United States: DoD Publishes Interim Rule On Supply Chain Security For Defense Contractors

The Department of Defense has issued an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to include "Requirements Relating to Supply Chain Risk."  Issued on November 18, 2013, the interim rule is one of several recent efforts to address cybersecurity concerns related to defense contractors and is part of a growing number of national and agency-level supply chain security initiatives.  The interim rule, which puts in place a pilot program to implement authorities granted by section 806 of the National Defense Authorization Act (NDAA) for FY 2011 as amended by the NDAA for FY 2013, allows DoD to address the impact of IT supply chain risk in certain types of procurements related to national security systems. 

Specifically, the interim rule authorizes officials in DoD to exclude certain sources for information technology, whether acquired as a service or a supply, or to direct DoD contractors to exclude certain sources as subcontractors.  Moreover, the interim rule grants those officials authority to limit disclosure of exclusion decisions and makes those decisions unreviewable in bid protests.  Although these authorities apply only with respect to procurements related to "covered systems," which are defined as national security systems, the interim rule requires that relevant clauses be included in all IT procurements subject to the DFARS.  As a result, contractors that directly or indirectly provide IT products or services to DoD should consider whether and how the security of their supply chains might affect their eligibility for future contracts.

Background

The security of the US Government's supply chain for sensitive information technology has been the subject of increasing concern in Congress and other policymaking circles.  The concern is that malicious actors could infiltrate or sabotage systems critical to US national security by compromising components of those systems (e.g., by inserting malware or backdoors) during the development and production process.  A response to this concern has been efforts to increase the government's authority to exclude from government contracts suppliers suspected of producing compromised products or services as well as to prohibit the acquisition of IT systems unless the risk of cyber espionage or sabotage has been addressed.  The authority granted by section 806 of the FY 2011 NDAA is the most prominent example of these efforts. 

The interim rule implements "pilot" authority granted to DoD that will expire on September 30, 2018.  Citing the need to put in place a pilot program with ample time to assess its efficacy as well as the need to immediately protect the supply chain security of key procurements, DoD published the interim rule, effective immediately, without notice and comment.  However, DoD will consider comments submitted before January 17, 2014 in the formation of its final rule.

The Interim Rule Applies Only to Procurements Related to National Security Systems

The interim rule applies to "covered procurements"—procurements to acquire "covered items" of technology, whether as a service or a supply, that are purchased for inclusion in a "covered system" and that if compromised could pose a supply chain risk to that system. 1 Covered systems have the same meaning as "national security systems" (NSS), as defined in 44 U.S.C. § 3542(b).  NSSs are information systems that are involved in intelligence activities, cryptologic activities related to national security, command and control of military forces, equipment that is an integral part of a weapon or weapon system, or that is otherwise critical to the fulfillment of military or intelligence missions (but unrelated to routine administrative functions).  NSSs also include IT systems that are otherwise protected by procedures established to secure classified information related to the national defense or foreign policy.

According to the interim rule, information systems need not be used or operated by a government agency in order to qualify as NSSs.  They could be contractor systems.  Moreover, the interim rule explicitly states that a telecommunications system may qualify as a NSS.

The Interim Rule Permits DoD to Exclude Sources and Limit Disclosure of Information About the Exclusion

With respect to those covered procurements, the interim rule grants authority to the Secretary of Defense, the Secretaries of the individual services, and their delegees to make exclusions from certain procurements.  Specifically, the rule permits these DoD officials to: 

  1. Exclude a source that fails to meet certain qualification standards established for the purpose of reducing supply risk in the acquisition of NSSs; 
  2. Exclude a source that fails to achieve an acceptable rating with regard to an evaluation factor providing for the consideration of supply chain risk in evaluation of proposals for the award of a contract or the issuance of a task order; or 
  3. Withhold consent for a contractor to subcontract with a particular source or direct a contractor for a covered system to exclude a particular source from consideration for a subcontract under the contract. 

The interim rule does not explain what "qualification standards" or "evaluation factor providing for the consideration of supply chain risk" will be used by DoD. 

In the event that any of these actions are taken, authorized individuals also have the authority to limit disclosure of information relating to the basis for this action.  If disclosure is limited, DoD will notify appropriate parties of a covered procurement action and the basis for the action "only to the extent necessary to effectuate the" action itself. 

But there are also more significant consequences to a decision to limit disclosure of information about an exclusion.  A decision to limit disclosure of information makes the underlying exclusion action unreviewable in a bid protest.  As contemplated by section 806 of the 2011 NDAA, the interim rule specifically states that once disclosure of information is limited, "[n]o action undertaken . . . shall be subject to review in a bid protest before the Government Accountability Office or in the Federal court." 

Further, in the event that disclosure of information about an exclusion is limited, the interim rule also requires the DoD official that made the decision to notify other DoD departments and other US government agencies that may be subject to similar supply chain risk of the decision to exclude the particular source.  Thus, even if a contractor does not know that it has been excluded from a procurement out of concern for supply chain security, other government entities may take actions to further exclude it, which in essence could operate as "de facto debarment."  We note in this regard that section 309 of the FY12 Intelligence Authorization Act provides the intelligence community agencies – aside from those components within DoD – similar authority to exclude suppliers on the basis of assessed supply chain risk.  This provision's sunset is explicitly linked to that of Section 806 of the FY11 NDAA.

