Prime contractors can expect to be asked for a new round of certifications as the result of a FAR provision that takes effect on August 13, 2020.  The provision was announced by an Interim Rule published in the Federal Register on July 14, 2020.  The rule is applicable to all contractors doing business with the Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA).

Basically, the new regulation is designed to protect the United States against Chinese intelligence threats by prohibiting the procurement of telecommunications equipment and other technologies produced by several named companies and by prohibiting contracting with companies that use such “covered equipment.”  Because Chinese law requires Chinese companies to cooperate with that nation’s intelligence services, the reliance on equipment from those companies has been deemed to be a security vulnerability.  Additionally, the Government seeks to avoid an unhealthy reliance on Chinese technology that could allow deliberate interference in our supply chain. 

“Covered telecommunications equipment” includes:

• • Telecommunications equipment produced by Huawei Technologies Company or ZTE Corporation (or any subsidiary or affiliate of such entities);
  • For the purpose of public safety, security of Government facilities, physical security surveillance of critical infrastructure, and other national security purposes, video surveillance and telecommunications equipment produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (or any subsidiary or affiliate of such entities).

The new interim rule is the result of legislative text in Section 889 of the FY 2019 National Defense Authorization Act that  prohibits the federal government from directly procuring “any equipment, system or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as a part of any system” or from entering into a contract with any entity that uses such covered telecommunications equipment or services.  The rule does, however, permit waivers to be granted at the agency level on a case-by-case basis.

The first part of that prohibition against procuring covered equipment was implemented a year ago, taking effect on August 13, 2019.  This prohibition flows down to subcontractors and vendors, so a contractor providing telecommunications equipment and other technology to the Government is required to disclose whether it will provide such equipment or services in the performance of the contract. If such equipment is to be provided, further disclosures are required to identify whether an exception applies or if a waiver is appropriate.

The second portion, the “use” prohibition, takes effect on August 13, 2020.  This provision requires contractors to assert whether it does or does not use covered telecommunications equipment or services.  Again, contractors answering affirmatively are required to make further disclosures to determine whether an exception applies, or a waiver may be appropriate.  This clause applies only to prime contractors and does not flow down to subcontractors or vendors, as it is limited to only the entity that enters the contract with the Government. 

To make their certification, contractors must make a “reasonable inquiry” into whether it uses covered equipment.  This reasonable inquiry is designed to uncover information in the contractor’s possession about the producer or provider of equipment used by the contractor. As a result, there is no need for the contractor to conduct an internal or third-party audit nor to approach its suppliers to develop information about the identity of the equipment producer or provider.

The “use prohibition” will be troubling to contractors.  First, the prohibition is very wide ranging and is not limited only to equipment used to perform a contract or on the job site.  Contractors must evaluate equipment and services that may be used anywhere in the company; such equipment may include computers, mobile telephones, network equipment, surveillance and access systems, copiers, and even thermostats.    The regulatory language may even reach employees personal technology if they use them for both personal and business use.  Also challenging is the fact that the Government has not provided any list of products incorporating covered technology that need to be reported.  While at present the rule is limited to the contractor entity itself, the FAR Council is considering expanding the scope of the “use prohibition” to apply to both the corporate entity and its domestic parents, affiliates, and subsidiaries.

The two prohibitions are implemented by the addition of two clauses to government contracts.  FAR 52.204-24  provides the representation required of contractors certifying whether they are providing to the government or use covered equipment.  FAR 52.204-25 provides the definitions, prohibitions, and reporting requirements.  Ultimately, the certifications will be incorporated into contractors’ representations and certifications in the System for Award Management (sam.gov).

Contractors can expect both clauses to be incorporated in any new procurements by the three agencies.  For contracts awarded before the effective dates, Contracting Officers will modify existing indefinite delivery contracts to include the clause for future delivery or task orders.  For other existing contracts, Contracting Officers will add the clauses when exercising an option or modifying the contract to extend the period of performance. The Government has started this process.

The new restrictions will undoubtedly increase contractors’ costs of compliance.  Cost reimbursement contracts will permit compliance costs to be recovered as part of normal indirect costs, but cost ceilings could still pose a problem.  On fixed-price contracts, contractors may have to pursue an equitable adjustment, which may be difficult to obtain.  Contractors should immediately consider steps required to bring their company into compliance and place the Agency on notice of anticipated costs or time impacts.

Failure to submit an accurate representation to the Government can constitute a breach of contract that could lead to cancellation, termination, and financial consequences.

Government contractors should consult with their counsel for guidance to ensure compliance with the new provisions and to consider whether costs incurred in compliance may be recoverable.  Our Government Contracts team at Vandeventer Black is available to assist you.