FAR 25.106—Determining reasonableness of cost.
Plain-English Summary
FAR 25.106 explains how contracting officers determine whether the cost of domestic offers is reasonable when applying Buy American evaluation preferences. It covers the required evaluation factors for comparing domestic and foreign offers, the special treatment for end products that are not critical items and do not contain critical components, the separate rules for critical items and end products containing critical components, the treatment of foreign end products with more than 55 percent domestic content, the interaction with small business set-asides, and the limits on using these factors when a trade agreement applies. It also points to the evaluation procedures in subpart 25.5 and incorporates the additional preference factors listed in FAR 25.105 for critical items and products containing critical components. In practice, this section tells the contracting officer how to “price in” the Buy American preference so that domestic offers are not rejected simply because they are higher than the low foreign offer before the statutory preference is applied. It is a price-reasonableness tool, not a separate responsibility determination or a substitute for the underlying Buy American and trade agreement coverage analysis. The section is especially important because it can change which offer is considered reasonable, affect award decisions in small business set-asides, and, for certain non-COTS foreign products, will sunset on January 1, 2030.
Key Rules
Use prescribed evaluation factors
The contracting officer must use the evaluation factors in FAR 25.106(b) and (c) unless the head of the agency makes a written determination that higher factors are more appropriate. If the agency uses higher factors across all acquisitions, those factors must be published in agency regulations.
No factors for trade agreements
The contracting officer must not apply these evaluation factors to offers of eligible products when the acquisition is subject to a trade agreement under subpart 25.4. In those cases, the Buy American evaluation preference in this section does not apply.
Apply 20 or 30 percent for standard domestic offers
For end products that are not critical items and do not contain critical components, the contracting officer compares the domestic offer to the low offer by adding 20 percent to the low offer if the lowest domestic offer is from a large business, or 30 percent if it is from a small business. The domestic offer is reasonable if it does not exceed the evaluated low offer.
Special rule for certain foreign offers over 55 percent domestic content
If the standard comparison does not produce a reasonable domestic offer, or if no domestic offer is received, and the low offer is a foreign end product that does not exceed 55 percent domestic content, the contracting officer must treat the lowest foreign end product manufactured in the United States and exceeding 55 percent domestic content as a domestic offer. The same evaluation factors are then applied to the low offer.
Sunset for the 55 percent rule
The procedures in paragraph (b)(2) for foreign end products exceeding 55 percent domestic content will no longer apply as of January 1, 2030. Contracting officers should not rely on that rule after the sunset date.
Add critical-item preference factors
For critical items or end products containing critical components, the contracting officer must add the additional preference factor identified in FAR 25.105 to the 20 percent or 30 percent factor. This increases the evaluation preference beyond the standard Buy American comparison.
Use small business factor in set-asides
In small business set-asides, if the low offer is from a small business concern offering the product of a small business concern that is not a domestic end product, the contracting officer must use the stated factor or another factor established in agency regulations. This rule ties the evaluation method to the small business set-aside framework in subpart 19.5.
Responsibilities
Contracting Officer
Apply the correct evaluation factors when determining whether domestic offer prices are reasonable; distinguish between standard end products, critical items, and products containing critical components; exclude these factors when a trade agreement applies; use the special 55 percent domestic content rule when applicable; and follow subpart 25.5 evaluation procedures.
Head of the Agency
If higher evaluation factors are needed, make a written determination authorizing them. If the higher factors will apply to all agency acquisitions, ensure they are published in agency regulations.
Agency
When using agency-wide higher evaluation factors, publish them in agency regulations and ensure acquisition personnel apply the approved factors consistently.
Offerors/Contractors
Submit offers with awareness that domestic content, business size, and whether the product is a critical item or contains critical components can affect price reasonableness and award evaluation under Buy American rules.
Practical Implications
This section can change the apparent low price into a non-awardable price once the Buy American evaluation factor is added, so contracting officers must evaluate offers using the correct adjusted price rather than the raw bid or proposal price.
A common pitfall is applying the Buy American evaluation factor to acquisitions covered by a trade agreement; FAR 25.106 expressly prohibits that.
Another frequent issue is failing to distinguish between ordinary end products and critical items or products containing critical components, which require an additional preference factor under FAR 25.105.
For certain foreign end products with more than 55 percent domestic content, the special comparison rule may make a foreign offer effectively compete as if it were domestic, but that rule ends on January 1, 2030.
