On February 17, 2026, the FAR Council released its long-awaited Proposed Rule implementing Section 5949 of the James M. Inhofe National Defense Authorization Act for Fiscal Year 2023, prohibiting the procurement of certain semiconductor products and services. The Proposed Rule has an effective date of December 23, 2027. Comments on the Proposed Rule are open until April 20, 2026.
As a reminder, the semiconductor industry has been high on the Government’s national security and supply chain watchlist for several years. Back in 2021, the National Counterintelligence and Security Center (“NCSC”) specifically called out the risks associated with the “global nature” of the semiconductor supply chain “creating chokepoints that can result in interruptions and opportunities for foreign adversaries to impair U.S. access to trusted semiconductors.” With growing concerns surrounding U.S. reliance on semiconductors from Taiwan and China in particular, the Government has taken a two-pronged approach to bolstering the semiconductor supply chain: (1) incentivizing production of U.S.-based manufacturing facilities through CHIPS Act funding, and (2) imposing restrictions on the use of foreign semiconductors in the Government’s supply chain.
This second approach was the goal of Congress in passing Section 5949, imposing a two-part prohibition on Federal executive agencies (and thus on government contractors by extension):
- In Part A, Congress prohibited executive agencies from “procur[ing] or obtain[ing], or extend[ing] or renew[ing] a contract to procure or obtain, any electronic parts, products, or services that include covered semiconductor products or services.” The focus in Part A is on products and services delivered directly to government end customers.
- In Part B, Congress prohibited agencies from “enter[ing] into a contract” with any entities “to procure or obtain electronic parts or products that use any electronic parts or products that include covered semiconductor products or services.” Importantly, the Part B prohibition is limited to use in a critical system, but it is intended to reach broader than a direct procurement.
Specifically, the FAR Council explains Part B “goes beyond the prohibition in [Part A] by prohibiting Federal agencies from acquiring electronic products, used within critical systems that use electronic products that incorporate covered semiconductor products or services.” This includes, for example: (1) a control panel within a critical system that enables an Internet of Things (“IoT”) device that includes a covered semiconductor product or service or (2) an unmanned aircraft ground control station that controls an unmanned aircraft that includes a covered semiconductor product or service.
When the FAR Council issued its Advanced Notice of Proposed Rulemaking on this topic in May 2024, government contractors were left with a lot of open questions regarding how to comply with these prohibitions. Now, with publication of the Proposed Rule, we have a little more insight into what contractors need to know for compliance. So, without further ado, we provide below our key takeaways from the Proposed Rule:
- A Two-Part Prohibition (But Not a Section 889 Two-Part Prohibition): As noted above, Congress handed down a two-part prohibition for covered semiconductor products and services. Part A is drafted as a standard procurement prohibition—the Government is prohibited from procuring, and therefore contractors are prohibited from providing, electronic “parts, products, or services that include covered semiconductor products or services” (more on what constitutes “covered semiconductor products or services” below). And though Part B is intended to be more expansive than Part A, it by no means is as expansive as the Section 889 Part B prohibition (which, as you all hopefully are aware, applies to all use within a company, even if not tied to Government business). The semiconductors in question must still have some nexus to the products and services being delivered to the Government customer.
- Broad Applicability to All Acquisitions (Except Commercial Services): The Proposed Rule applies to all government contracts of all types and sizes—including acquisitions below both the Simplified Acquisition Threshold and the Micropurchase Threshold. The prohibitions likewise will apply to providers of commercial products and commercially available, off-the-shelf products—but not to commercial services (with the exception of commercial information technology and telecommunication services).
Though applicable to commercial offerings, the Proposed Rule does offer a limited exception for commercial products without viable alternatives—the prohibitions in question will not apply until December 23, 2028, giving commercial businesses a little more time to bring their offerings into compliance. - Reasonable Inquiry Required Throughout the Supply Chain: Contractors will be required to “conduct a reasonable inquiry to determine whether the electronic products or electronic services [they] provide[] to the Government include covered semiconductor products or services or use electronic products that include covered semiconductor products or services.” The FAR Council suggests this will include assessing what electronic products or services are included in a contractor’s offering to the Government and “seek[ing] out information to identify the source of semiconductor products or services included in those offerings.” To the extent a contractor cannot discern this information from available resources, contractors are expected to “look to its suppliers to conduct reasonable inquiries and provide the required certification in the solicitation provision” of the Proposed Rule.
