U.S. Government Seeks Input on Semiconductor Procurement Ban: Key Insights from Proposed FAR Rule | Sheppard Mullin Richter & Hampton LLP

Key Takeaways

The FAR Council has proposed a rule prohibiting the procurement of certain semiconductor products beginning December 23, 2027, inviting comments until April 20, 2026.
The rule implements a two-part prohibition, affecting federal agencies and contractors, targeting electronic parts with connections to specific foreign manufacturers.
Contractors must perform reasonable inquiries to ensure compliance, including mandatory disclosure of covered products to both government and non-government customers.

Proposed Rule Overview

On February 17, 2026, the FAR Council introduced a Proposed Rule that implements Section 5949 of the James M. Inhofe National Defense Authorization Act for Fiscal Year 2023. This rule aims to prohibit the procurement of specific semiconductor products and services due to national security concerns. The effective date for compliance is set for December 23, 2027, and agencies, as well as contractors, can comment on this rule until April 20, 2026.

The semiconductor industry is under scrutiny due to its critical role in the U.S. supply chain and reliance on foreign sources, especially from Taiwan and China. The government’s dual approach focuses on enhancing domestic manufacturing through CHIPS Act funding and restricting foreign semiconductor use. Section 5949 specifically targets federal executive agencies and their contractors with a two-part prohibition.

In Part A, agencies are banned from procuring or extending contracts for electronic products that include covered semiconductor products. Part B expands this to prevent agencies from contracting with entities that use these products in critical systems, such as IoT devices or unmanned aircraft control systems.

Previously, the Advanced Notice of Proposed Rulemaking raised various compliance questions for contractors. The newly published Proposed Rule clarifies key aspects:

Two-Part Prohibition: While similar to the Section 889 prohibition, this rule is more specific to products delivered to government customers and less expansive in scope.
Broad Applicability: The prohibition applies to all government contracts, including lower-value acquisitions, covering both commercial products and off-the-shelf items. An exemption exists for commercial products without alternatives until December 23, 2028.
Reasonable Inquiry Requirement: Contractors must conduct thorough inquiries to identify the origin of semiconductor products provided to the government. Certifications will be required with every solicitation submission, alongside mandatory disclosures if covered products are found.
Mandatory Disclosure: Contractors must inform the government and non-federal clients about any covered products during both the solicitation and execution phases. Timely reporting within 72 hours of discovery will protect contractors from civil liabilities.
Flow Down Provisions: New rules extend compliance responsibilities to all subcontractors, including suppliers of commercial products.
Defined Entities: The prohibition specifically targets semiconductors from three companies: Semiconductor Manufacturing International Corporation (SMIC), ChangXin Memory Technologies (CXMT), and Yangtze Memory Technologies Corp (YMTC). The Department of Commerce may designate additional entities under this rule.

To support compliance, the Department of Commerce will maintain resources that outline which entities are affected by these prohibitions. This rigorous oversight aims to enhance supply chain resilience and address national security concerns effectively, placing the onus on contractors to ensure their products meet new regulatory standards.

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