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On July 14, the FAR Council published an interim rule revising FAR 52.204-24 and FAR 52.204-25 to implement Section 889(a)(1)(B) of the 2019 National Defense Authorization Act (NDAA) prohibiting executive agencies from entering into, renewing, or extending contracts with contractors that use Huawei, ZTE, or other identified telecommunications equipment and services (“covered telecommunications equipment and services”) anywhere within the contracting entity as a substantial or essential component of any system or critical technology of any part of a system, regardless of whether there is a nexus with the contractor’s performance of government contracts.  Among other significant differences from 889(a)(1)(A),which went into effect on August 13, 2019, the Section 889(a)(1)(B) prohibition is not a mandatory flowdown; does not include an exception for contractors’ use of backhaul and roaming features that include covered telecommunications equipment; and has more extensive waiver request requirements.  Moreover, while the rule currently only applies to the offeror entity, the final rule may apply to all offeror domestic affiliates and subsidiaries.  The new interim rule is effective August 13, 2020 unless a waiver is granted; however, contracting officers are expected to immediately begin including the new representation requirement (a revised version of FAR 52.204-24) in solicitations.  Comments on the rule are due by September 14, 2020.

We have pulled out a number of highlights and they are followed by a more detailed description of the nuances of the new rule:

  • Will Immediately Be Added as a Representation in Solicitations Whose Contracts Will Issue After August 13, 2020.
  • For Now Only the Offeror Entity Must Meet the Prohibition Requirements: The 889(a)(1)(B) representation is restricted to only the offeror entity.  Subsidiaries and affiliates need not be evaluated for compliance.  Indeed, the interim rule indicates that at most the final rule may apply the representation and prohibition requirement to domestic entities.  Therefore, it is unlikely offerors will need to assess foreign subsidiaries and sister companies’ networks, services, and equipment (except to the extent they are providing the contracting entity with products or services).
  • Applies to All FAR-Covered Contracts: The provision applies broadly to a range of industries and applies to commercial items, including commercial off-the-shelf items. The rule applies to the offeror entity and all of its activities.
  • No Third-Party Backhaul Services Exception for Contractors for 889(a)(1)(B): There is no third-party backhaul, roaming, and interconnection arrangement exception for contractors although the FAR Council recognizes such an exception for the government.  In the 2019 NDAA, there is an exception to this rule stating that “nothing… shall be construed to (a) prohibit the head of an executive agency from procuring with an entity to provide a service that connects to the facilities of a third-party, such as backhaul, roaming, or interconnection arrangements…” The FAR Council has interpreted this to permit the government to buy a service that connects to backhaul that includes covered telecomm equipment, but not to permit contractors to use such services without representing such and obtaining a waiver.  The FAR Council clarified that: […the exception does not apply to a contractor’s use of a service that connects to the facilities of a third-party, such as backhaul, roaming, or interconnection arrangements. As a result, the Federal Government is prohibited from contracting with a contractor that uses covered telecommunications equipment or services to obtain backhaul services from an internet service provider, unless a waiver is granted.] This means, for the time being, while contractors can provide services to the government that use covered telecommunications equipment in backhaul, interconnection arrangements, and roaming, the offeror entity itself may not use such services or must seek a waiver.
  • Extensive Waiver Request Requirements and More Than One Waiver May Be Required: There are extensive waiver request requirements, including for a comprehensive identification of each category of covered telecommunications or surveillance equipment or services in the entity’s supply chain and systems, as well as an identification of where such technology can be found in the equipment, systems, networks, and services of the entity or its supply chain where covered telecommunications equipment and services are used in any system.
  • Not a Mandatory Flowdown: This NDAA 889(a)(1)(B) provision is not a mandatory flowdown.  However, the offeror entity would need to evaluate any covered equipment or services in products or services subcontractors and suppliers are providing to the offeror entity.  Still the subcontractor or supplier entity would not be required to evaluate systems and services unrelated to those being provided to the offeror entity.
  • Offerors Are Expected to Develop Compliance Plans: Such a plan is expected to include at least:
    • (1) an understanding of the Section 889 requirements;
    • (2) a reasonable inquiry to identify any covered equipment within or affecting the entity’s infrastructure, systems, or services (including inquiry subcontractor and supplier relationships) – this will likely need to occur when a supplier or subcontractor is first used, when significant changes occur within the entity, and annually after the initial inquiry;
    • (3) training of procurement/purchasing personnel to ensure awareness of Section 889 and the compliance plan;
    • (4) procedures for replacing any covered telecommunications equipment or services once identified;
    • (5) plan for updating representation or providing notification to the government if covered telecommunications equipment is identified; and
    • (6) plan for requesting waivers (for entities planning to do so).
  •  Ongoing Efforts to Delay: Although not mentioned in the rule, there continue to be legislative efforts to extend the implementation date, perhaps through COVID-19 legislation, before the current August 13, 2020 effective date.
  • Deadline for Comments: September 14, 2020.

