Comprehensive Overview of Section 889 for Not-for-Profit Federal Contractors and Grant Recipients

Posted on Jan 5, 2021

The Office of Management and Budget (OMB) recently issued Frequently Asked Questions regarding the implementation of Section 889(b) of the National Defense Authorization Act (NDAA) of Fiscal Year 2019. If you’re part of a not-for profit organization, you may be asking yourself, “What is the Prohibition on Covered Telecommunications and Video Surveillance Services or Equipment covered in Section 889 of the NDAA, and what do we need to do?”

In this article, we will provide an overview of this provision, including how it differs between Federal contractors and Federal grant recipients, and steps your organization should be taking to ensure you comply.

Executive Summary

Section 889 is part of Public Law 115-232, the John S. McCain National Defense Authorization Act, which is intended to protect U.S. national security. Requirements of Section 889 include significant limitations that directly affect U.S. Federal funding received through procurement contracts and, by extension, to federal assistance in the form of grants and loans. These limitations are effective now. Certain temporary waivers have been provided by the U.S. Agency for International Development, the U.S. State Department, and the Department of Defense through September 30, 2022, giving breathing room for some organizations, but requiring immediate analysis and possible action by others.

Section 889 of the NDAA of 2019 defines “covered telecommunications equipment or services” to mean
telecommunications and video surveillance equipment or services produced by Huawei Technologies
Company, ZTE Corporation, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company (or any subsidiary or affiliate of such entities).

While Section 889 prohibits the U.S. Federal government from procuring any equipment, system, or service that includes certain technology or services produced by companies with known ties to China, its impact may be felt much more broadly by nonfederal entities receiving Federal funding, both as Federal contractors and Federal grant recipients alike. In short, Section 889, through regulations in 2 CFR 200 (the Uniform Guidance), prohibits Federal grantees from recovering direct and indirect costs associated with the use of covered equipment and goes one step further in prohibiting Federal contractors from using the covered equipment whether the associated costs are recovered or not.

At a glance, it may appear that only entities that receive Federal funding and operate overseas may be directly affected, but given the breadth of Section 889 and the prevalence of parts and components of technology systems manufactured in China, the effects may be widely felt even within the U.S. Now is the time to determine whether your entity utilizes what is considered to be “covered equipment” and, if so, evaluate and document whether a prohibited manufacturer is being used.

The Section 889 restrictions are complex and evolving. Identifying, disclosing, managing covered equipment and services, and developing and implementing a plan to comply with the law can be costly and time consuming. However, noncompliance will likely result in lost revenue and opportunities to obtain federal funding. The following information outlines key aspects of Section 889, how it affects the Uniform Guidance, and highlights the various effective dates. Links to resources are included at the end for your direct reference.

Section 889 – Federal Contractors

Part A and Part B of Section 889 pertain to Federal procurements subject to the Federal Acquisition Regulations (FARs). Part A prohibits the Federal government from procuring, obtaining, extending, or renewing a contract for covered equipment and services after August 13, 2019. However, Part B is of more interest to nonfederal entities, as Part B contains the prohibition for Federal agencies to contract with entities that use covered equipment or services. This is applicable to all new, extended, or renewed contracts as of August 13, 2020.

Part B also requires certain disclosures and representations to be made by offerors/contractors when pursuing Federal contracts. Effective August 13, 2020, the offeror/contractor must submit a representation stating whether it does or does not use covered equipment or services (FAR 52.204-24). A representation must be submitted with each new offer, extension, or when exercising an option, until the annual representation (see below) is available. The representation must cover the entity’s entire supply chain regardless of whether such covered equipment or services are used in the performance of work under a Federal contract or not. If the offeror/contractor represents that it does use covered technology or services, a contract may not be awarded unless an exception applies or a waiver is granted.

Effective October 26, 2020, FAR 52.204-26 requires only an annual representation, unless the entity represents that it does utilize covered equipment or services, in which case the offeror/contractor will be required to submit an offer-by-offer representation.

Note that, effective August 13, 2020, the representations required under FAR 52.204-24 must be made for new contracts and for modifications and options under existing contracts. However, the prohibition implemented in FAR 52.204-25 applies only to new awards, extensions, and when exercising an option made on or after August 13, 2020.

