October 15, 2019

October 15, 2019

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October 14, 2019

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DoD Issues Final Rule Addressing Exclusion of Contractors that Present Supply Chain Risk in National Security System Procurements

On October 30, 2015, the Department of Defense (“DoD” or the “Department”) issued a Final Rule amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) and clarifying the scope of the DoD’s ability to evaluate and exclude contractors that represent “supply chain risks” in solicitations and contracts involving the development or delivery of IT products and services related to National Security Systems (“NSS”). The Final Rule clarifies that the DoD’s exclusion authority is limited to procurement of NSS, explains that decisions apply on a procurement-by-procurement basis, and removes the flow down requirement that was present in the Interim Rule. The Final Rule also encourages contracting officers to consider imposing a Government consent requirement for all subcontracts.  Our in-depth analysis of the Final Rule is available here.

When the DoD issued its Interim Rule, these amendments are significant because they provide the DoD with authority to undertake a Section 806 Action to exclude IT contractors from contract participation or withhold consent to subcontract if the Department determines that a contractor or subcontractor presents a supply chain risk.  Notably, the DoD may implement this tool without providing pre- or post-exclusion notice to or engaging in dialogue with contractors.  Further, the Final Rule states that Section 806 Actions are not reviewable in a bid protest before the Government Accountability Office or in any Federal court.  The lack of procedural protections led commentators to the Interim Rule to suggest that contractors could be effectively excluded from DoD procurements without advance notice or an opportunity to object.  The DoD attempted to address this de facto debarment concern by clarifying that each Section 806 decision to exclude is done on a procurement-by-procurement basis. Nevertheless, multiple exclusions without an opportunity to object or address the Government’s concerns could effectively result in a blanket exclusion.

In addition to outlining the DoD’s authority under Section 806 Actions, the Final Rule allows the Department to use an evaluation factor to assess supply chain risk when making procurement decisions and imposes on contractors an ongoing obligation to “mitigate supply chain risk.”  However, the DoD declined to provide guidance in the Final Rule regarding the manner in which the evaluation factor will be applied or the appropriate means of mitigating supply chain risk.

In short, under the Final Rule, contractors may be excluded from certain DoD IT procurements without (1) notice or an opportunity to be heard, (2) an impartial review of the DoD’s decision, or (3) an opportunity to take corrective action.  In addition, contractors must address a new supply chain risk evaluation factor and satisfy an ongoing obligation to “mitigate supply chain risk.”  Given the potentially significant impact of the Final Rule, contractors would be well advised to closely monitor the DoD’s implementation of these amendments.

© 2019 Covington & Burling LLP

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About this Author

Susan B. Cassidy, Government Contracts Attorney, Covington Burling, Law Firm
Partner

Susan Cassidy advises clients on the complex rules and regulations imposed on government contractors, with a special emphasis on the defense and intelligence sectors. She combines a sophisticated knowledge of the FAR and DFARS with the practical insight gained from senior in-house positions at both dedicated defense and commercial item contractors.

Ms. Cassidy conducts internal investigations for clients on wide array of government contracts and national security compliance issues. She regularly advises on FAR mandatory disclosure obligations and represents...

202-662-5348
Alexander Hastings, Litigation and e-discovery lawyer, Covington
Associate

Alex Hastings advises clients across a broad range of government contracting issues, including advising clients in transactional matters involving government contractors and assisting defense contractors and pharmaceutical companies in securing and performing government contracts.

Mr. Hastings also advises clients concerning best practices in e-discovery. He assists in investigations and litigations that involve complex e-discovery issues and has represented clients in matters involving the U.S. Department of Justice, Securities and Exchange Commission and the United States International Trade Commission.

202-662-5026