Federal agencies now move aggressively to adopt Artificial Intelligence (AI) under binding, government-wide guidance, establishing a new landscape for Government Contractors AI providers. The Office of Management and Budget (OMB) issued Memoranda M-24-10 and M-24-18, setting mandatory requirements for how agencies govern, use, and acquire AI systems. These policies compel federal departments to manage risks proactively and ensure that AI deployments do not infringe upon the rights and safety of the public. Contractors supplying AI products and services must prepare now to implement flow-down requirements related to risk management, transparency, competition, and incident reporting. The new standards signal a crucial shift, requiring vendors to demonstrate not only technical capability but also robust compliance and ethical safeguards built into their AI offerings.
Managing Risk in AI Acquisition
The new guidance introduces prescriptive requirements that flow directly into contract provisions. Agencies must identify AI systems that impact public rights and safety, applying minimum risk management practices to these high-stakes applications.
- Designated Leadership: Agencies must appoint a Chief AI Officer (CAIO) to coordinate AI strategy, promote innovation, and manage enterprise risks. Contractors should align their offerings and communications to support the CAIO’s governance role.
- Use Case Inventories: Agencies are required to develop and maintain public-facing inventories of their AI use cases. This drive for transparency provides contractors with early insight into agency needs and potential future solicitations.
- Incident Reporting: Contractors providing safety-impacting or rights-impacting AI must implement processes to identify and report serious AI incidents or malfunctions to the contracting agency. These reports must happen promptly, often within 72 hours, depending on the severity of the issue.
Clear Deadlines and Compliance Mandates
Federal agencies began implementing key mandates immediately following the guidance release, forcing contractors to move quickly to ensure compliance with new contractual obligations.
- High-Risk Contracts: Agencies must identify existing contracts for rights-impacting or safety-impacting AI by November 1, 2024. These contracts must comply with all provisions of the new guidance by December 1, 2024.
- New Acquisitions: The new requirements apply to all new contract solicitations issued after March 23, 2025, and to any option to renew or extend an existing contract exercised after that date.
- Generative AI Requirements: For generative AI (GenAI) outputs like audio, images, or video that are not obviously AI-generated, agencies will require vendors to include mechanisms, such as watermarks, to clearly signify the media’s AI source.
Promoting a Competitive and Transparent Marketplace
The federal push aims to expand the marketplace for AI products and services by fostering competition and reducing barriers to entry. This directive offers significant opportunities for innovative firms, including non-traditional vendors and small businesses, while placing new demands on established providers.
To promote competition and prevent vendor lock-in, agencies will prioritize:
- Interoperability: Agencies will seek solutions designed for interoperability, allowing them to switch vendors or integrate multiple systems easily.
- Data Rights and Sharing: Contracts will increasingly require terms committing contractors to knowledge transfers, potentially including the sharing of custom-developed AI code and models as open-source software, as well as the underlying data used for training and testing.
- Best Value Focus: Procurement officials must prioritize “best value” source selection over low-price technically acceptable (LPTA) determinations for AI acquisitions, focusing instead on technical capabilities, robust risk mitigation plans, and privacy protections. This shift rewards companies with superior technology and clear governance structures for their Government Contractors AI offerings.
Contractors must proactively update their internal policies and compliance frameworks to meet these heightened expectations for risk management, transparency, and data sharing, positioning themselves strategically for the next wave of federal AI investments.
