Why Is Government AI Procurement Complex?
Federal, state, and local governments increasingly procure AI systems for various applications including cybersecurity and threat detection, administrative automation and case management, predictive analytics for resource allocation, and citizen services and engagement. However, government procurement operates under complex regulatory frameworks distinct from commercial contracting, particularly for emerging technologies like AI.
Federal acquisition follows Federal Acquisition Regulation (FAR) and supplementary regulations like Defense Federal Acquisition Regulation Supplement (DFARS), creating unique requirements including competition requirements and sole-source justifications, small business set-asides and preferences, security clearances and classified information handling, and extensive documentation and compliance obligations.
For AI vendors seeking government contracts and agencies procuring AI, understanding procurement regulations, security requirements, technical specifications, and compliance obligations is essential for successful government AI deployments while meeting legal requirements and protecting sensitive information.
Federal Acquisition Regulation Framework
FAR Structure and Authority
The Federal Acquisition Regulation governs most federal government purchases. FAR establishes policies and procedures for acquisition including competition requirements, contract types and terms, socioeconomic programs, and contract administration.
Agency supplements like DFARS for Defense Department add specific requirements for particular agencies.
Threshold and Competition Requirements
FAR mandates full and open competition for most procurements. However, thresholds and procedures vary by amount. Micro-purchases under $10,000 require minimal procedures. Simplified acquisition procedures apply up to $250,000. Above simplified acquisition threshold, formal procurement processes including requests for proposals or invitations for bids are required.
Competition requirements affect how agencies can procure AI systems.
Sole-Source and Limited Competition
Agencies may procure without full competition only with specific justifications including only one responsible source and no other supplies or services satisfy requirements, unusual and compelling urgency, industrial mobilization or engineering developmental or research capability, or international agreement or treaty.
AI vendors claiming unique capabilities must substantiate exclusivity claims.
Small Business Programs
Set-Asides and Preferences
FAR requires set-asides for small businesses, women-owned small businesses, service-disabled veteran-owned small businesses, and HUBZone small businesses.
Set-asides reserve certain procurements exclusively for qualifying businesses.
Size Standards
Small business status depends on NAICS codes and corresponding size standards based on employees or revenues. AI software and services typically fall under NAICS codes with 500-1500 employee thresholds.
Subcontracting Plans
Large contractors must develop subcontracting plans showing good faith efforts to provide subcontracting opportunities to small businesses.
Security Requirements
FedRAMP Authorization
Federal Risk and Authorization Management Program standardizes security assessment and authorization for cloud services. Most federal agencies require FedRAMP authorization for cloud-based AI services.
FedRAMP includes impact levels (Low, Moderate, High) with corresponding security controls, and typically 3-6 month authorization timelines.
FISMA Compliance
Federal Information Security Management Act requires agencies to protect federal information and systems. Contractors handling federal information must implement FISMA-compliant security controls.
NIST Cybersecurity Framework
National Institute of Standards and Technology provides cybersecurity guidance that government agencies reference in contracts. Contractors must often demonstrate compliance with NIST standards including NIST 800-53 security controls and NIST Cybersecurity Framework functions.
DoD Security Requirements
Defense contractors face additional security obligations including DFARS cybersecurity requirements, Controlled Unclassified Information (CUI) protection under NIST 800-171, and Cybersecurity Maturity Model Certification (CMMC).
CMMC will be required for DoD contractors handling CUI.
AI-Specific Procurement Guidance
OMB AI Memoranda
Office of Management and Budget has issued guidance on federal AI use including requirements for impact assessments, human oversight and accountability, and fairness and bias mitigation.
Agencies incorporate OMB guidance into procurement specifications.
NIST AI Risk Management Framework
NIST AI RMF provides voluntary framework for managing AI risks. Government agencies increasingly require contractors to follow AI RMF principles including identifying and mitigating AI risks, ensuring transparency and explainability, and implementing monitoring and governance.
DoD AI Ethical Principles
DoD adopted AI ethical principles requiring AI to be responsible, equitable, traceable, reliable, and governable.
Defense AI procurements must align with these principles.
Technical Specifications and Standards
Performance-Based Contracting
Government increasingly uses performance-based contracting focusing on outcomes rather than prescriptive specifications. For AI, this means specifying desired capabilities like accuracy or processing speed, without dictating implementation approaches.
Interoperability Requirements
Government systems require interoperability through standard data formats and APIs, integration with legacy systems, and cross-agency compatibility.
AI vendors must ensure solutions integrate with government infrastructure.
Scalability and Performance
Government procurements specify performance requirements including user capacity and concurrent usage, data volume and processing speed, and availability and uptime guarantees.
Data Rights and Intellectual Property
Government Rights in Technical Data
FAR addresses government rights in technical data and computer software. Rights depend on development funding with government-funded development generally resulting in government rights, while privately-funded development allows contractor retention of proprietary rights with government receiving limited rights or licenses.
AI Model and Algorithm Rights
For AI systems, determine ownership of AI models and trained weights, algorithms and source code, and training data and datasets.
Contractors should negotiate to retain proprietary AI while licensing to government.
Unlimited Rights vs. Restricted Rights
Government seeks unlimited rights allowing free use, modification, and disclosure. Contractors prefer restricted rights limiting government use.
Negotiations balance government needs with contractor IP protection.
