Where Did This Come From?
National Defense Authorization Act (NDAA) of 2019, required the implementation of a new Federal Acquisition Regulation (FAR) rule barring federal contractors from using telecommunications products or services or video surveillance equipment from certain foreign companies – The People’s Republic of China. As a result, a new contract clause came into place – FAR 52.204-25, Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment – effective August 13, 2020.
What is the Prohibition?
FAR 52.204-25(b)(1) prohibits the higher tier contractor from “procuring or obtaining, or extending or renewing a contract to procure or obtain, 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.” The subcontractor is prohibited from providing to the higher tier contractor “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.”
The clause defines critical technology as any of the following:
- Defense articles or services included on the United States Munitions List;
- Items included on the Commerce Control List and controlled pursuant to multilateral regimes, including for reasons relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology; or for reasons relating to regional stability or surreptitious listening;
- Specially designed and prepared nuclear equipment, parts and components, materials, software, and technology relating to assistance to foreign atomic energy activities;
- Nuclear facilities, equipment, and material relating to export and import of nuclear equipment and material;
- Select agents and toxins; or
- Emerging and foundational technologies controlled pursuant to the Export Control Reform Act of 2018.
There are some exceptions in paragraph (c) of the clause and FAR 4.2104 allows for a waiver by the head of an executive agency issuing the prime contract and the Director of National Intelligence. We see little likelihood that either will be a viable option.
Impact on Purchasing System
FAR 52.204-25(e) requires contractor to flow down this clause to all lower tier subcontracts and other contractual instruments, including purchases of commercial items. Based on the FAR 4.2105(b) requirement that FAR 52.204-25 be included “in all solicitations and contracts” (yes – no dollar threshold), you are going to have to flow the clause down in all purchases in direct support of a Government contracts.
Now that you have flowed the clause down, DCMA CPSR reviewers are going to expect you to have a process in place to monitor subcontractor compliance with the prohibition. While the clause does not specifically call this requirement out, it does define what “Reasonable inquiry” means. The expectation is you perform “an inquiry designed to uncover any information in the … [subcontractor’s] possession about the identity of the producer or provider of covered telecommunications equipment or services used by the … [subcontractor] that excludes the need to include an internal or third-party audit.” We believe requesting the subcontractor provide a listing of its qualified vendors and vendors receiving purchases over the last year should address the reasonable inquiry requirement. We recommend the development of a policy to identify when the inquiry is necessary, as not every vendor is a risk.
The FAR clauses at 52.204-24 and 52.204-26 requiring a representation do not have a flow down requirement. So, no addition to the ever-growing list of representations and certifications you need to get from subcontracts is necessary.
A Second Interim Rule Under FAR Case 2019-009
A second interim rule was issued by the FAR Council (Federal Register / Vol. 85, No. 167 / Thursday, August 27, 2020) addressing the provisions within FAR 52.204–24 and 52.204–26. FAR 52.204–24 and 52.204–26 deal with the contractor’s use of prohibited equipment within its operations. Not the inclusion of prohibited equipment in supplies or services to be delivered to the Federal Government customer covered by FAR 52.204-25.
This second rule states that updates to the System for Award Management (SAM) will be made to allow contractors to make annual representation, after the contractor conducts a reasonable inquiry as to whether it uses prohibited equipment or services. The burden on contractors is thereby reduced by allowing the contractor to respond ‘‘does not’’ in the annual representation and skip the offer-by-offer representation. The rule makes is clear that all contracts, including at or below the simplified acquisition threshold and for commercial items, including commercially available off-the-shelf items. So, even small business with prime contracts are going to be making the representation in SAM.
Now that the representation is in SAM, higher tier contractors should be able to leverage this representation to start the process of supporting its FAR 52.204-25 requirement to ensure nothing delivered by a subcontractor includes the prohibited equipment as the subcontractor has already represented it does use prohibited equipment. It is likely that DCMA CPSR reviewers are going to still want to see you have a process in place to ensure no prohibited equipment is included in any supplies or service to be delivered to the Federal Government customer.
Reporting Requirement
FAR 52.204-25(d) requires higher tier contractors to report when they are notified by a subcontractor at any tier of violation of the prohibition. The way this paragraph of the clause is written every contractor in the chain must report the issue to the contracting officer, likely to create some confusion. The reporting requirements are very short, one day from discovery and with 10-days information on migration. As with the new cyber incident reporting, DCMA CPSR reviewers are going to expect you to have a tracking system.
Some Relief for Subcontracts
FAR 52.204-25(e) excludes the FAR 52.204-25(b)(2) prohibition on the use of covered telecommunications equipment or services, regardless of whether that use is in performance of work under a Federal contract. For subcontracts the prohibition is limited to equipment included or utilized in supplies or services to be delivered to the higher tier contractor.
What You Need To Do
Update your purchasing system for the following:
- A requirement to flow down FAR 52.204-25 in all direct purchases;
- A policy/process for monitoring subcontractor compliance;
- A tracking system for reported issues; and
- As always, documentation within the individual purchase order files to support you are doing all this.
Redstone GCI is available to assist contractor’s in assessing their purchasing system compliance with DFARS 252.244-7001 and additional DCMA CPSR expectations. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in applying business system requirements.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant