Buy American Act: How amendments affect Canadian businesses

In this blog, we review the Buy American Act, amendments that came into effect in 2022, and how the Act impacts Canadian businesses.

Amendments to the Buy American Act and a new administration have once again reignited the conversation on Canada’s ability to export to the U.S. government market and the implications this policy will have on its operations. In this blog, we review some basic information about the Buy American Act and how Canadian businesses can navigate it.

What is the Buy American Act?

The Buy American Act (BAA) (41 U.S.C. §§ 8301–8305), as implemented in Federal Acquisition Regulation (FAR) Part 25, has existed since the 1930s. It requires the U.S. government to preferentially purchase goods and services made in the United States.

The policy applies to a wide range of purchases of more than the micro-purchase threshold of $10,000 USD made by federal agencies for construction projects, infrastructure investments, and goods and services.

Under FAR 25.003, for products that are not iron and steel products, a product qualifies as a domestic end product if the item is manufactured in the U.S. and more than 65 percent of the cost of all the component parts is also mined, produced, or manufactured in the U.S. The rule has been amended to gradually increase this threshold to 75% in 2029, as seen in the section below.

Buy American Act requirements (2022 amendments)

The Department of Defense, General Services Administration (GSA), and National Aeronautics and Space Administration issued a final rule that significantly changed the domestic preference requirements in Federal Acquisition Regulation (FAR) Part 25. These amendments came into effect on October 25, 2022, and they impact Buy American Act provisions.

Increased thresholds

Before October 25, 2022, the cost of domestic components was required to exceed 55 percent of the cost of all components to satisfy the component test. The new rule increased this domestic content threshold to 60 percent on October 25, 2022, 65 percent in calendar year 2024, and 75 percent in calendar year 2029.

For multi-year contracts, the domestic content threshold will be required to comply with the applicable increased threshold for the items delivered each year. For example, if the supplier is awarded a contract in February 2023, they must comply with the 60 percent domestic content for deliverables before the 2024 calendar year. However, for deliverables between 2024 and 2028, they must supply products with 65 percent domestic content.

Price preferences

For offers of domestic end products and construction materials subject to the BAA, an evaluation factor (price preference) is applied. The preference is 50 percent in procurements conducted by the Department of Defense. For procurements conducted by civilian agencies, the preference is 30 percent if the offer is made by a small business and 20 percent if the offer is made by an entity other than a small business.

Regulatory changes that will take effect at a future date will authorize agencies to apply an enhanced price preference to domestic end products and construction material considered a critical item or made up of critical components.

Threshold exemptions for U.S. DoD purchases

Currently, the US government waives Buy American requirements for long-standing U.S. Department of Defense bilateral reciprocal defence procurement agreements, such as the Canada-U.S. Defence Production Sharing Agreement (DPSA). DFARS 225.872-1, which supports U.S. DoD’s ability to purchase products, services and solutions from Canada, states explicitly that:

As a result of memoranda of understanding and other international agreements, DoD has determined that it is inconsistent with the public interest to apply the restrictions of the Buy American statute to acquisitions from qualifying countries, Canada being one of those countries.

Essentially, the increase in domestic content threshold does not affect U.S. DoD contracts with Canadian businesses since they are exempt from Buy American regulations.

Exemptions due to Trade Organization Agreement

Buy American requirements also do not apply to Canada for U.S. federal purchases covered by the revised World Trade Organization Agreement on Government Procurement (WTO GPA), to which Canada, the U.S. and 46 other countries are Parties. Canadian suppliers benefit from the same treatment as American suppliers when bidding on U.S. federal procurements covered by these agreements.

The Buy American Act also provides exceptions for the acquisition of commercially available off-the-shelf (COTS) items.

Other exemptions

Waivers are also granted for the public interest or if the cost of U.S. products is unreasonable compared to equivalent foreign products (20 percent more than the import ordinarily or 30 percent more if offered by a domestic small business; 50 percent if the acquisition is made by the Department of Defense (DOD) for both large and small business). They may also be granted if products are not produced in the U.S. in sufficient and reasonably available commercial quantities of satisfactory quality.

Other basic exemptions include:

if it is in the “public interest” to procure from another country;
if the procurement is for commercial information technology equipment7
if a domestic product is for use outside of the United States; or
if the goods purchased are specifically for commissary resale.

Fallback threshold

The final rule also includes a “fallback threshold” provision until 2030, when the procuring agency has determined that no end products or construction materials meet the new domestic content threshold or that such products can be obtained only at an unreasonable cost. In that case, the original 55 percent domestic content threshold can be used.

The fallback threshold only applies to end products and construction materials that does not consist wholly or predominantly of iron, steel, or a combination of both and that not COTS items.

For iron and steel products, the applicable percentage for cost of domestic components is 95 percent. The FAR provides a similar standard for domestic construction materials.