Importantly, as discussed below, solicitations will include an express certification that contractors have performed this reasonable inquiry before submitting an offer on any covered solicitation—laying the groundwork for potential enforcement actions if contractors do not have some documentary evidence supporting the conduct of a reasonable inquiry. On the other hand, prime and higher-tier subcontractors may also reasonably rely on the representations and certifications of suppliers, so long as there is no reason to doubt the accuracy of the certification. - Express Certifications Incorporated into Every Solicitation: The FAR will contain a new solicitation certification provision requiring offerors to certify that they have conducted a reasonable inquiry, in addition to certifying compliance with the prohibition, upon submitting an offer.
- Mandatory Disclosure Obligations to Both the Government and Non-Federal Customers: Upon discovery of covered electronic products or services, offerors during the solicitation phase and contractors during performance must disclose certain information to the Government, including information regarding the manufacturer and whether there are alternatives available. If appropriately disclosed as required in the FAR clauses, contractors will be subject to a safe harbor that protects them from civil liability, poor past performance ratings, or determinations that they are not presently responsible. During the solicitation stage, a timely notification must occur before award. During the contract stage, though, notification must be made to the Contracting Officer within 72 hours of discovery in order to take advantage of the safe harbor provisions. This 72 hour notice requirement is a glaring deviation from Section 5949, which required disclosure within 60 days of discovery.
These disclosure obligations are fairly consistent with recent procurement prohibitions involving, in particular, Chinese-origin goods (such as the 889 restrictions). But the Proposed Rule differs in that it includes the mandatory requirement to make similar disclosures to non-Federal customers whenever covered semiconductor products or services are found in products or services covered by the prohibition. You read that correctly—if at any point a contractor is required to make a disclosure under the prohibition, they must in turn disclose the “inclusion of a covered semiconductor product or service in electronic products or electronic services subject to the prohibition…which are sold to non-Federal customers outside of the Government.” This includes all “direct” customers of a contractor—higher-tier contractors, state and local customers, even commercial customers who may otherwise be purchasing these products. - Mandatory Flow Down: Unsurprisingly, the new FAR Clause will be a mandatory flow down for all subcontractors, including providers of commercial products and services.
- Specific Named Entities for Definition of “Covered Semiconductor Product or Service,” with Room for Expansion: The prohibition applies to electronic parts, products, or services that include “covered semiconductor products or services,” which are defined to include “a semiconductor, a semiconductor product, a product that incorporates a semiconductor product, or a service that utilizes such a product…” where designed, produced, or provided by: (1) Semiconductor Manufacturing International Corporation (SMIC), (2) ChangXin Memory Technologies (CXMT), or (3) Yangtze Memory Technologies Corp (YMTC). As with the Section 889 restrictions, the prohibition also extends to any subsidiary, affiliate, or successor of these specified entities.
The Department of Commerce has the authority to designate additional entities under the prohibition where connected to a “foreign country of concern” —which includes China, North Korea, Russia, and Iran, among potentially others. If we were gambling folks we’d keep a close eye on the Department of Defense 1260H list and any semiconductor manufacturer identified by the DOD as a Chinese Military Entity. - Department of Commerce Resources: Commerce will host a website listing entities “determined by the Secretary of Commerce or Secretary of Defense to be an entity owned or controlled by, or otherwise connected to, the government of a semiconductor foreign country of concern,” providing a single resource for determining if there are others that become subject to the prohibition outside the three named entities above.
Commerce may also host a list of entities who have certified compliance with the prohibition for specified products and services. Contractors would be permitted to reasonably rely on these published representations without conducting further diligence.
Continuing along with the Government’s emphasis on supply chain resiliency and national security concerns, the Proposed Rule greatly emphasizes the role of supply chain diligence throughout the contract life cycle—requiring contractors to certify that reasonable inquiries have been made before even submitting a response to a solicitation, and placing the onus on prime and higher-tier subcontractors to seek out the information needed from suppliers to meet their certification requirements.