On August 25, 2025, the US Department of Defense (“DoD”) issued a Final Rule amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) to prohibit DoD contracting officers from awarding certain consulting services contracts to contractors where they or their subsidiaries or affiliates hold contracts and subcontracts that involve providing “consulting services” to “covered foreign entities” (“CFEs”) unless they implement a conflict-of-interest mitigation plan. The prohibition applies specifically to contracts assigned a North American Industry Classification System (“NAICS”) code beginning with 5416 for management, scientific, and technical consulting services. The Final Rule may result in targeted consultants having to choose between continuing to work with the DoD or with CFEs.
The Final Rule will take effect on October 24, 2025 following a 30-day comment period ending on September 24, 2025. It is the culmination of a proposed rule issued on September 26, 2024 pursuant to section 812 of the National Defense Authorization Act for Fiscal Year 2024 to implement a statutory directive to the DoD to prevent adversaries from accessing sensitive information that may cause harm to the United States.
The Final Rule defines CFEs to include:
- the government of the People’s Republic of China, the Chinese Communist Party, the People’s Liberation Army, the Ministry of State Security and any other security service or intelligence agency of the Chinese government;
- the government of the Russian Federation and any entity sanctioned pursuant to Executive Order 13662, which includes over 700 entities and individuals, including major Russian banks and energy companies;
- the government of any country determined to have repeatedly provided support for terrorism (i.e., currently Cuba, Iran, North Korea, and Syria);
- entities identified on various lists maintained by the US Department of Commerce, including the Entity List; and
- entities listed on certain DoD- or US Department of the Treasury-issued lists of entities involved in China’s military-civil fusion strategy, including the Chinese Military Companies List and the Non-Specially Designated Nationals Chinese Military-Industrial Complex Companies List.
With respect to categories #1 and 2 above, it is not clear if state-owned entities in China, Russia, or State Sponsors of Terrorism or entities not designated by the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) but considered sanctioned under Executive Order 13662 under OFAC’s “50% Rule” are considered CFEs. We also note that the US State Department is implementing a decision by President Trump to delist Syria as a State Sponsor of Terrorism, as discussed in our blog post here, which would exempt the Syrian government from the restrictions by the Final Rule’s implementation.
With respect to the services provided to CFEs that can trigger the prohibition, the Final Rule defines the term “consulting services” to mean “advisory and assistance services,” but excludes the provision of products or services related to:
- compliance with legal, audit, accounting, tax, reporting, or other requirements of the laws and standards of countries; or
- participation in a judicial, legal, or equitable dispute resolution proceeding.
The Final Rule uses a mechanism similar to that found in other recent rules prohibiting federal contracting officers from awarding contracts to bidders that, e.g., use certain Chinese-made telecommunications equipment or services or semiconductor products or services in their business, as described here. The DoD will issue solicitations to offerors bidding for contracts assigned NAICS codes beginning with 5416, and offerors will be required to certify whether or not they hold contracts that involve consulting services with one or more CFEs, as well as whether they maintain a conflict-of-interest mitigation plan.
If an offeror certifies that it does hold such a contract, the offeror may consult with the contracting officer and submit a conflict-of-interest mitigation plan that is auditable by a contract oversight entity. The conflict-of-interest mitigation plan, which will be further described in DFARS Section 252.209-7012(d), must include:
- identifying, if lawful, any consulting services contracts the offeror or its subsidiaries or affiliates holds with a CFE;
- a written analysis outlining a course of action for avoiding, neutralizing, or mitigating the actual or potential conflict of interest of the consulting services contract with the CFE;
- a description of the procedures to prevent the same individuals from working on the DoD contract and the CFE; and
- a description of the procedures by which the offeror will notify the contract oversight entity within 15 days of determining that an unmitigated conflict of interest has arisen.
If the offeror or its subsidiary or affiliate holds a consulting services contract with a CFE but does not submit a conflict-of-interest mitigation plan that is approved and incorporated into the resulting contract by the contracting officer, the contracting officer may nevertheless determine that the award is in the best interests of the United States with appropriate approval and waive the prohibition. To exercise this waiver authority, the DoD will be required to determine that the waiver is necessary for national security purposes and notify Congress about the waiver.