Privacy and Civil Liberties
Privacy Act Compliance
Privacy Act regulates federal agency collection and use of personal information. AI systems processing personally identifiable information must comply with Privacy Act requirements including notice and consent, access and correction rights, and security safeguards.
E-Government Act
E-Government Act requires Privacy Impact Assessments for systems processing personal information. Agencies procuring AI must conduct PIAs evaluating privacy risks, mitigation measures, and alternatives considered.
Civil Rights and Non-Discrimination
Federal agencies must ensure AI systems don’t discriminate based on race, color, national origin, sex, religion, or disability. Procurement specifications increasingly require bias testing, fairness metrics, and ongoing monitoring.
Contract Types for AI Procurement
Firm-Fixed-Price Contracts
FFP contracts set fixed prices for specified deliverables. They’re appropriate for well-defined AI products but create risk if requirements aren’t fully understood upfront.
Cost-Reimbursement Contracts
Cost-reimbursement contracts reimburse contractor costs plus fee or profit. They’re used for research or development with uncertain costs but require extensive cost accounting and reporting.
Time-and-Materials Contracts
T&M contracts pay for labor hours and materials. They’re used when requirements aren’t fully known but create risk of cost overruns.
Other Transaction Authority
DoD and some agencies have Other Transaction Authority allowing flexible procurement outside FAR for research, prototyping, and production. OTA enables faster, more innovative contracting for emerging technologies like AI.
Evaluation Factors and Source Selection
Technical Evaluation
Government evaluates technical proposals based on understanding of requirements, technical approach and methodology, experience and qualifications, and past performance.
AI proposals must demonstrate technical expertise and relevant experience.
Price Evaluation
Price is always evaluated but isn’t always determinative. Agencies often use “best value” tradeo
ff allowing selection of higher-priced technically superior proposals.
Socioeconomic Factors
Agencies may evaluate small business participation, veteran employment, or other socioeconomic goals.
Contract Clauses and Terms
FAR Clauses
FAR includes mandatory clauses for most contracts covering termination rights, changes, disputes, and payment terms.
AI contracts incorporate applicable FAR clauses.
DFARS Clauses
Defense contracts include DFARS clauses addressing cybersecurity, export control, and supply chain security.
AI-Specific Terms
Government AI contracts increasingly include specific provisions requiring explainability and transparency, bias testing and mitigation, human oversight and accountability, and performance metrics and monitoring.
Compliance and Audit
Cost Accounting Standards
Contractors with substantial government business must comply with Cost Accounting Standards ensuring consistent cost accounting, allocating costs appropriately, and supporting claimed costs.
Government Audit Rights
Government contracts include audit rights allowing Defense Contract Audit Agency or other auditors to examine contractor records, verify cost claims, and assess compliance.
FAR Compliance Programs
Contractors should implement compliance programs including internal audits, training for employees, and policies and procedures ensuring FAR compliance.
Ethics and Conflicts of Interest
Organizational Conflicts of Interest
FAR prohibits organizational conflicts where contractors have unfair competitive advantages or ability to bias government decisions.
AI contractors must disclose potential conflicts.
Procurement Integrity Act
Procurement Integrity Act prohibits contractors from seeking or obtaining procurement information and government officials from disclosing source selection information.
Violations result in disqualification and penalties.
Protests and Disputes
Bid Protests
Unsuccessful offerors can protest agency procurement decisions to Government Accountability Office or Court of Federal Claims.
Protests allege violations of procurement law or regulations.
Contract Disputes
Disputes under awarded contracts are resolved through contracting officer decisions, agency boards of contract appeals, or Court of Federal Claims.
Alternative Dispute Resolution
FAR encourages ADR for disputes through negotiation and mediation before formal litigation.
State and Local Government Procurement
Varying State Requirements
State and local governments have distinct procurement laws often modeled on but differing from FAR.
AI vendors must understand requirements in each jurisdiction.
Cooperative Purchasing
Many states participate in cooperative purchasing allowing leveraging contracts negotiated by other jurisdictions.
Model Procurement Codes
American Bar Association and other organizations provide model procurement codes that some states adopt.
Best Practices for Government AI Vendors
Early Engagement
Engage with agencies early through industry days, requests for information, and capability briefings to understand requirements and shape solicitations.
Teaming and Partnerships
Form partnerships with prime contractors, small businesses for set-aside opportunities, and system integrators with government relationships.
Compliance Infrastructure
Build compliance infrastructure including security certifications (FedRAMP, CMMC), quality systems (ISO 9001), and government contracting expertise.
Transparency and Documentation
Provide comprehensive documentation of AI capabilities and limitations, security and privacy measures, and compliance with government requirements.
Conclusion: Navigating Complex Government AI Procurement
Government AI procurement requires understanding Federal Acquisition Regulation and supplements, security requirements like FedRAMP and CMMC, AI-specific guidance and ethical principles, and contract types and evaluation criteria.
Successful government AI vendors combine technical excellence with procurement compliance expertise and commitment to responsible AI aligned with government values.
Contact Rock LAW PLLC for Government AI Procurement Counsel
At Rock LAW PLLC, we help AI companies navigate government procurement regulations.
We assist with:
- FAR and DFARS compliance
- FedRAMP and security certification
- Government contract negotiation
- Bid protest and dispute resolution
- Small business programs and certifications
- State and local procurement compliance
Contact us for expert guidance on government AI procurement.
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