Second Quarter 2026 Government Contracts Policy and Regulatory Review

At a Glance

• The Federal Acquisition Regulation (FAR) Council transitioned its "Revolutionary FAR Overhaul" initiative from agency class deviations to formal notice-and-comment rulemaking.
• In May 2026, the Office of Management and Budget (OMB) proposed sweeping revisions to the governmentwide financial assistance framework at 2 CFR Part 200 and related agency rules, raising important compliance questions for federal award recipients, subrecipients, and pass-through entities.
• The Small Business Administration and Congress advanced competing small business policy initiatives throughout the second quarter, including a proposed 8(a) social disadvantage rule, legislation targeting 8(a) and women-owned small business (WOSB) preferences, legislation to codify the Rule of Two, and Small Business Innovation Research/Small Business Technology Transfer reauthorization.
• Separately, updated guidance and proposed rules issued across the Department of Defense (DoD) expanded foreign ownership, control, and influence (FOCI) disclosure and mitigation concepts beyond the traditional classified-contract and facility-clearance landscapes, raised additional compliance obligations related to supply-chain risks, suspended the next phase of Cybersecurity Maturity Model Certification (CMMC) compliance, and indicated preferences for fixed-price contracting.

Federal agencies advanced a number of procurement changes impacting contracts and all manner of financial assistance agreements throughout the second quarter of 2026, including through proposed rulemakings and new policy guidance. Although several proposed rules remain subject to further agency review, and the most significant legislation affecting federal procurement is still pending, these developments already are shaping agency practice and compliance planning. This alert summarizes several principal developments and their impact on federal contractors, grant recipients, subrecipients, and pass-through entities, including effects on acquisition policy, certification and documentation risk, and closer scrutiny of ownership, eligibility, and program alignment. We also recently covered updates to CMMC compliance and a new government-wide preference for firm fixed-price contracts in separate, detailed client alerts.

FAR Overhaul Implementation

The FAR Council has entered the formal rulemaking phase of its "Revolutionary FAR Overhaul" (RFO). On June 23, 2026, it published four proposed rules covering a broad range of FAR parts: Parts 1, 2, 4, 33, 39, 40, and 53; Parts 6, 7, 10, 18, 26, 37, and 41; Parts 5, 24, and 29; and Parts 3 and 49, with related changes to the provisions and clauses in Part 52. Although the proposed rules are primarily based on the model class deviations issued during phase one of the overhaul, not all involve merely stylistic changes. In particular, the proposed rules implicate changes affecting bid protests, Controlled Unclassified Information (CUI) compliance, termination administration, System for Award Management (SAM) representations, acquisition planning, publicizing obligations, and clause management. Comments on the first round of proposed rules were due July 23, 2026.

We cover several of the most notable proposed changes in greater detail below.

FAR Part 33: Agency Protests, GAO Procedures, and the Disputes Clause

The proposed Part 33 revisions are intended to "ensure efficient resolution of protests, minimize disruption to contract award, correct procurement errors quickly, and safeguard the rights of interested parties to an independent review of the alleged violations." Under the proposed rule, if a protester elects independent review by an official at a level above the contracting officer, the agency may disclose a redacted copy of the agency's final technical evaluation of the protester's proposal and a redacted copy of the source selection decision. The rule also would allow protesters to raise additional agency-level protest grounds within a reasonable time set by the independent review official. These changes are intended to make agency-level protests a more meaningful alternative to Government Accountability Office (GAO) or Court of Federal Claims protests, especially where the protester seeks more information before deciding whether to bring a more fully developed protest.

The proposed rule also would require contracting officers to report protests to the head of the contracting activity, giving agency leadership more visibility into protest trends and recurring acquisition issues. It would also remove text from the FAR that duplicates GAO's bid protest regulations, instead directing parties to 4 C.F.R. Part 21.

