On May 3, the Department of Defense (DOD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) issued an Advanced Notice of Proposed Rulemaking (ANPRM) that would prohibit executive agencies from procuring electronic goods and services incorporating semiconductor products and services from certain named companies and others affiliated with the governments of U.S. adversaries.

The proposed rule seeks to implement a section of the James M. Inhofe National Defense Authorization Act for Fiscal Year 2023 and is slated to go into effect on December 23, 2027.

What Is In the ANPRM?

The ANPRM contemplates the clause will be broadly applicable to “all solicitations and contracts.” This includes contracts valued at or below the simplified acquisition and micro-purchase thresholds, the acquisition of commercial products and services, and the acquisition of commercial off-the-shelf (COTS) items. The proposal would require a provision to be added to all solicitations mandating that offerors certify, after conducting a “reasonably inquiry,” the non-use of covered semiconductor products or services.

In addition, the ANPRM plans to require contracting officers to insert a clause in contracts that would prohibit contractors from supplying government agencies with any electronic products or services that include covered semiconductor products or services or electronic parts or services that use electronic products that include covered semiconductor products or services, unless the electronic products are used in certain “critical systems.” Contractors must also conduct a reasonable inquiry into their electronic products and electronic services to avoid the inclusion of covered semiconductor products and services.

 “Covered semiconductor products and services” is defined in the ANPRM as “a semiconductor product, a product that incorporates a semiconductor product, or a service that is designed, produced, or provided by” certain specifically listed companies including Semiconductor Manufacturing International Corporation (SMIC), ChangXin Memory Technologies (CXMT) and Yangtze Memory International Corp (YMTC) or other entities that the Secretary of Defense or Secretary of Commerce determine to be “owned or controlled by, or otherwise connected to, the government of a foreign country of concern.” The ANPRM defines “foreign country of concern” as “a country that is a covered nation” (i.e., North Korea, China, Russia, and Iran) and “any country that the Secretary of Commerce . . . determines to be engaged in conduct that is detrimental to the national security or foreign policy of the United States.”

The ANPRM also establishes a reporting requirement for federal contractors and subcontractors. Contractors must disclose to direct customers any instances where these covered semiconductor products and services were included in supplied electronic products or services. Similarly, if ever a product which contains covered semiconductor products or services is delivered to a federal agency and is “to be used in a critical system purchased by the Federal Government, or purchased by a Federal Contractor or subcontractor for delivery to the Federal Government for any critical system,” the contractor or subcontractor must notify the appropriate federal authorities within 60 days.

Those contractors who do notify the federal government within the required timeframe will not face civil liability nor be “determined to not be a presently responsible contractor” on the basis of that information “if the Federal contractor or Subcontractor makes a comprehensive and documentable effort to identify and remove the covered semiconductor products or services.” Those contractors that fail to make a required disclosure “shall be responsible for any rework or corrective action that may be required to remedy the use or inclusion of such covered semiconductor product or service.”

Prime contractors must incorporate all these requirements in subcontracts for the supply of electronic products.

Supply Chain Tracing

The ANPRM also provides that the Federal Acquisition Regulatory (FAR) Council is considering a requirement that offerors identify the provenance of their semiconductor components for each electronic product provided under a government contract. Required supply chain information could include the identities of vendors or facilities responsible for the design, fabrication, or assembly of the product; and manufacturer or distributor codes used for the products; among other items.

Interestingly, the ANPRM identifies the stringent provenance reporting requirements of the Uyghur Forced Labor Prevention Act (UFLPA) as informative in their rulemaking. In fact, the ANPRM suggests the rule may include the creation of a list, reminiscent of the UFLPA Entity List, “issued by the Department of Commerce that would identify a list of electronic products and services that include covered semiconductor products and services that utilize such products, such as telecommunications and cloud storage.”

Waivers

The plan is to have two avenues for contractors to obtain a waiver. First, the Secretary of Defense, Director of National Intelligence, Secretary of Commerce, and Secretary of Energy will have the authority to grant a waiver for any executive agency. Second, the head of each executive agency would have the authority to grant waiver.

Impact on Contractors

The DOD, GSA, and NASA believe that “75 percent of all unique awardees have electronic products or services that will be impacted by this prohibition.” Further, impacted contracts are estimated to include 5 to 15 products that contain semiconductors, and roughly 10-20% of semiconductors are non-compliant with the planned prohibition. The authors of the ANPRM predict that “for each non-compliant semiconductor product or service, it is anticipated to cost on average $10,000 to come into compliance by providing an alternative product or service or updating a product or service to remove prohibited semiconductors.” It seems likely that compliance with the rule will be costly for some contractors in terms of both monetary resources and time. Contractors who rely on soon-to-be prohibited semiconductor products and services should begin assessing alternative sources of supply in anticipation of the 2027 effective date.

Going Forward

Semiconductors are viewed as essential to U.S. economic and national security. The Biden administration has been active in attempting to maintain the U.S. technological edge over strategic competitors like China. While this ANPRM is the latest salvo in that effort, it is not the first time we have seen the FAR Council wade into the U.S.-China rivalry. For example, the FAR Council has curtailed the acquisition of certain articles containing specialty metals, banned U.S. agencies from entering contracts for products and services from companies like Huawei and ZTE, and promulgated a final rule implementing the Federal Acquisition Supply Chain Security Act (FASCSA) which prohibits the delivery and use of certain “covered articles” on the FASCSA exclusion list. Contractors should expect more such actions over the next few years.

In addition, the ANPRM lists 18 questions for commenters to address. These questions provide some insight into the direction the drafters may take when implementing the final regulations. Interested parties have until June 3, 2024 to submit comments. Companies that wish to clarify certain terms or potentially shape the final rule should submit their thoughts soon.