With regard to subcontractors, FAR 52.204-24 does not require subcontractors to submit a representation; however, FAR 52.204-25 requires the prime contractor to verify the use of prohibited equipment or services in its supply chain worldwide. Therefore, the prime contractor must make “reasonable inquiry” designed to “uncover any information in the entity’s possession about the identity of the producer or provider of covered telecommunications equipment or services used by the entity that excludes the need to include an internal or third-party audit.”

Section 889 – Federal Grants and Loans

Although FARs do not generally apply to Federal grants and loans, recent revisions to 2 CFR 200 (Uniform Guidance) introduced new provisions which prohibit the Federal grantee from recovering direct and indirect costs associated with the use of covered services and equipment.

2 CFR 200.216, Prohibition on certain telecommunications and video surveillance services or equipment, states that recipients and subrecipients are prohibited from obligating or expending loan or grant funds to:

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

2 CFR 200.216 refers to Public Law 115-232, Section 889 and specifically lists five companies whose equipment or services are prohibited:

  • Huawei Technologies Company,
  • ZTE Corporation,
  • Hytera Communications Corporation,
  • Hangzhou Hikvision Digital Technology Company,
  • Dahua Technology Company, and
  • any of subsidiaries or affiliates of these companies.

2 CFR 200.471, Telecommunication costs and video surveillance costs, states that costs incurred for telecommunications and video surveillance services or equipment such as phones, internet, video surveillance, and cloud servers are allowable except for obligating or expending covered telecommunications and video surveillance services or equipment or services as described in 200.216.

A certification or representation is not required for Federal assistance awards. A recipient agrees to comply with all applicable laws, regulations, and standard award provisions when the recipient submits an application and signs an award.

The OMB FAQ clarifies that Federal grant awards made prior to August 13, 2020, do not need to be amended to include the prohibition on covered telecommunications equipment and video surveillance services. However, if a new award was issued after August 13, 2020, and it did not include the new standard provision, the award must be amended. Further, it has been clarified in FAQ Q-6, the Section 889 prohibition on covered telecommunications and video surveillance services or equipment is effective “on all expenditures charged to Federal awards as of August 13, 2020.” However, responses to FAQs from USAID appear to provide a different interpretation (see below).

It’s important to note that the Uniform Guidance does not prohibit recipients from using covered telecommunications equipment or services; rather, recipients cannot use federal government award funds to acquire such equipment or services. Recipients should still be aware of what they are including in their indirect costs, however, as prohibited equipment must be excluded from an allowable cost pool. Note also that the prohibition includes costs incurred under fixed amount awards as well. Further, the costs associated with covered telecommunications equipment or services cannot be used to meet cost sharing or matching requirements.

The prohibition on covered costs does not affect a nonfederal entity’s use of the de minimis indirect cost rate; however, the MDC cannot include unallowable costs in the calculation of the de minimis cost rate.

Unlike Federal procurement contracts, a one-time entity specific waiver is not available for Federal assistance and loans.

What Should I Do?

Not-for-profit entities should become familiar with the details of the interim rule and the updated Uniform Guidance. The details of Section 889 are complex. Clear and consistent guidance on interpretation and implementation for all Federal agencies is still unfolding.

Using existing inventories of telecommunications and video surveillance equipment, identify the manufacturer to determine whether, in accordance with provision of the Section 889 and the Uniform Guidance, such equipment would be considered “covered equipment.” Remember, Section 889(a)(1)(b) applies to both Federal and commercial entities, both domestic and overseas locations, and technology used when employees are working from home.

If you do own or use covered equipment or services, determine whether a limited waiver has been obtained by the Federal agency from which you receive funding. Note, however, that a waiver from one Federal agency does not apply to funding received from any other Federal agency, so you may still be covered by the requirements. In addition, develop a plan to replace covered equipment with reasonable alternatives and budget to fund those replacements.

Consider contacting your contracts or grants officer for specific information on your agreements. New contracts, as well as modifications of existing contracts, will add Part B terms. Assistance agreements and modifications will incorporate requirements through the inherent applicability of the Uniform Guidance.

Prepare for compliance now. Even if you’re lucky enough to have funding through a Federal agency with a two-year waiver, compliance with Section 889 requirements and the Uniform Guidance updates may be extensive and costly. If you have any questions regarding Section 889, or need assistance getting your organization in compliance, please send us an email.

Resources

Sec. 889 of the 2019 NDAA FAQ for Federal Grants and Loans

Interim rule that implements Section 889(a)(1)(B)

Acquisition.gov (FAR 52.204)

Electronic Code of Federal Regulations (2 CFR 200, Uniform Guidance)

USAID FAQs

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