In recent years, the government contracts space has seen an increased scrutiny of procurements from certain countries, especially the People's Republic of China. A prominent example is Section 889 of the National Defense Authorization Act of 2019 ("NDAA FY 19"), which prohibits the Federal Government from procuring or even contracting with contactors that use covered telecommunications equipment and services from designated Chinese companies. A similar restriction is found in Section 844 of NDAA FY 19 that forbids the Federal Government from procuring "covered materials"—i.e., specialty metals, including samarium-cobalt magnets, neodymium-iron-boron magnets, tungsten metal powder, tungsten heavy alloy or any finished or semi-finished component containing tungsten heavy alloy, and tantalum metals and alloy—from "covered nations"—i.e., the Democratic People's Republic of North Korea, the People's Republic of China, the Russian Federation, and the Islamic Republic of Iran. See 10 U.S.C. § 4872(d)(1) & (2).
Now, the Department of Defense ("DOD") has issued proposed amendments to the Defense Federal Acquisition Regulation Supplement ("DFARS") to implement Section 844 and clarify the scope of the "covered materials" restriction and demonstrate just how much it changes the current landscape of specialty metals procurement. See Defense Federal Acquisition Regulation Supplement: Restriction on Certain Metal Products (DFARS Case 2021-D015), 88 Fed. Reg. 25609, 25610 (Apr. 27, 2023). This alert will briefly present the purpose, scope, and effective dates for this proposed DFARS update, as well as considerations for impacted contractors.
Purpose
According to DOD, the Section 844 DFARS update "significantly expands the scope of compliance" for affected procurements. 88 Fed. Reg. 25610. Specifically, the proposed DFARS provisions would reflect Part 844's adjustment of the current legal framework at 10 U.S.C. § 4872 and would "include the entire supply chain from mining or production . . . through production of finished magnets." Id. at 25609. To this end, DOD proposes to amend DFARS 225.7018, Restriction on acquisition of certain magnets, tantalum, and tungsten. In particular, the proposal would change DFARS 225.7018-2, Restriction, and DFARS 225.7018-3, Exceptions. It would also modify the relevant DFARS contract clause at 252.225-7052.
Scope
The substance of DOD's update to the DFARS comes in two timeframes. First, the current restrictions will remain in place through December 31, 2025, to allow affected firms the time to adjust their supply chains and business operations. The current restrictions prohibit the acquisition of "any covered material melted or produced in any covered country, or any end item, manufactured in any covered country, that contains a covered material." 88 Fed. Reg. 25611 (to codified at DFARS 225.7018-2(a)(1)). Second, the new restrictions will take effect January 1, 2026. The new restrictions will prohibit the acquisition of "any covered material mined, refined, separated, melted, or produced in any covered country, or any end item, manufactured in any covered country, that contains a covered material." Id. (to be codified at DFARS 225.7018-2(a)(2)) (emphasis added). In sum, where the current restrictions prohibit acquiring covered materials that are melted or produced in a covered country, the new restrictions will prohibit acquiring covered materials from covered countries that are melted or produced, as well as mined, refined, or separated. Additional, metal-specific provisions repeat this change, emphasizing that the new restrictions "include[] the entire supply chain from mining . . . through production of a finished magnet." Id. at 25611-12 (to codified at DFARS 225.7018-2(b), (c), & (d)).
Exceptions
Inversely, where the proposed DFARS provisions would expand the scope of the prohibitions at DFARS 225.7018-2, DOD's updated DFARS 225.7018-3 would shrink the scope of the exceptions. The current version of DFARS 225.7018-3 provides that the prohibitions in DFARS 225.7018-2 do not apply to commercially available off-the-shelf items ("COTS") except for COTS that are "50 percent or more tungsten by weight" or various forms of tantalum. The proposed DFARS 225.7018-3 would alter the exception to the exception, effective January 1, 2026. Thereafter, the covered materials prohibitions would not apply to COTS items except where a covered material accounts for "50 percent or more" of the weight of the COTS item and except where "a covered material" in various forms "has not been incorporated into an end item, subsystem, assembly, or component." 88 Fed. Reg. 25612.
Contractor Considerations
Given the expansion of coverage and the narrowing of inspections, it is important for contractors that deal in specialty metals to review this proposed rule and consider the following:
- Provide comments (by June 26, 2023) to present concerns or seek clarity in the proposed rule;
- Review your current supply chain compliance and examine how the changes in the proposed rule, once effective in January 2026, would impact your organization and business practices; and
- If the changes would impact your current supply chain practices, begin exploring how you might maintain compliance in light of the proposed rule, including searching and vetting potential new suppliers.
Conclusion
The growing scrutiny around procurement of goods or components produced in China presents considerable challenges for commercial firms. In fact, this increased scrutiny seemingly coincides with greater scrutiny domestically of government contracts that have a myriad and complex web of compliance-related obligations. For example, False Claims Act settlements in 2022 exceeded $2 billion, which stemmed from the second-highest number of settlements in history. Given this, the stakes are high. Nevertheless, the opportunities for new business opportunities are also increasing for firms domestically and located in United States trade partner countries to rise to the occasion and capture and/or expand upon the federal contracting market. For advice on navigating this constantly evolving landscape, Venable LLP and its government procurement team are monitoring these changes and available to assist.