On August 13, 2020, the Office of Management and Budget (OMB) released new revisions to its Guidance for Grants and Agreements set forth under 2 CFR (commonly referred to as the Uniform Guidance).  The Uniform Guidance governs the terms of federal funding issued by agencies, including grants, cooperative agreements, federal loans, and non-cash assistance awards.  This includes federal awards to state and local government agencies, which are generally required to flow down certain provisions of the Uniform Guidance to organizations that they contract with.  Accordingly, the guidance is relevant both when an organization receives funding directly from the Government and when an organization receives funding from a federally funded state or local program.

Among other notable changes to the Uniform Guidance is the implementation of Section 889(b) of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 through the addition of 2 CFR § 200.216, which prohibits federal award recipients from using loan or grant funds to enter into contracts (or to extend or renew contracts) with entities that use covered telecommunications equipment or services.[1]  Because of its impact on state and local procurements, as well as on billions of dollars in other federal funding distributed to agencies, this is expected to significantly expand the reach of the Section 889 statutory prohibition, which we have covered in several other prior blog posts.

OMB’s guidance is somewhat contradictory with regard to the implementation of Section 889 in the Uniform Guidance.  On the one hand, the preamble states that new section, 2 CFR § 200.216, is intended to “prohibit Federal award recipients from using government funds to enter into contracts (or extend or renew contracts) with entities that use covered telecommunications equipment or services.”  Further, OMB states that “[t]his prohibition applies even if the contract is not intended to procure or obtain, any equipment, system, or service that uses covered telecommunications equipment or services” indicating that OMB intended for the restrictions to apply to telecommunications equipment or services used by an entity even if that entity is providing non-connected commodities.

On the other hand, the actual language in 2 CFR § 200.216 does not refer to a restriction on entering into contracts with entities that use covered telecommunications equipment and services.  Rather, the prohibition in section 200.216 is limited to the use of federal funds to procure or contract for covered telecommunications equipment or services.  The regulatory prohibition, which closely mirrors the statutory language in Section 889(b)(1) states:

Recipients and subrecipients are prohibited from obligating or expending loan or grant funds to:

(1) Procure or obtain;

(2) Extend or renew a contract to procure or obtain; or

(3) Enter into a contract (or extend or renew a contract) to procure or obtain equipment, services, or systems that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.

Thus, although the preamble indicates a broader intention, the actual regulatory language appears to impose only the limitations of Section 889(a)(1)(A) on recipients.  Similarly, although not entirely clear, the language of the statute can be read to limit the loan and grant fund prohibition to Part A’s procurement ban.  In addition, 2 CFR § 200.216 also does not appear to prohibit the procurement or use of covered telecommunications equipment or services where the equipment or services is purchased using non-federal funds.

Consistent with this approach, the new guidance clarifies that telecommunications and video surveillance costs associated with purchases prohibited by 2 CFR § 200.216 are unallowable.  (2 CFR § 200.471.)  In recognition of the costs associated with complying with the prohibitions on covered technology and the importance of ensuring users continue to have access to communications services, the Uniform Guidance requires federal awarding agencies to work with OMB to prioritize funding and technical support to assist affected businesses, institutions, and organizations.  The funds should be prioritized as “reasonably necessary” to help affected entities transition from covered technologies to replacement technologies.

Recipients of federal funds should be mindful of the new prohibitions contained in 2 CFR § 200.216 and ensure that they are appropriately segregating their costs going forward, particularly as compliance with the new provision will almost certainly be closely evaluated by auditors, awarding agencies, and pass-through entities alike.  Entities that contract with state and local governments will need to be mindful of the new requirements and may begin to see in the short term new contract language incorporating the requirements of 2 CFR § 200.216 from state and local agencies where federal funds are being used, such as state and local transportation projects which commonly receive funding from the Federal Transit Administration.

[1] Other notable changes to the regulations not discussed in depth in this post include among others: (i) expanding the ability of award recipients to elect use of a de minimis 10% indirect cost rate even where they have previously held Negotiated Indirect Cost Rate Agreements with federal agencies (2 CFR § 200.414); (ii) expanding the definition of fixed amount awards to allow Federal awarding agencies to apply the provision to both grant agreements and cooperative agreements (2 CFR § 200.201); (iii) making technical clarifications to key definitions within the regulations such as “recipient,” “subsidiary,” and “period of performance” (2 CFR § 200.201); and (iv) raising the micro-purchase threshold to $10,000 and the simplified acquisition threshold to $250,000, as well as allow recipients to request approval to operate under a micro purchase threshold in excess of $10,000 (2 CFR § 200.320).

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Photo of Susan B. Cassidy Susan B. Cassidy

Susan is co-chair of the firm’s Aerospace and Defense Industry Group and is a partner in the firm’s Government Contracts and Cybersecurity Practice Groups. She previously served as in-house counsel for two major defense contractors and advises a broad range of government contractors…

Susan is co-chair of the firm’s Aerospace and Defense Industry Group and is a partner in the firm’s Government Contracts and Cybersecurity Practice Groups. She previously served as in-house counsel for two major defense contractors and advises a broad range of government contractors on compliance with FAR and DFARS requirements, with a special expertise in supply chain, cybersecurity and FedRAMP requirements. She has an active investigations practice and advises contractors when faced with cyber incidents involving government information, as well as representing contractors facing allegations of cyber fraud under the False Claims Act. Susan relies on her expertise and experience with the Defense Department and the Intelligence Community to help her clients navigate the complex regulatory intersection of cybersecurity, national security, and government contracts. She is Chambers rated in both Government Contracts and Government Contracts Cybersecurity. In 2023, Chambers USA quoted sources stating that “Susan’s in-house experience coupled with her deep understanding of the regulatory requirements is the perfect balance to navigate legal and commercial matters.”

