Beginning on August 13, U.S. federal government agencies will be prohibited from issuing new contracts or extending or renewing existing contracts to entities that use certain telecommunications and video surveillance equipment and services from five targeted Chinese suppliers.
On July 14, 2020, the Federal Acquisition Regulatory Council (“FAR Council”) published an interim rule amending the Federal Acquisition Regulation (“FAR”) to implement Section 889(a)(1)(B) of the John S. McCain National Defense Authorization Act for Fiscal Year 2019, Pub. L. No. 115-232, 132 Stat. 1636 (2019). The law imposes sweeping restrictions intended to remove Huawei Technologies and ZTE telecommunications equipment and services and Hytera Communications, Hangzhou Hikvision Digital Technology, or Dahua Technology video surveillance equipment and services, designated as “covered telecommunications equipment and services,”1 from the supply chains of U.S. government contractors, subcontractors, and recipients of federal grant and loan funding. Huawei, Hangzhou Hikvision, and Dahua are already designated on the U.S. Department of Commerce Entity List, which bans exports of goods and technologies subject to the U.S. Export Administration Regulations, and Huawei and ZTE have been designated by the Federal Communications Commission as presenting unacceptable security risks to the U.S. telecom system.
Section 889 is a significant supply chain risk management directive that includes three key subparts:
Subparagraph (a)(1)(A) became effective August 13, 2019 and prohibits executive branch U.S. government agencies from procuring or obtaining, directly or through subcontracts, “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 part of any system.”2
Effective August 13, 2020, Subparagraph (a)(1)(B) prohibits executive agencies from entering into “a contract (or extend[ing] or renew[ing] a contract) with an entity that uses 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 part of any system.” This prohibition is especially sweeping because it is triggered by contractors’ “use” of covered telecommunications equipment and services, regardless of whether such use is related to any U.S. government contract.
Paragraph (b), also effective on August 13, 2020, prohibits executive agencies from “obligat[ing] or expend[ing] loan or grant funds . . . to procure or obtain the equipment, services, or systems described in subsection [§ 889](a).” The Office of Management and Budget’s January 22, 2020 proposed guidance implementing Paragraph (b) at 85 Fed. Reg. 3,766 proposed a new provision at 2 C.F.R. § 200.216, stating: “Grant, cooperative agreement, and loan recipients are prohibited from using government funds to enter into contracts (or extend or renew contracts) with entities that use covered technology.”
The new rule implementing Subparagraph (a)(1)(B) requires contracting officers to include revised versions of the solicitation provision FAR 52.204-24 and contract clause FAR 52.204-25 in all solicitations issued and contracts awarded on or after August 13, 2020. Contracting officers will also be required to modify existing indefinite quantity-indefinite delivery contracts to apply the revised FAR clause to future orders.
Starting August 13, 2020, prime contractors submitting offers, signing, extending, or renewing contracts will need to either (i) represent that they do not use, and no entity in their supply chain uses, the covered equipment or services as a substantial or essential component of any system, or as critical technology as part of any system; or (ii) work with individual agencies as contracts are entered into, extended, or renewed to employ an applicable exception3 or pursue a waiver.4 Offerors who represent that they use covered telecommunications equipment and services will be assumed to be seeking a waiver and, if the contracting officer decides a waiver is necessary to make an award, the offeror will need to then provide “(1) A compelling justification for the additional time to implement the requirements under 889(a)(1)(B), for consideration by the head of the executive agency in determining whether to grant a waiver; (2) a full and complete laydown of the presences of covered telecommunications or video surveillance equipment or services in the entity’s supply chain; and (3) a phase-out plan to eliminate such covered telecommunications equipment or services from the entity’s systems.” 85 Fed. Reg. at 42,667.
For all prime contractors, the FAR Council assumes that contractors will develop a compliance plan within the first year to include the following steps:
- Regulatory familiarization. The FAR Council expects contractors to read and become familiar with the rule and requirements for compliance.
- Corporate Enterprise Tracking. Contractors are required to make a “reasonable inquiry” into whether they use or have subcontractor or supplier that uses covered telecommunications equipment or services.
- Education. Contractors should train their procurement and materials management personnel on compliance with the rule.
- Cost of Removal. If – after a reasonable inquiry – a contractor identifies use of covered equipment or services, it may decide to replace existing equipment or services with compliant equipment or services.
- Representation. The solicitation provision at 52.204-24 has two disclosure sections, one for 889(a)(1)(A) and one for 889(a)(1)(B). The FAR Council is working on updates to SAM.gov to allow annual representations by offerors. Like the representations for 889(a)(1)(A), only offerors who provide an affirmative response to the annual representation would be required to make an offer-by-offer representation on their use of covered equipment and services.
- Cost to Develop a Phase-out Plan and Submit Waiver Information. For a limited time, agencies may request waivers for contractors, but such contractors will be required to develop a phase-out plan for their existing equipment or services and provide detailed information to the government about the presence of the covered equipment or services.
The interim rule, which takes effect before the comment period closes, will modify several FAR provisions and clauses, as follows:
- FAR Subpart 4.21, Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment;
- FAR Part 13, Simplified Acquisition Procedures;
- FAR Part 39, Acquisition of Information Technology; and
- FAR Part 52, Solicitation Provisions and Contract Clauses; specifically, FAR 52.204-24, Representation Regarding Certain Telecommunications and Video Surveillance Services or Equipment, and FAR 52.204-25, Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment.
Although the new interim rule will take effect on August 13, 2020, the FAR Council will accept public comments on the rule through September 14, 2020. The final rule may include changes to the interim rule. Most notably, the FAR Council is considering whether to expand the scope of the new rule to prohibit agencies from issuing contracts, extensions or renewals to any entities whose domestic affiliates, parents, and subsidiaries use the covered telecommunications equipment or services. Such an expansion would significantly increase the burden of contractors to survey their corporate infrastructures and replace equipment and services to remain eligible for U.S. government business.
Comments may be submitted via Regulations.gov, under “FAR Case 2019–009.”