifies as domestic if manufactured in the U.S. (except for COTS fasteners or iron/steel items).

Price Evaluation Penalty Method (FAR 25.105)

The BAA does not prohibit purchasing foreign products. Instead, it applies a price evaluation penalty to foreign offers during evaluation to determine award:

• 20% Penalty: Added to the foreign offer price if the lowest domestic offer is from a large business.
• 30% Penalty: Added to the foreign offer price if the lowest domestic offer is from a small business concern.
• 50% Penalty: Applied in Department of Defense (DoD) acquisitions under DFARS 225.105.

BAA Price Evaluation Worked Scenario

Consider a civilian agency solicitation for electronic equipment. Three offers are received:

• Offeror A (Domestic Small Business): $100,000
• Offeror B (Domestic Large Business): $95,000
• Offeror C (Foreign Offeror): $80,000

Evaluation: Because the lowest domestic offer ($95,000) is from a large business, a 20% penalty is added to the foreign offer ($80,000 × 1.20 = $96,000 evaluated price). Comparing Offeror B ($95,000) against Offeror C's evaluated price ($96,000), Offeror B wins award at $95,000 because the domestic price is lower than the evaluated foreign price.

Statutory BAA Exceptions (FAR 25.103)

Contracting Officers may grant BAA exceptions for: Public Interest, Nonavailability (class or individual determination by HCA/CO), Unreasonable Cost (when domestic price after penalty exceeds foreign price), Resale, or Micro-purchases.

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The Trade Agreements Act (TAA - FAR Subpart 25.4)

The Trade Agreements Act of 1979 (19 U.S.C. 2501 et seq.) authorizes the President to waive the Buy American Act for acquisitions at or above statutory TAA financial thresholds. When TAA applies, BAA restrictions are completely waived for eligible products from TAA-designated countries.

TAA Financial Thresholds

• Supply & Service Contracts: $174,000
• Construction Contracts: $6,683,000

The TAA "All-or-Nothing" Rule

Unlike the Buy American Act (which uses price evaluation penalties), the Trade Agreements Act enforces an all-or-nothing rule. Contracting Officers MUST acquire ONLY domestic end products or eligible products from TAA-designated countries (World Trade Organization Government Procurement Agreement [WTO GPA] signatories, Free Trade Agreement partners, Least Developed Countries, and Caribbean Basin Countries). Non-eligible foreign offers MUST BE REJECTED unless no eligible domestic or designated country offers are received.

Substantial Transformation Test

Under TAA, an item manufactured in a non-designated country becomes an eligible product of a designated country if it undergoes substantial transformation in a designated country into a new and different article of commerce with a distinct name, character, or use.

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Direct BAA vs. TAA Comparison Matrix

Buy American Act Waiver Protocols & Defense Balance of Payments Policy

When a contractor requests a Buy American Act (BAA) exception based on non-availability or unreasonable cost, the Contracting Officer must verify the factual basis before granting relief. Under FAR 25.103(b), non-availability determinations for individual acquisitions exceeding the SAT require formal coordination with technical specialists and public notification where applicable. Additionally, in Department of Defense acquisitions under DFARS Part 225, the Balance of Payments Program applies BAA-like evaluation preferences to overseas contracts exceeding the SAT to minimize expenditures of U.S. dollars abroad. For Commercially Available Off-The-Shelf (COTS) items, while the 65% component content test is generally waived, Congress explicitly retained component content testing for COTS fasteners, iron, and steel construction materials to protect domestic heavy industrial capacity.