FAR Part 40: CUI, Controlled Information, and Supply Chain Security

The proposed Part 40 changes would consolidate information security and supply chain security requirements into a reorganized Part 40, including security prohibitions and exclusions now spread across Parts 4, 25, and 40. Importantly, the proposal would also create a governmentwide CUI framework through new FAR 52.240-6, Notice of Controlled Unclassified Information Requirements, and FAR 52.240-7, Controlled Unclassified Information. Under the proposed rule, agencies would use a new "Standard Form XXX" to identify whether the contractor will handle CUI, where the CUI will be handled, marking responsibilities, and any enhanced safeguarding requirements. Contractor systems handling CUI would need to meet NIST SP 800-171 Revision 3 and any additional contract requirements. For critical programs or high-value assets, agencies could also require selected NIST SP 800-172 controls. Cloud services used to handle CUI would need to meet requirements equivalent to the "FedRAMP" Moderate baseline — i.e., the most widely adopted standard across FedRAMP, the federal government's standardized cybersecurity compliance program. This proposed rule reflects several changes from the FAR Council's earlier CUI proposal and model deviation materials. For information the contractor has reason to believe is unmarked or mismarked CUI, the proposed rule uses a 72-hour reporting period rather than the eight-hour period previously proposed. The proposed rule also removes separate contractor-liability language and replaces a more prescriptive training approach with a flexible standard tied to employees' duties.

Although these revisions respond to industry concerns submitted during the earlier informal review period, the proposal would still impose significant new compliance obligations. In particular, contractors handling CUI would need to report CUI incidents within 72 hours, preserve affected system images for at least 90 days or until the government declines interest, reconstruct relevant user activity, identify access methods, inventory affected CUI, and cooperate with government officials. Contractors also would need to notify the contracting officer within 72 hours after determining that they cannot comply with applicable CUI requirements or that the Standard Form XXX and contract clauses are inconsistent. Prime contractors would need to flow down the substance of FAR 52.240-7 to subcontractors handling CUI, and subcontractors would report CUI incidents directly to the government while notifying the contracting officer and the next higher-tier contractor.

FAR Part 49: Terminations

The proposed Part 49 revisions would preserve the government's basic termination for convenience and default rights, but would accelerate termination administration. Notably, the termination settlement proposal deadline would be reduced from one year to 90 days, and extension requests for settlement proposals would be due within 60 days. The deadline for termination inventory schedules would be reduced from 120 days to 60 days, with extension requests due within 30 days of the termination notice. Those timelines may impose challenges for contractors with complex cost-reimbursement work, unsettled indirect rates, significant inventory, or large subcontractor networks. Contractors facing a termination would need to move quickly to collect subcontractor settlement data, segregate costs, support inventory positions, reconcile financing payments, and prepare a detailed settlement proposal.

The proposed rule would also replace mandatory audits of certain termination settlement proposals with a permissive, risk-based audit approach. Termination contracting officers would decide whether audit support is warranted based on the facts and risk of the proposal rather than a fixed dollar threshold. Although the change may improve processing times for lower-risk settlements, it would also increase agency discretion and could make documentation quality more important. The proposed rule also clarifies cure notice and show-cause notice procedures in default terminations, preserves small business priority handling and SBA-notice safeguards, and confirms that commercial product and commercial service terminations remain governed principally by Part 12 rather than the Part 49 settlement framework.

Other Important Changes for Contractors

Several other proposed changes warrant contractor attention, including changes to Part 4 (simplifying aspects of SAM registration and representations and moving security prohibitions and exclusions into Part 40); Part 5 (reorganizing the publicizing rules by acquisition phase, updating posting thresholds, moving commercial acquisition coverage to Part 12, and making certain public announcements of large awards permissive rather than mandatory); and Parts 6 and 7 (reorganizing competition and acquisition planning coverage, moving market research from Part 10 into Part 7, and reinforcing the preference for commercial solutions and existing contract vehicles where practicable). Specifically, SAM registration practices in Part 4 have been changed to only include entity-level representations and certifications, rather than procurement-specific representations, which will be moved to solicitation responses. Accordingly, the provision at FAR 52.204-8 (Annual Representations and Certifications) will be removed, while other provisions will be consolidated under FAR 52.204-7 (proposed to be re-named "System for Award Management — Registration"). These changes generally align with broader administration policies encouraging faster acquisition, category management (i.e., classifying goods and services by industrial category and organizing procurement tools accordingly), and use of existing contracting vehicles.

