Government contractors are facing a significant compliance burden thanks to three new FAR provisions that impose restrictions on contractors who supply or use Chinese telecommunications equipment services.
Generally speaking, the new FAR provisions, 52.204-24, 52.204-25, and 52.204-26, are designed to ensure that contractors do not supply any covered equipment or services to the government (the “supply restriction”) or use any covered equipment or services in their business (the “use restriction”). Covered equipment or services include any telecommunications equipment or services from companies linked to the Chinese government, such as Huawei (the world’s largest telecom manufacturing company) and ZTE, as well as any subsidiaries or affiliates of such companies.
The new FAR provisions implement the supply and use restrictions by requiring contractors to make annual representations in the System for Award Management about whether their offerings to the government include covered equipment or services and whether they use covered equipment or services. Contractors who respond affirmatively for either representation must make a similar representation on an offer-by-offer basis. Any time a contractor represents in an offer that it intends to provide covered equipment or services, or that it uses covered equipment or services, the contractor must submit additional information for the government to evaluate and determine if a waiver is appropriate.
Most contractors will find the use restriction to be more onerous than the supply restriction. For one thing, the impact of the supply restriction will be limited because many contractors do not supply telecommunications equipment or services to the government. By contrast, the use restriction includes any use of covered equipment or services by the contractor, even if the use is not connected to a government contract. In addition, contractors are required to affirm that they undertook a “reasonable inquiry” to determine whether or not they use covered equipment or services. In performing a reasonable inquiry, contractors must review any information in their possession about the source of the telecommunications equipment they use.
The use restriction does have some important limits, however. In particular, the use representation only applies to equipment or services used by the entity making the offer. Therefore the restriction does not apply to equipment or services used by subsidiaries or affiliates of the offeror, but it does apply to equipment or services that the offeror uses but does not own.
If during the course of performing a contract, a contractor discovers that it is using or supplying covered equipment or services, the contractor must report the discovery to the government and undertake mitigation efforts. The report must be made within one business day of discovering the covered equipment or services.
Notably, there is no flow-down requirement for the restrictions on the use of covered equipment or services, but prime contractors must flow down the restrictions on providing covered equipment or services to the government.
Finally, it is worth noting that the new FAR provisions are currently implemented via interim final rules, which means that they are applicable to contractors, but they may be subject to change when the FAR Council releases the final rules. The last interim rule’s comment period closed on October 26, 2020, which means that the final rules will likely be issued in 2021.