The Cost Method Nobody Wrote

January 2028 — New contracts under 10 U.S.C. §4865

Sixteen months remain before Section 4865 attaches to new contracts, and for covered lithium-ion batteries the binding constraint has shifted. It is no longer how many qualified suppliers exist. It is that the federal government has not published a method for calculating the statute's 95% cost-origin threshold. The DFARS implementation deadline passed June 16, and as of August 28, Case 2024-D011 shows nothing public — no proposed rule, interim rule, or class deviation — only an internal report deadline of October 7.

The statute requires that more than 95% of the cost of a battery's functional cell components originate outside the covered foreign entity set. A percentage test applied to costs needs three things the text does not supply: a valuation convention, a valuation date, and a refresh frequency. Without those, a contracting officer cannot evaluate a supplier's representation, a supplier cannot defensibly construct one, and a third-party assessor cannot reproduce whatever number arrives on the desk. The test is not administrable.

The domestic and allied qualification pipeline remains thin, as tracked in prior issues and in the status lines below. But for the moment, qualification and compliance are disconnected. A qualified supplier is no better positioned to construct a defensible §4865 representation than an unqualified one, because the method for calculating the ratio does not yet exist.

Three questions the method must answer

Valuation convention. Is the cost of a cathode active material lot measured at transaction price, standard cost, or weighted-average cost? A supplier buying NMC precursor from a qualified non-FEOC source at spot will produce a different cost ratio than one buying physically identical material under a long-term fixed-price contract. The ratio is an accounting output, not a physical property of the cell.

Valuation date. Is the ratio calculated at qualification, at contract award, or at delivery? A configuration that clears 95% when nickel trades at one price may fail six months later at another. Valuation at delivery makes compliance float with commodity markets. Valuation at qualification makes it stable, at the cost of drifting away from actual procurement economics over a multi-year contract.

Refresh frequency. Does a compliant determination persist until the supply chain changes, or must it be revalidated on a schedule? If on a schedule, against what price basis?

The three parameters interact. A supplier using standard cost, valued at qualification, with no refresh requirement holds a stable compliance position. The same supplier using actual transaction cost, valued at delivery, with quarterly revalidation holds one that moves with input markets. Both are reasonable readings of the same statutory text, and they produce different outcomes for the same cell.

A supplier reporting 97% under a method of their own choosing may sit at 94% under the method the eventual rule adopts.

Federal cost-percentage precedents stop short of what §4865 needs

The Buy American Act is the closest analogue. It runs a domestic-component-cost percentage test — 65% through 2028, 75% from 2029 — and FAR 25.003 defines which costs enter the numerator: acquisition cost for purchased components, manufacturing cost for self-manufactured ones, transport and duty included. What it does not do is prescribe standard versus actual cost, fix a valuation date, or require periodic revaluation. DFARS 225 permits locking the percentage threshold at contract award, which fixes the target and leaves the measurement open.

The Berry Amendment, the Trade Agreements Act, and the CHIPS Act guardrails are built on different architectures — origin restriction, substantial transformation, and ownership-and-capacity thresholds — and none of them supply component-cost valuation conventions, because none of them need to.

Federal procurement has always defined which costs enter a percentage test. It has never had to supply the temporal and accounting conventions that a 95% threshold demands when the inputs are volatile commodities. Buy American has deferred that question for decades at lower thresholds with steadier inputs. Section 4865 inherits the same gap at a threshold with almost no room for adverse price movement.

DDP requires Section 842 compliance before the federal method exists

The Drone Dominance Program's Version 2 supply-chain framework, dated July 23, is the only current program building phased compliance gates that reach Section 842 at the cell level. As covered in Issue #10, Section 842-compliant cells from outside the covered-country set are preferred in Phase 3 (February 2027) and become a mandatory purchasing gate at Phase 4 minimum (August 2027).

The framework states that vendor systems "will be self-certified and also evaluated by third-party assessors." It does not say what the assessment measures against. DDP invokes Section 842 compliance at the cell level without specifying the 95% calculation, a valuation date, an accounting convention, a refresh interval, or the evidence an assessor would need to reproduce the ratio. The framework is program policy rather than statutory implementation, and it says so.

Phase 4 arrives in August 2027, five months before Section 4865 attaches to new contracts. A program is requiring Section 842-compliant cells before the government has published the method for determining compliance. Self-certification against an undefined test tells you what the supplier intends; whether it holds depends on whether the eventual federal rule ratifies or contradicts the methodology they picked.

For a procurement team preparing for either gate, the practical question is the same. Any supplier claiming §4865 compliance today is reporting a ratio they calculated by a method they chose. Ask for the ratio, then the method behind it, then what the ratio does under a 15% move in cathode precursor prices. That last number — the sensitivity — tells you whether the compliance position is durable or fragile.

Other deadlines

Section 154 — October 1, 2027. Named-entity prohibition on procurement from covered foreign entities. No change since Issue #11's assessment. This is an entity-level restriction and straightforwardly binary, so the cost-method gap does not touch it.

Section 4865 — January 1, 2029 (standard batteries). Same cost-method dependency as the January 2028 cohort. The Defense Industrial Base Consortium's cylindrical-cell solicitation (RPP-BES-26-01) remains closed, with no public Phase 2 invitation or award. As noted in Issue #8, DIBC's 95% objective covers electrode active materials only, a narrower set than §4865's full functional-component-cost basis — a distinction that will matter more once a federal method defines the wider denominator.