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On January 21 and February 5, 2019, the Under Secretary of Defense for Acquisition and Sustainment, Ellen Lord, issued two memoranda outlining steps that the Department of Defense (DOD) is taking to increase the scrutiny and consideration of a government contractor’s implementation of DOD cybersecurity requirements.  These memoranda make clear that the DOD is ratcheting up its scrutiny of government contractor cybersecurity and supply chain risk management.  Contractors at all tiers would be well advised to take steps now to internally audit their compliance with these cybersecurity requirements and to confirm that they are properly addressing them when engaged in bidding and performing government contracts and subcontracts.

DFARS 252.204-7012 and NIST SP 800-171

Contractors whose contracts contain DFARS 252.204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting, are required to implement the 110 controls in the National Institute of Standards and Technology (NIST) Special Publication 800-171, Protecting Controlled Unclassified Information in Nonfederal Information Systems and Organizations, or to request and obtain approval of any variation to these requirements to provide “an alternative, but equally effective, security measure that may be implemented in its place.”  Compliance requires, among other things, a System Security Plan (SSP) and Plan of Action and Milestones (POA&M) for the implementation and continuing compliance with NIST SP 800-171. Compliance also requires that contractors report to the Government regarding an actual or suspected cyber incident within 72 hours of its discovery.  The clause also obligates the contractor to preserve and protect data relating to such an incident for at least 90 days in order to allow DOD the opportunity to request such data.

Contractors are obligated to flow down these requirements to their subcontractors or similar agreement holders, including those that provide commercial items, where their performance will involve Covered Defense Information (CDI) or operationally critical support.  Since the clause must be flowed down unchanged, subcontractors and similar agreement holders receiving the clause are also required to ensure that they properly flow down and ensure compliance of their subcontractors and suppliers, including those providing commercial items. The only commercial item subcontracts excepted are those where solely Commercial-Off-The-Shelf (COTS) items are being provided; services are not considered COTS items.

DOD to Audit Compliance with DFARS and NIST Requirements

DOD intends to audit government contractors’ compliance with the cybersecurity program and reporting requirements of DFARS 252.204-7012 and NIST SP 800-171.  In addition to assessing the state of government contractors’ implementation of their own cybersecurity requirements, the DOD will be assessing whether contractors are properly identifying and flowing down cybersecurity requirements to covered subcontractors whose performance will involve CDI that includes DOD’s Controlled Unclassified Information (CUI).  In the memoranda, Ms. Lord directs DOD to take steps to audit 1) contractor compliance with marking and distribution requirements relating to DOD CUI and 2) contractor procedures for ensuring the compliance of their “Tier 1 Level Suppliers” with the DFARS and NIST requirements.

Pursuant to Ms. Lord’s memoranda, the Defense Contract Management Agency (DCMA) has been charged with conducting purchasing system audits of contractors for which it currently provides contact administration and oversight to audit the contractors’ compliance with these cybersecurity requirements.  DOD intends to ensure that contractors that are not subject to DCMA contract administration and oversight are audited for compliance in these areas as well.  For these contractors, DOD will be working with the affected communities, such as the Navy’s shipbuilding program, to develop a similar approach for auditing.

Follow up

Contractors would be advised to ensure that they include the appropriate flow down terms and procedures for ensuring that their subcontractors and similar agreement holders are receiving the clause and complying with its terms.  Though the term “Tier 1 Level Suppliers” is not defined in the memorandum and we traditionally think of Tier 1 suppliers as those subcontractors or suppliers that directly contract with the contractor, DFARS 252.204-7012 requires that prime contractors flow down the clause to subcontractors without alteration except for the names of the parties, meaning that the clause’s subcontract flow down requirement–subparagraph (m)–must be included in their lower tier subcontractor agreements.  The rulemaking to implement the clause and the DOD memoranda make clear that it is DOD’s ultimate intent to ensure that contractors are taking adequate steps to protect DOD CUI whenever and wherever in the supply chain it is being used or provided.

We will monitor and report on future developments here. In the meantime, if you have any questions about this or other government contracting and compliance issues, contact one of Stinson Leonard Street’s Government Contracts and Investigations attorneys.