 

Summary of Key Elements and Related Application Concerns

Expect to Immediately See Representation Requirements in Solicitations and to See Modifications to Existing Contracts and Options August 13, 2020

The rule, consistent with Section 889(a)(1)(B), requires contracting officers to include a revised representation about a contracting entity’s use of covered telecommunications equipment and services in solicitations after August 13, 2020 and even in solicitations before August 13, 2020 if the resulting contract will be issued after August 13.  As such, contractors will begin seeing the expanded representation requirement immediately.  Contracting officers are also required to modify existing indefinite delivery contracts to include the expanded FAR 52.204-25 prohibition and representation before any new orders are placed and to include the representation before exercising an option period.

 

Representation Requirements and Prohibition Applies to All FAR-Covered Contracts 

The expanded representation requirement state that “After conducting a reasonable inquiry…  [the offeror] [ ]does, [ ] does not use covered telecommunications equipment or services, or use any equipment, system, or service that uses covered telecommunications equipment or services.”[1]  The prohibition against the covered telecommunications equipment applies to any equipment, system or service that uses covered telecommunications equipment or services, regardless of the whether the system, equipment or service is used to perform government work.  It applies to all FAR contracts, including micro-purchase and commercial items contracts.

Below we break the 889(a)(1)(B) representation down into key components:

  • Covered Telecommunications EquipmentTelecommunications equipment and services produced or provided by Huawei Technologies Company or ZTE Corporation (and all affiliates or subsidiaries of either) and others as identified. Video surveillance and telecommunications equipment produced by or services provided by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company, and others as identified.
  • Types of Products: Not just end-use products, but any equipment, system, or services that uses covered telecommunications equipment or services.  This includes products that are used by the entity that are unrelated to government contracts or subcontracts.
  • Who Must RepresentFor now, only the offeror entity that executes a contract is representing or must meet the requirements of the representation concerning telecommunications equipment.  This means that only the entity representing, not its affiliates, subsidiaries, or parents companies, must meet the telecommunications equipment prohibition requirements. However, for contracting entities that share equipment or otherwise rely on equipment with affiliates or other entities under the corporate umbrella, they must determine if such equipment uses the concerning telecommunications equipment.  In addition, the FAR Council is considering expanding this representation requirement to include domestic affiliates, parents, and subsidiaries of the offeror.  Although more burdensome, this indicates that the FAR Council will not expect foreign affiliates, parents or subsidiaries to meet the telecommunications equipment prohibition in any case.
  • Exceptions: The prohibition does not apply to telecommunications equipment that cannot route or redirect user data traffic or cannot permit visibility into user data.  Most importantly, the 889(a)(1)(B) requirements do not include an exception for contractors using third-party services such as backhaul, roaming or interconnection arrangements at this time.[2] While the government may purchase service that use covered telecommunications equipment for these third-party services, contractors would have to represent that their networks do include covered telecommunications services in the event they relied on such systems or services themselves.  The FAR Council explicitly identified this lack of an exception for the offerors.  Therefore, the government may not contract with an entity using covered telecommunications equipment or services for any of these backhaul or roaming services, unless a waiver is granted.