The FAR Council is also considering a broader Part 52 restructuring that would move overhauled clauses from the current 52.2 numbering structure into a new 52.4 structure. Although the change would distinguish legacy and overhauled clauses, it could create additional implementation work for contract management systems, clause matrices, subcontract templates, training materials, and compliance tools. Overall, the first RFO proposed rules confirm that contractors must track not only the final FAR text, but also agency deviations, solicitation-specific representations, and the operational systems involved in implementation.

OMB Federal Grants Proposed Rule

On May 29, 2026, OMB and more than 40 federal agencies published a proposed rule, "Regulation for Federal Financial Assistance," which would substantially revise provisions under Title 2 of the Code of Federal Regulations (CFR) and agency-specific regulations in 2 CFR Subtitle B, affecting virtually every federal agency that makes financial assistance awards. We previously published a detailed client alert covering the proposed rule.

The proposed rule would make substantial changes across agency-specific financial assistance regulations. Although framed as a governmentwide grants management rulemaking, the proposal has practical and substantive consequences for grants, cooperative agreements, subawards, pass-through entities, and grant-funded procurements across virtually all federal agencies. Among other things, the proposed rule would give agencies significantly more discretion at several points in the award lifecycle, including during a new "pre-issuance review" process for discretionary grants. Under proposed § 200.205(b), agency heads must designate one or more senior appointees to review discretionary awards, applying enumerated principles that include determining whether awards "demonstrably advance the President's policy priorities."

The proposed rule also significantly expands the authority of federal agencies to terminate or suspend active grants, allowing agencies to terminate any discretionary grant "in part or its entirety" whenever an agency determines that termination is "in the interest of the [f]ederal agency," including if the award no longer effectuates "program goals, [f]ederal agency priorities, or the national interest as they exist at the time of the termination." Agencies also would be prohibited from using federal grant awards to "fund, promote, encourage, subsidize, or facilitate" DEI policies or practices "that violate any applicable [f]ederal anti-discrimination laws," "gender ideology" as defined in EO 14168, or gender transition for individuals under 19 years of age. Further, recipients of federal funding conducting these activities with nonfederal funds could face risk if the activity is argued to be "facilitated" by the award itself, potentially expanding the scope of the provision.

The proposal leaves significant implementation questions. By mid-July 2026, the rulemaking docket reflected tens of thousands of public comments, underscoring the proposed rule's potential impact on federal funding recipients across sectors and industries. Agencies will need to explain how any new review criteria interact with program statutes, peer review expectations, negotiated indirect cost rates, existing awards, and recipient appeal or objection rights. Federal funding recipients should also watch for agency-specific implementation actions, as individual programs often involve special award conditions, eligibility rules, and reporting requirements.

OMB proposed an October 1, 2026, effective date, which would make the final rule applicable to new FY2027 awards if finalized on that timeline. We will closely monitor any interim developments or announcements from OMB regarding the proposed rule in the coming weeks.

Significant Updates Affecting Small Businesses

SBA Proposed Rule Eliminating the 8(a) Rebuttable Presumption of Social Disadvantage

On June 11, 2026, the Small Business Administration (SBA) issued a proposed rule that would remove the 8(a) Business Development Program's rebuttable presumption of social disadvantage for individually owned firms. We previously covered the proposed rule in a more detailed client alert.

Under the proposal, an individual owner would need to establish social disadvantage with a self-certification that he or she: (1) was a member of a particular group at the time of a relevant governmental or private entity action, policy, rule, regulation, or practice; and (2) suffered material harm because of that action, policy, rule, regulation, or practice. The proposal effectively translates SBA's January 2026 policy guidance into a proposed formal regulation. SBA's January 2026 guidance asserted SBA's position that, when considering "whether an individual has suffered social disadvantage," it would consider "whether such individual has been the victim of illegal or radical DEI policies or illegal affirmative action policies or has otherwise been the victim of discriminatory practices such as race-based quotas, set asides, or hiring targets, in each case, whether by governmental or non-governmental actors."

