FAR Council issues proposed rule on semiconductor supply chain management

A lot of attention has been paid in recent years to semiconductors, tiny electronic parts that power everything from consumer electronics and automobiles to critical infrastructure and advanced military systems.  Most prominently, the CHIPS and Science Act, which President Biden signed into law in August 2022, appropriated nearly $52 billion to boost semiconductor research and manufacturing in the United States, reflecting the importance of these parts to our nation’s supply chain.

More recently—indeed, just last week—the FAR Council (which consists of the Department of Defense, the General Services Administration, and the National Aeronautics and Space Administration) announced a rulemaking that will implement a provision of the FY 2023 National Defense Authorization Act prohibiting federal agencies from procuring certain semiconductors and products that utilize them.

As the FAR Council explained, the U.S. Government “has identified semiconductors as one of the technology sectors where the stakes of disruption are potentially greatest for U.S. economic and national security.  There are numerous opportunities for adversaries and other threat actors to introduce hardware backdoors, malicious firmware, and malicious software into a semiconductor during production.”  Therefore, “it is vital that these threat vectors are addressed during the production process.  Chips are ultimately integrated into end products, so it can be difficult to identify and mitigate risks to semiconductor hardware, firmware, and software.” (emphasis added)

At this point, the semiconductor products that will be targeted by the FAR Council’s ban include semiconductor products designed, produced, or provided by one of several Chinese companies (such as SMIC, China’s biggest chipmaker) or by companies included on a future list to be developed by the Departments of Defense and Commerce.

The FAR Council plans to issue a solicitation provision, which will require contractors to certify “the non-use of covered semiconductor products or services in electronic products or electronic services provided to the Government,” and a standard contract clause that will include the actual acquisition prohibition from the NDAA.

Here are a few prospective provisions of the contract clause that we found interesting:

Liability and suspension/debarment shield for contractors who disclose – The clause will provide “that a contractor or subcontractor that provides a notification… regarding electronic parts or products manufactured or assembled by such contractor or subcontractor shall not be subject to civil liability nor determined to not be a presently responsible contractor on the basis of such notification if the Federal contractor or subcontractor makes a comprehensive and documentable effort to identify and remove the covered semiconductor products or services.”

Contractors will be on the hook for certain noncompliance costs – The clause will state “that any rework or corrective action that may be required to remedy the use or inclusion of a covered semiconductor product or service is not an allowable cost.”

Prime contractors can rely on the representations of their subs – The clause will provide “that contractors and subcontractors may reasonably rely on the certifications of compliance from covered entities and subcontractors who supply electronic products or services when providing proposals to the Federal Government and are not required to conduct independent third-party audits or other formal reviews related to such certifications.”

It will be interesting to see how this rule takes shape over the coming months.

Have questions about the FAR or supply chain issues? Give Ward & Berry, PLLC a call.