Her clients range from new entrants into the federal procurement market to well established defense contractors and she provides compliance advices across a broad spectrum of procurement issues. Susan consistently remains at the forefront of legislative and regulatory changes in the procurement area, and in 2018, the National Law Review selected her as a “Go-to Thought Leader” on the topic of Cybersecurity for Government Contractors.

In her work with global, national, and start-up contractors, Susan advises companies on all aspects of government supply chain issues including:

  • Government cybersecurity requirements, including the Cybersecurity Maturity Model Certification (CMMC), DFARS 7012, and NIST SP 800-171 requirements,
  • Evolving sourcing issues such as Section 889, counterfeit part requirements, Section 5949 and limitations on sourcing from China
  • Federal Acquisition Security Council (FASC) regulations and product exclusions,
  • Controlled unclassified information (CUI) obligations, and
  • M&A government cybersecurity due diligence.

Susan has an active internal investigations practice that assists clients when allegations of non-compliance arise with procurement requirements, such as in the following areas:

  • Procurement fraud and FAR mandatory disclosure requirements,
  • Cyber incidents and data spills involving sensitive government information,
  • Allegations of violations of national security requirements, and
  • Compliance with MIL-SPEC requirements, the Qualified Products List, and other sourcing obligations.

In addition to her counseling and investigatory practice, Susan has considerable litigation experience and has represented clients in bid protests, prime-subcontractor disputes, Administrative Procedure Act cases, and product liability litigation before federal courts, state courts, and administrative agencies.

Susan is a former Public Contract Law Procurement Division Co-Chair, former Co-Chair and current Vice-Chair of the ABA PCL Cybersecurity, Privacy and Emerging Technology Committee.

Prior to joining Covington, Susan served as in-house senior counsel at Northrop Grumman Corporation and Motorola Incorporated.

Photo of Ryan Burnette Ryan Burnette

Ryan Burnette is a government contracts and technology-focused lawyer that advises on federal contracting compliance requirements and on government and internal investigations that stem from these obligations. Ryan has particular experience with defense and intelligence contracting, as well as with cybersecurity, supply chain…

Ryan Burnette is a government contracts and technology-focused lawyer that advises on federal contracting compliance requirements and on government and internal investigations that stem from these obligations. Ryan has particular experience with defense and intelligence contracting, as well as with cybersecurity, supply chain, artificial intelligence, and software development requirements.

Ryan also advises on Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS) compliance, public policy matters, agency disputes, and government cost accounting, drawing on his prior experience in providing overall direction for the federal contracting system to offer insight on the practical implications of regulations. He has assisted industry clients with the resolution of complex civil and criminal investigations by the Department of Justice, and he regularly speaks and writes on government contracts, cybersecurity, national security, and emerging technology topics.

Ryan is especially experienced with:

  • Government cybersecurity standards, including the Federal Risk and Authorization Management Program (FedRAMP); DFARS 252.204-7012, DFARS 252.204-7020, and other agency cybersecurity requirements; National Institute of Standards and Technology (NIST) publications, such as NIST SP 800-171; and the Cybersecurity Maturity Model Certification (CMMC) program.
  • Software and artificial intelligence (AI) requirements, including federal secure software development frameworks and software security attestations; software bill of materials requirements; and current and forthcoming AI data disclosure, validation, and configuration requirements, including unique requirements that are applicable to the use of large language models (LLMs) and dual use foundation models.
  • Supply chain requirements, including Section 889 of the FY19 National Defense Authorization Act; restrictions on covered semiconductors and printed circuit boards; Information and Communications Technology and Services (ICTS) restrictions; and federal exclusionary authorities, such as matters relating to the Federal Acquisition Security Council (FASC).
  • Information handling, marking, and dissemination requirements, including those relating to Covered Defense Information (CDI) and Controlled Unclassified Information (CUI).
  • Federal Cost Accounting Standards and FAR Part 31 allocation and reimbursement requirements.

Prior to joining Covington, Ryan served in the Office of Federal Procurement Policy in the Executive Office of the President, where he focused on the development and implementation of government-wide contracting regulations and administrative actions affecting more than $400 billion dollars’ worth of goods and services each year.  While in government, Ryan helped develop several contracting-related Executive Orders, and worked with White House and agency officials on regulatory and policy matters affecting contractor disclosure and agency responsibility determinations, labor and employment issues, IT contracting, commercial item acquisitions, performance contracting, schedule contracting and interagency acquisitions, competition requirements, and suspension and debarment, among others.  Additionally, Ryan was selected to serve on a core team that led reform of security processes affecting federal background investigations for cleared federal employees and contractors in the wake of significant issues affecting the program.  These efforts resulted in the establishment of a semi-autonomous U.S. Government agency to conduct and manage background investigations.

Photo of Darby Rourick Darby Rourick

Darby Rourick advises defense and civilian contractors on a range of issues related to government contracting and has particular experience in federal cybersecurity and information technology supply chain issues. She has an active investigations practice and has experience representing clients in internal and…

Darby Rourick advises defense and civilian contractors on a range of issues related to government contracting and has particular experience in federal cybersecurity and information technology supply chain issues. She has an active investigations practice and has experience representing clients in internal and government investigations, including conducting witness interviews and managing government subpoena and CID responses. She also counsels clients on cybersecurity incident response; compliance with federal cybersecurity laws, regulations, and standards; supplier and subcontractor security issues; and cybersecurity related investigations.