In small business set-asides, the business size of the low domestic offeror matters because the evaluation factor is 20 percent for large business and 30 percent for small business, and agencies may have their own approved factors for these situations.
Official Regulatory Text
(a) The contracting officer- (1) Must use the evaluation factors in paragraphs (b) and (c) of this section unless the head of the agency makes a written determination that the use of higher factors is more appropriate. If the determination applies to all agency acquisitions, the agency evaluation factors must be published in agency regulations; and (2) Must not apply evaluation factors to offers of eligible products if the acquisition is subject to a trade agreement under subpart 25.4 . (b) For end products that are not critical items and do not contain critical components . (1) (i) If there is a domestic offer that is not the low offer, and the restrictions of the Buy American statute apply to the low offer, the contracting officer must determine the reasonableness of the cost of the domestic offer by adding to the price of the low offer, inclusive of duty— (A) 20 percent, if the lowest domestic offer is from a large business concern; or (B) 30 percent, if the lowest domestic offer is from a small business concern. The contracting officer must use this factor, or another factor established in agency regulations, in small business set-asides if the low offer is from a small business concern offering the product of a small business concern that is not a domestic end product (see subpart 19.5 ). (ii) The price of the domestic offer is reasonable if it does not exceed the evaluated price of the low offer after addition of the appropriate evaluation factor in accordance with paragraph (a) or (b)(1)(i) of this section. See evaluation procedures at subpart 25.5 . (2) (i) For end products that are not COTS items and do not consist wholly or predominantly of iron or steel or a combination of both, if the procedures in paragraph (b)(1)(i) of this section result in an unreasonable cost determination for the domestic offer or there is no domestic offer received, and the low offer is for a foreign end product that does not exceed 55 percent domestic content, the contracting officer shall— (A) Treat the lowest offer of a foreign end product that is manufactured in the United States and exceeds 55 percent domestic content as a domestic offer; and (B) Determine the reasonableness of the cost of this offer by applying the evaluation factors listed in paragraph (b)(1)(i) of this section to the low offer. (ii) The price of the lowest offer of a foreign end product that exceeds 55 percent domestic content is reasonable if it does not exceed the evaluated price of the low offer after addition of the appropriate evaluation factor in accordance with paragraph (a) or (b)(1)(i) of this section. See evaluation procedures at subpart 25.5 . (iii) The procedures in this paragraph (b)(2) will no longer apply as of January 1, 2030. (c) For end products that are critical items or contain critical components . (1) (i) If there is a domestic offer that is not the low offer, and the restrictions of the Buy American statute apply to the low offer, the contracting officer shall determine the reasonableness of the cost of the domestic offer by adding to the price of the low offer, inclusive of duty— (A) 20 percent, plus the additional preference factor identified for the critical item or end product containing critical components listed at section 25.105 , if the lowest domestic offer is from a large business concern; or (B) 30 percent, plus the additional preference factor identified for the critical item or end product containing critical components listed at section 25.105 , if the lowest domestic offer is from a small business concern. The contracting officer shall use this factor, or another factor established in agency regulations, in small business set-asides if the low offer is from a small business concern offering the product of a small business concern that is not a domestic end product (see subpart 19.5 ). (ii) The price of the domestic offer is reasonable if it does not exceed the evaluated price of the low offer after addition of the appropriate evaluation factor in accordance with paragraph (a) or (b) of this section. See evaluation procedures at subpart 25.5 . (2) (i) For end products that are not COTS items and do not consist wholly or predominantly of iron or steel or a combination of both, if the procedures in paragraph (c)(1)(ii) of this section result in an unreasonable cost determination for the domestic offer or there is no domestic offer received, and the low offer is for a foreign end product that does not exceed 55 percent domestic content, the contracting officer shall— (A) Treat the lowest offer of a foreign end product that is manufactured in the United States and exceeds 55 percent domestic content as a domestic offer; and (B) Determine the reasonableness of the cost of this offer by applying the evaluation factors listed in paragraph (c)(1) of this section to the low offer. (ii) The price of the lowest offer of a foreign end product that exceeds 55 percent domestic content is reasonable if it does not exceed the evaluated price of the low offer after addition of the appropriate evaluation factor in accordance with paragraph (a) or (b) of this section. See evaluation procedures at subpart 25.5 . (iii) The procedures in this paragraph (c)(2) will no longer apply as of January 1, 2030.