  

Requesting Waivers Will Be Burdensome, at Least in the First Instance

Executive agencies may grant a one-time waiver from 889(a)(1)(B) requirements that will expire no later than August 13, 2022.  The executive agency is required to conduct market research and obtain feedback from contractors when determining whether to issue a waiver.  If an offeror represents that it does use covered telecommunications equipment and is not subject to an exception, then the agency must seek, before issuing a waiver, (1)  a compelling justification from the offeror for additional time to meet the 889(a)(1)(B) requirements, (2) a full and complete laydown of the presences of covered telecommunications or video surveillance equipment or services in the offeror’s supply chain, and (3) a phase-out plan to eliminate covered telecommunications equipment and services from the offeror’s systems.

Waivers are expected to take at least a few weeks to obtain and the guidance indicates agencies may choose an offeror that does not require a waiver when time does not permit obtaining a waiver for another offeror.  Waivers must be reported to the Office of the Director of National Intelligence and certain Congressional committees. Waivers are expected to be on a contract-by-contract basis for now.  Waivers are not transferable between agencies or contracts at this time.  We expect agencies to create waivers broadly applicable at least within the agency.  As the representation is entity-wide, offerors may be able to use the same laydown and justification for multiple waiver requests.

 

889(A)(1)(B) Will Not Be Flowed Down to Subcontractors, But Suppliers and Subcontractors Will Be Subject to Businesses’ Reasonable Inquiries

This provision does not expressly require flow-down of its terms to subcontractors.  However, the prime contractor will need to make a “reasonable inquiry” of its supply chain to evaluate whether the prime contractor can properly represent that it does not use a service that relies on covered telecommunications equipment.  As such, subcontractors and service providers should be analyzing any relationship between its services to prime contractors and covered telecommunications equipment (to the extent not already done so for 889(a)(1)(A) compliance).  The lack of a backhaul exception may become particularly relevant in these inquiries.

 

Developing a Compliance Plan

The rule is currently offer-specific but the FAR Council is working on SAM edits to allow for annual representations like that now provided for 889(a)(1)(A) representations.  Once the annual representation is made available, only offerors providing an affirmative response would be required to provide offer-by-offer representations.

Submission of an inaccurate representation may constitute breach of a government contract and can lead to cancellation, termination, and financial consequences.  For this reason, contractors are expected to develop a compliance plan that will allow them to submit accurate representations.  At the least, the FAR Council expects contractors’ compliance plans to include:

  • (1) understanding the Section 889 requirements;
  • (2) reasonable inquiry to identify any covered equipment within or affecting the entity’s infrastructure, systems, or services (including shared technology and services and an examination of subcontractor and supplier relationships);
  • (3) training of procurement/purchasing personnel to ensure awareness of Section 889 and the compliance plan;
  • (4) procedures for replacing any covered telecommunications equipment or services once identified;
  • (5) plan for updating representation or providing notification to the government if covered telecommunications equipment is identified; and
  • (6) plan for requesting waivers (for entities planning to do so).

Both DoD and industry have pressed for a delay to the rule’s effective date.  There continue to be legislative efforts to extend the implementation date, perhaps through COVID-19 legislation, before the current August 13, 2020 effective date.  On July 13, an NDAA amendment was introduced in the House to extend the implementation date for Section 889(a)(1)(B) to January 1, 2022.

 

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[1] A reasonable inquiry is an inquiry designed to uncover any information in the entity’s possession – primarily documentation or other records – about the identity of the producer or provider of covered telecommunications equipment or services used by the entity.  However, it excludes the need for an internal or third-party audit.

[2] The new rule also adds definitions for the following terms that are part of an exception under 889(a)(1)(A).

  • Backhaul – intermediate links between the core network, or backbone network, and the small subnetworks at the edge of the network (e.g., connecting cell phones/towers to the core telephone network). Backhaul can be wireless (e.g., microwave) or wired (e.g., fiber optic, coaxial cable, Ethernet).
  • Interconnection arrangements – arrangements governing the physical connection of two or more networks to allow the use of another’s network to hand off traffic where it is ultimately delivered (e.g., connection of a customer of telephone provider A to a customer of telephone company B) or sharing data and other information resources.
  • Roaming – cellular communications services (e.g., voice, video, data) received from a visited network when unable to connect to the facilities of the home network either because signal coverage is too weak or because traffic is too high.