DoD Rule on Reporting Employees in China Published and In Effect This Week

On August 25, 2022, the Department of Defense (“DoD”) published two new DFARS clauses prohibiting the award of covered DoD contracts to contractors that leverage resources in China unless those resources are disclosed.  Implementing Section 855 of the FY22 National Defense Authorization Act and effective immediately, the clauses are DFARS 252.225-7057 “Preaward Disclosure of Employment of Individuals Who Work in the People's Republic of China” and DFARS 252.225-7058 “Postaward Disclosure of Employment of Individuals Who Work in the People's Republic of China.” These clauses will be incorporated into DoD solicitations and contracts with an estimated value over $5 million unless a senior procurement executive waives the disclosure requirements due to national security interests.  The requirements do not apply to contracts for commercial products and commercial services, including contracts for commercially available off-the-shelf (“COTS”) items, or to contracts at or below the simplified acquisition threshold (currently $250,000).

DFARS 252.225-7057 specifically prohibits award of a contract to any corporation, company, limited liability company, limited partnership, business trust, business association, or other similar entity, including any subsidiary thereof, performing work on a covered contract [1] in the People's Republic of China, including by leasing or owning real property used in the performance of the covered contract in the People's Republic of China (“covered entity”) [2], if:

1. that covered entity proposes to employ one or more individuals who will perform work in the People’s Republic of China (“China”); and
2. fails to disclose its use of workforce and facilities in China.

Under this clause, at the time of bid or proposal submission, an offeror must disclose:

1. the proposed use of workforce on a covered contract or subcontract, if the offeror employs one or more individuals who perform work in China;
2. the total number of such individuals who will perform work in China; and
3. a description of the physical presence, including street address or addresses, in China where work on the covered contract will be performed.

DFARS 252.225-7058 prohibits award of a contract, extension of a contract, or exercising an option on a contract with a covered entity unless the covered entity submits separate government Fiscal Year 2023 and 2024 disclosures of its use of workforce and facilities in China on a covered contract.  These annual disclosures must include:

1. the total number of such individuals who perform work in China on the covered contracts funded by DoD; and
2. a description of the physical presence, including street address or addresses in China, where work on the covered contract is performed.

Flowdown of this clause is required for subcontracts exceeding $5 million that are not for commercial products or commercial services.  This clause does not state to whom or how the FY23 and FY24 disclosures are to be made.

Key Takeaways

Government contractors with DoD contracts or subcontracts in excess of $5 million that are not commercial product or commercial service contracts should begin preparing to provide this information.  Such reporting will include even the use of warehouses in China.  While the interim rule does not require that DFARS 252.225-7058 be incorporated into existing contracts, it is likely that DFARS 252.225-7058 will be incorporated into existing contracts that would qualify as covered contracts before option year renewals.