Alternate Domestic Content Test

The final rule authorizes senior procurement executives to allow for the application of an alternate domestic content test to enable some U.S. DoD contractors to lock in an applicable threshold at the time of contract award for the contract’s entire period of performance. This is intended for circumstances when it is not feasible for a DoD contractor to meet changing content threshold(s) during the contract’s entire performance period.

Enhanced price preference for critical products and critical components

The rule provides for a framework through which higher price preferences will be applied for end products and construction materials deemed to be critical or made up of critical components. This means that American-made products will have an even greater preference over foreign products in these areas.

The proposed rule places the onus on offerors to identify that their domestic end products contain a critical component, so that contracting officers can apply the higher price preferences when appropriate. Separate rulemaking will identify and add critical products and components to the FAR and to establish the associated preferences.

What amendments mean to Canadian businesses

These amendments, especially the higher thresholds, will affect the number of U.S. federal contracts Canadian businesses can bid on, except when selling to the U.S. DoD. They will also force Canadian businesses to consider new business arrangements with U.S. partners so they can participate in U.S. federal government procurement opportunities.

Impact on Canadians defence and security companies

As mentioned above, Canada receives special consideration for contracts related explicitly to defence and security, given the integrated nature of the North American defence industrial base.

“Defence is its unique circumstance in many ways,” says Darren Boomer, Director, Contract Operations for CCC. “Canada is part of the North American defence industrial base, and the U.S. Department of Defense (DoD) needs access to Canadian solutions.”

Buy American requirements are waived for procurements made by the U.S. DoD under agreements such as the Canada-U.S. Defence Production Sharing Agreement (DPSA) and Defense Federal Acquisition Regulation (DFARS) 225.872-1.

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Mitigating impacts of the Buy American Act

So, what can Canadian businesses do to mitigate the impact of recent amendments? One solution is to focus on innovation and differentiation. By developing innovative products and services unavailable in the U.S. market, Canadian businesses can carve out a niche and avoid direct competition with American companies.

Other options include:

working with Canadian officials to exercise exemptions under the WTO or DPSA;
being a subcontractor to a U.S. company;
setting up a joint venture;
establish a U.S. affiliate;
obtaining a waiver;
engaging in projects that don’t use federal funds.

Work with Canadian officials

Canadian businesses can work with the Canadian government to exercise existing exemptions and exceptions to the Buy American Act. The Canadian government has historically successfully negotiated recognition of exemptions for Canadian businesses, which may continue to be a viable option.

Become a subcontractor to a U.S. firm

According to the Trade Commissioner Service, Canadian firms legally do not qualify to bid directly on contracts set aside for small, minority, or disadvantaged businesses. However, Canadian suppliers may participate in such a contract in several ways. One option is to subcontract.

A small business prime contractor may spend up to 50% of the value of a contract set aside for a small business on any other type of business.

Setting up a joint venture

Canadian suppliers may partner with U.S. firms by entering joint ventures or becoming subcontractors to a U.S. firm. One joint venture option is to partner with a small U.S. business providing access to U.S. federal government procurements below US$250,000 that must be set aside for U.S. small businesses.

Another joint venture option is a protégé-mentor joint venture with a small U.S. business to bid on a set-aside contract. As stated in an EDC article, the mentor must provide technical or financial assistance to the protégé. In contrast, the protégé must be designated as the manager of the joint venture and perform at least 40 percent of the work. Small businesses must also own at least 51 percent of the joint venture entity.

Establish a U.S. affiliate

Canadian companies can become compliant with Buy America by letting their U.S.-based affiliates work for the contract. When setting up an affiliate, Canadian companies should get professional legal and accounting assistance to understand their options.

According to Christelle Shirandi, EDC’s associate regional manager in the United States, having a U.S. affiliate offers significant investment tax credits. Carrying out a merger or acquisition is much easier if it’s done by a Canadian company’s U.S. affiliate. An affiliate also puts a Canadian company logistically closer to U.S. buyers and projects.

Apply for waivers

Waivers are allowed where the Buy America requirement for a particular project would be inconsistent with U.S. public interest, the required materials aren’t produced in the U.S. in sufficient quantities and/or satisfactory quality, and the use of required domestic material over foreign material would increase the cost of the overall project by more than 25 percent.

According to Michael Gonsalves, EDC’s Director of Global Business Development in the United States, obtaining a waiver can be arduous and complex and is not designed for fast-moving projects. It is also a public and transparent process that requires companies to disclose what they do and how they are positioning themselves to obtain the waiver. Disclosing such details may be a competitive disadvantage.

How CCC can help

Canadian businesses should seek legal advice to understand how the Buy American Act will affect their business with the U.S. Government

Based on our experiences and collaboration with Government of Canada partners, we can also help you navigate government regulations and connect you with experts to understand government procurement markets and processes.

Want to learn more about CCC’s service to help Canadians sell to the U.S. military? Read about our U.S. DoD Prime Contractor service.

This post was last updated on January 16, 2025.