Entity-owned 8(a) firms require a separate analysis, as the proposed rule explicitly does not amend or affect the eligibility of small businesses owned by tribes, Alaska Native Corporations, Native Hawaiian Organizations, or Community Development Corporations. If the rule is finalized as proposed, new program applicants should be prepared to submit evidence showing how discrimination or bias caused them a material disadvantage in education, employment, business history, access to capital, or other relevant circumstances.

Although SBA states that it does not currently intend to apply the new test to existing participants at their next annual review, existing participants should begin evaluating whether their circumstances would satisfy the proposed test. Subsequent SBA guidance will shape how contracting officers and SBA district offices treat pending applications, pending offers to the 8(a) program, and annual review submissions during the transition period. Comments on the proposed rule were due July 13, 2026; and a final rule remains pending.

Small Business Contracting Legislation: 8(a), WOSB, and the Rule of Two

Congress also considered significant legislation that would alter federal small business policies during the second quarter of 2026. On April 27, 2026, Senator Mike Lee (R-Utah) and Representative Glenn Grothman (R-Wisconsin) introduced companion bills titled the Ending Discrimination in Government Contracting Act (S. 4390 and H.R. 8511). If enacted, the legislation would eliminate federal contracting preferences for businesses owned by socially and economically disadvantaged individuals and women, effectively dismantling the statutory foundations for both the 8(a) Business Development Program and the Women-Owned Small Business (WOSB) Program.

The House Small Business Committee also held a markup session on H.R. 2804, the Protecting Small Business Competitions Act, a small business protection measure. A companion bill, S. 2656, was also introduced in the Senate. The bill would codify the Rule of Two, which generally requires a small business set-aside when the contracting officer has a reasonable expectation of receiving offers from at least two responsible small business concerns at fair market prices. Codifying the Rule of Two would be particularly important for small business contractors because the Rule of Two is currently grounded in procurement regulations and case law rather than in statute. Although passage would not significantly change how the Rule of Two is applied at the individual agency level, it would provide greater stability by codifying the rule in federal statute.

SBIR/STTR Reauthorization Restarts Awards and Adds New Obligations

On April 13, 2026, the Small Business Innovation and Economic Security Act was signed into law, reauthorizing the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs through September 30, 2031. The reauthorization provides stability for small businesses, research institutions, and agencies that use SBIR/STTR awards to move technology from early-stage research toward procurement or commercialization.

The statute also changes the program by authorizing Strategic Breakthrough Awards for eligible agencies with significant SBIR obligations, potentially allowing larger Phase II transition awards of up to $30 million over a limited performance period with matching-fund requirements. Companies seeking Strategic Breakthrough Awards should be prepared to demonstrate technology maturity, matching funds, customer demand, and a credible Phase III pathway.

Small businesses should prepare for a more rigorous SBIR/STTR award environment. The law strengthens foreign-risk review efforts by requiring greater agency scrutiny of foreign ownership, investment, licensing, cybersecurity, and connections to restricted or watch-listed entities among program participants. Beginning in fiscal year 2027, agencies must develop proposal submission limits to address repeated submissions by the same firms, while maintaining limited waiver authority for mission-critical needs.

Agency implementation guidance for the SBIR/STTR programs also remains important because solicitation caps, due diligence procedures, and Strategic Breakthrough Award processes will vary by agency and component.

Department of Defense Updates

Proposed DFARS FOCI Rule for Unclassified Contracts

On May 7, 2026, the Department of Defense (DoD) published a proposed rule, "Mitigating Risks Related to Foreign Ownership, Control, or Influence," that would amend the Defense Acquisition Regulation Supplement (DFARS) to require disclosure and potential mitigation of beneficial ownership and foreign ownership, control, or influence (FOCI) risks. Specifically, the proposed rule would implement Section 847 of the FY2020 National Defense Authorization Act (NDAA), as amended by Section 819 of the FY2021 NDAA, by expanding FOCI disclosure and mitigation concepts beyond the traditional classified-contract and facility-clearance landscape. As proposed, the rule would apply to covered unclassified DoD contracts and subcontracts above $5 million, subject to specified exceptions and scope limitations.

