Compliance Risks Facing Government Contractors & How to Stay Ahead

Risk management takes on new meaning when your primary customer is the United States government. For contractors, the risk of non-compliance with government standards is significant. Where the private sector prioritizes speed and cost, the public sector has different, and typically more complex, considerations for engaging suppliers.

As international tensions intensify, ESG concerns become mainstream, and digital technologies advance, these standards will grow increasingly numerous and complex. Government contractors must be ever more vigilant and strategic in planning to ensure they adhere to appropriate regulations and build sustainable business models and supply chains.

This article examines what makes government contracting unique from a risk management perspective, the consequences of failing to manage risk in the public sector adequately, and how organizations can future-proof compliance.

The Complexity of Government Contracting

While all organizations must comply with relevant regulations, government contractors face unique compliance challenges. 

“In serving government entities, suppliers need to be mindful of the additional requirements and standards they need to adhere to, such as those that address concerns around national security and foreign and domestic policy priorities,” says Cvete Koneska, head of advisory at Dragonfly Intelligence, a FiscalNote company. “And because non-compliance can compromise government policies or national security, suppliers need thorough risk assessment and management tools to ensure their supply chains adhere to government requirements and standards.”

Two recent federal government compliance standards offer insight into the future of contracting compliance:

The Cybersecurity and Infrastructure Security Agency’s (CISA) Software Bill of Materials (SBOM)

Cyber-attacks threaten virtually all organizations, but for those serving the U.S. government, any vulnerabilities in your digital systems can quickly become national security concerns.

The Cybersecurity and Infrastructure Security Agency (CISA) now requires federal government contractors to provide a software bill of materials (SBOM) as part of the third pillar of their National Cybersecurity Strategy Implementation Plan (NCSIP). CISA defines SBOM as “a nested inventory, a list of ingredients that make up software components.” SBOMs provide visibility within digital systems, revealing vulnerabilities such as open-source code. Cybersecurity requirements will likely become ever more stringent as the administration promotes the further development of SBOMs.

The Department of Defense’s Interim DFARS Amendment

The U.S. government has recently enforced several regulatory actions to address forced labor. One major update is a new interim rule that amends the Defense Federal Acquisition Regulation Supplement (DFARS), preventing contractors from sourcing products associated with forced labor in the Xinjiang Uyghur Autonomous Region (XUAR) in China.

Updates such as these serve as reminders that contractors need deep transparency into their supply chains and must be aware of any potentially material risk factors that may come to fruition.

The Risk of Non-compliance

Noncompliance with federal government standards exposes contractors to several serious risks. These include:

Broken Contracts

The most immediate consequence of noncompliance is an end to contractual agreements. These endings can be swift and disruptive to business, particularly if the contract is a significant part of revenue streams.

Legal Ramifications

“Non-compliance can lead to legal action against the organization and its executives,” explains Koneska. “This can be very costly and lead to further damage to the business, as licenses to operate may be revoked (depending on the sector), fines may be imposed, and even business leaders can be held individually responsible for non-compliance.”

Reputational Damage

Non-compliance with supply chain regulations and requirements is no longer simply a legal issue; it’s also a reputational issue for brands under public scrutiny.

“Even before legal action is taken,” says Koneska, “allegations of — for example — human rights violations within the supply chain can lead to substantial reputational damage. As consumers hear of such allegations and spread them across social media, they can lead to campaigns to boycott or even protest against the company.”

Operational Risk

The risk of operational disruptions across complex and demanding supply chains is high. “Identifying and replacing a non-compliant supplier with an alternative can be a lengthy and expensive process, likely to disrupt the rest of the supply chain,” explains Koneska. “Being aware of non-compliance risk and building resilience within the supply chain is essential to reduce operational disruptions.”

Cyber and Other Risks

“Often, non-compliant suppliers are the weak point through which threat actors target large organizations,” says Koneska. This puts contractors and their country at risk.

Challenges Lurking Beyond the First Tier

It’s not just tier-one suppliers that affect compliance risk; stringent regulations demand accountability through all tiers of the supply chain. Yet identifying compliance risks in distant supplier connections is far more complicated. Three key challenges exist for government contractors.

1. Mapping the Full Supply Chain

“Many large companies struggle to map and understand their full supply chain,” explains Koneska, and this is especially true about fourth- or fifth-tier suppliers. Yet, companies cannot adequately identify and understand the inherent risks without a comprehensive map of their supply chains.

2. Assessing Impact

The larger and more complicated a supply chain becomes, the more risks it is exposed to. Contractors must assess the impact of each link in their supply chain on their broader compliance risk. Many of these smaller suppliers on the fourth or fifth tiers may lack the resources and time required to model and assess the impact of their risk exposure, so it’s important that contractors conduct their own risk assessments.

3. Monitoring the Supply Chain

“Even those companies that can map their supply chains often lack the capacity to regularly and fully monitor the risks their supply chains are exposed to,” says Koneska. Since these risks are often dynamic and evolve rapidly, regular monitoring is critical to preventing disruption to operations.

Future-Proof Your Compliance

Government contractors can take several actions to ensure they remain compliant amid changing standards and regulations.

First, companies must stay on top of government policies and regulations. “Those familiar with the regulatory and policy processes are better positioned to prepare and adapt for these requirements when they come into force,” explains Koneska. With tax regulations changing, data hosting requirements constantly updated, and financial and non-financial reporting directives evolving rapidly, staying up to date is a time-consuming but necessary task for risk managers.

Second, organizations should invest in comprehensive supply chain monitoring. “Monitoring supply chains across different jurisdictions with diverse compliance requirements is a tremendously difficult, but essential, task to ensure that an organization remains compliant with supply chain regulations,” says Koneska.

Finally, risk management is key. “No supply chain is risk-free,” Koneska says. “The most compliant organizations are those best at managing and mitigating risk across their supply chains to reduce the adverse impact from risks materializing.” Establish an effective compliance program and ensure it extends to your suppliers beyond the third tier.

Faster, Deeper, Sharper: Managing Risk with AI Technology

Many tools exist to help government contractors manage compliance risk. FiscalNote Risk Connector provides an unmatched picture of the supply chain including third-, fourth-, and fifth-party threats and their potential consequences.

Using AI to track a greater breadth of information at lightning speed, Risk Connector helps risk management and compliance teams identify operational, relational, and reputational risks. In an evolving compliance landscape, Risk Connector can enhance your team’s readiness for future standard changes.

A Proactive Approach to Compliance Risk

With the U.S. government as their customer, government contractors are familiar with hoops and hurdles. But as technological, geopolitical, social, and environmental changes make their way around the world, the standards required to service the government will only intensify.

Detailed requirements such as SBOM and forced labor conditions are just the beginning; no matter where you sit on the federal supply chain, compliance should be a key concern for risk management teams.

Forward-thinking organizations will take a proactive approach to compliance adherence, employing advanced tools to navigate the complexity of compliance risk.