The Interim Rule Provides a Required Procedure For Exclusion Actions

The interim rule does, however, limit the ability of authorized officials to use this authority by requiring a specific procedure.  The authorized official must first obtain a joint recommendation from the Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L) and the Chief Information Officer of DoD, based on a risk assessment by the Under Secretary of Defense for Intelligence, that there is a significant supply chain risk to a particular NSS.  (Pursuant to DoD Instruction 5240.24, the Defense Intelligence Agency provides supply chain threat analyses to DoD acquisition programs.)

Then, the authorized official must make a determination in writing, with the concurrence of the Under Secretary for AT&L, that exercise of the authority is necessary to protect national security and that less intrusive measures to reduce the supply chain risk are not reasonably available.  Finally, the authorized official must notify Congress of the exclusion in advance of the action.

The procedure appears aimed at ensuring the accuracy of exclusion decisions.  Given the number of actors that must be involved in an exclusion determination, it may also, if nothing else, limit the frequency with which the authority is ultimately used.

The Interim Rule Creates Ambiguity By Requiring Language in All IT Procurements Subject to the DFARS

As stated above, the interim rule directly affects a limited subset of procurements—ones related to items for inclusion in NSSs.  But it establishes a new provision to be included in all solicitations and a new clause to be included in all contracts for acquisitions of information technology that are subject to the DFARS.   The language in both the provision and the clause, inter alia, define supply chain risk and provide notice that DoD may use authorities provided in section 806 of the NDAA in order to manage supply chain risk. The contract clause also includes a flowdown provision, requiring contractors to include the clause "in all subcontracts involving the development or delivery of any information technology, whether acquired as a service or supply."

Analysis provided by DoD along with the interim rule emphasizes that although DoD can only use its 806 authorities in procurements involving a NSS, it has decided to include this language in all IT procurements and contracts because there is a risk that "portions of these contracts may be used to support or link with one or more NSS."   Even in cases where there is no such risk, DoD states that the language should be included in solicitations and contracts to avoid creating security risks by specifically identifying only the most sensitive procurements with the language.  This creates significant ambiguity for contractors and subcontractors, since it may be impossible for them to know whether a system (which could in theory be operated by other contractors and not DoD) that they are providing services or supplies for is somehow connected with an NSS. 

Unanswered Questions

A number of questions arise from the interim rule as it is currently drafted.  They include the following:

1.    How broadly will DoD interpret its definition of "covered items" and "covered systems"?

Although the interim rule appears to limit the definition of covered systems to NSSs involved in a specifically listed set of functions, other aspects of the interim rule suggest that the applicability of this rule is quite extensive.   First, the rule makes clear that covered systems include not only DoD systems but also contractor systems that serve these functions, presumably in support of work for the DoD.  Second, DoD's analytical comments suggest that even systems that connect to NSSs could be covered.  Thus, the interim rule could in theory allow DoD to reach quite broadly into the supply chain of government contractors.

2.    What qualification standards and evaluation factors will DoD use to measure supply chain security?

Although the authority of DoD officials is clarified by the interim rule, it is not entirely clear from the rule what standards they will apply in exercising their authority under the rule.  The vulnerability of a particular technology's supply chain may be difficult to assess.  The interim rule provides for the reliance on qualification standard and evaluation factors in making a determination.  Although entities like the National Institute of Standards and Technologies (NIST) have been working on supply chain security best practices—NIST Special Publication 800-53, Revision 4, includes a security control for supply chain protection—the interim rule does not state whether DoD will use published standards or its own internal criteria.  We note that the DoD-chaired Committee on National Security Systems (CNSS) – not NIST – sets policy for all US Government department and agency NSSs, including with regard to supply chain security, and that contractors are required to protect NSSs consistent with CNSS requirements.  In March 2012, CNSS issued Directive 505 on Supply Chain Risk Management.  In addition, in October 2009, CNSS published Instruction 1253, which establishes NIST Special Publication 800-53 as a common foundation for information security controls for national security systems.  Under this instruction, national security systems are directed to use NIST controls as appropriate.

3.    How transparent will DoD be in its implementation of the rule?

Given DoD's authority to limit disclosure of information related to actions it takes under the interim rule, there is a strong possibility that IT contractors will not have visibility into how DoD ultimately implements it.  This means that it may be difficult at the margins for contractors or subcontractors to know whether a particular procurement is "covered" or whether a particular supplier passes muster.  Perhaps the most at risk as a result of this ambiguity will be companies that provide fairly routine IT products or services to contractors or DoD entities that operate NSSs.

Conclusion

As noted above, although the interim rule took effect on November 18, 2013, DoD is accepting comments until January 17, 2014 with the intent to publish a final rule thereafter.  We will continue to monitor this and related developments. 

Footnotes

1. The FY11 NDAA defines supply chain risk as "the risk that an adversary may sabotage, maliciously introduce unwanted function, or otherwise subvert the design integrity, manufacturing, production, distribution, installation, operation or maintenance of a covered system so as to surveil, deny, disrupt, or otherwise degrade the function, use, or operation of such system."

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