The proposal would materially expand the number of contractors that must evaluate and disclose FOCI-related risks, including through pre-award FOCI disclosures about ownership structures and foreign financial interests and through potential risk mitigation measures. DoD has estimated that the proposed rule could affect more than 37,000 entities, including more than 21,000 small businesses, which is far more than the smaller population historically subject to FOCI review through the National Industrial Security Program. Covered contractors would need to collect ownership and control information, assess beneficial ownership and foreign influence indicators, respond to government requests for further information, and potentially develop mitigation measures through the Defense Counterintelligence and Security Agency (DCSA) or another designated process.

Contractors should consider mapping ownership, governance rights, financing arrangements, foreign investor rights, parent-subsidiary relationships, and subcontractor flow-down issues in advance of the final rule. In particular, the rule may be especially important for venture-backed defense technology companies, commercial companies entering DoD supply chains, and contractors with complex global affiliates. Companies should also coordinate any FOCI analysis with the Committee on Foreign Investment in the United States (CFIUS), export control, sanctions, cybersecurity, and supply-chain representations, as facts relevant to one compliance regime often create disclosure or mitigation issues under another.

While the comment period closed on July 6, 2026, and the final rule remains pending, key open questions include the treatment of commercial products and services, the timing and content of mitigation plans, subcontractor responsibility for disclosures, the role and capacity of DCSA in implementation, and how contracting officers will handle proposal evaluations when FOCI issues are still under review.

Updated Chinese Military Company Designations

On June 8, 2026, DoD published a substantially expanded update to its list of "Chinese military companies" under Section 1260H of the Fiscal Year 2021 National Defense Authorization Act (NDAA). The updated list identifies nearly 200 entities, spanning sectors including artificial intelligence, semiconductors, telecommunications, automotive and electric vehicles, e-commerce, biotechnology, and clean energy. While Section 1260H designation alone does not currently prohibit US companies from transacting with the listed entities, various laws and regulations have recently incorporated the designation in more detail. For example, as of June 30, 2026, DoD is prohibited from entering into, renewing, or extending contracts with listed entities or entities under their control pursuant to Section 805 of the FY2024 NDAA.

Notably, a more significant restriction will go into effect on June 30, 2027, prohibiting DoD from entering into contracts for the procurement of goods or services that include goods or services produced or developed by a listed entity, even when such goods or services are procured indirectly through a contractor's supply chain. Separately, under the BIOSECURE Act framework, federal agencies are expected to face phased restrictions on contracts and grants involving biotechnology equipment or services from companies designated as biotechnology companies of concern by OMB, and Section 1260H status may be relevant to those designations.

These developments create a materially more complex compliance environment for federal contractors, grant recipients, and US companies with exposure to Chinese counterparties, supply chains, or capital markets. The expansion of the 1260H List to include major publicly traded Chinese companies may increase the likelihood of future designations that could restrict procurement or other transactions. At the same time, China's Blocking Regulations may expose companies to competing legal risks when they conduct US-law-driven diligence or take steps to comply with US sanctions, procurement, or supply-chain restrictions.

Federal contractors should remain aware of potentially conflicting compliance obligations and liabilities, and should continue to trace their supply chains in accordance with evolving DoD requirements.

What's Next?

The second quarter of 2026 reflected continued movement from policy announcements to implementation across the federal government. Federal contractors and grant recipients should closely review their compliance posture, even as final rulemakings remain pending on several matters. For example, the FAR overhaul is already affecting solicitations through class deviations and proposed rules; OMB's proposed grant regulations may reshape award terms and oversight expectations; and SBA and Congress are actively revisiting small business eligibility and set-aside protections. In the near term, clients should inventory affected awards, identify comment and implementation deadlines, review standard certifications and flow-downs, and prepare for agency-specific guidance that may arrive before governmentwide rules are finalized.

For More Information

Faegre Drinker's government contracts team will continue to monitor additional regulatory and legislative developments in the coming months. For further information you may contact the authors.