Follow Reena
Email Reena Email
Legal Issues
Jan 1, 2026

The Fatal Input: Why Giving Your Sensitive Bid Data to Public AI Might Violate M-25-22 and Kill Your Contract

Sponsored Content provided by Reena Bhatia , North Carolina Military Business Center, Federal Business Development, Raleigh

The Office of Management and Budget (OMB) Memorandum M-25-22, “Driving Efficient Acquisition of Artificial Intelligence in Government,” has introduced a powerful, non-negotiable compliance requirement into the federal acquisition lifecycle. For the defense and technology contractors of North Carolina, the document serves as an immediate, high-stakes warning: the casual use of public Generative AI models for business development (BD) and proposal drafting must cease, as it introduces a compliance failure risk that could disqualify bids or terminate contracts.
This risk is not theoretical. It stems directly from the clash between commercial AI's business model and the government's mandate to protect its data.
Section I: The Contract-Killing Clash of Data Ownership
The most potent guardrail in M-25-22 is the prohibition on unauthorized data use, a provision aimed at preventing the government's intellectual assets from being exploited by third-party vendors.
The Explicit Prohibition: M-25-22 dictates that future federal contracts must include terms that prohibit vendors from using non-public government data to train or develop publicly or commercially available AI algorithms without explicit, written consent.
The Front-Loaded Risk for Proposal Teams: While this rule is enforced during contract performance, the risk begins the moment a contractor’s BD team starts drafting a proposal.
When utilizing popular, commercial Large Language Models (LLMs) to analyze requirements, summarize documents, or generate draft text, contractors often input sensitive, non-public information. This includes:
Proprietary Bid Data: Detailed cost structures, unique technical methodologies, and competitive intelligence that is never intended for public view.
Restricted Procurement Materials: Specific, non-public requirements, scope details, or agency-internal documentation sourced from draft Requests for Proposals (RFPs) or restricted industry days.
If the public AI model's terms of service allow it to retain and use that input for model performance tuning or future training, which is often the case by default, the contractor has potentially violated the core data training guardrail before the contract is even awarded. This failure to secure government-adjacent information constitutes an unacceptable risk in the eyes of the procurement official, providing grounds for bid rejection or immediate contract termination.
Section II: The Erosion of Intellectual Property and Trust

  1. The OMB memo’s focus on IP and transparency further exposes the liability inherent in using external AI for bid preparation.
    IP Delineation and Ambiguity: M-25-22 requires contracts to clearly delineate the respective ownership and IP rights of both the government and the contractor. When proposal content is generated by a public LLM, the ownership structure becomes clouded. The AI vendor's terms of service may grant them broad, perpetual licenses to the generated output, even if the user is a federal contractor.
    If a government procurement officer suspects the contractor cannot claim unencumbered ownership over the technical approach or proprietary systems detailed in the bid, it creates a material weakness. A contractor who cannot provide clear assurance regarding the chain of title for the content risks a severe degradation of their technical score.
    The Demand for Disclosure and Governance: Agencies are now specifically directed to be "cognizant of the risks posed by the unsolicited use of AI systems by vendors" and to include provisions requiring the disclosure of AI use during contract performance. This scrutiny will inevitably extend to the proposal review process. A lack of transparent, verifiable internal policies regarding AI use signals a critical deficiency in corporate governance and data security maturity.
    Federal agencies view this as a litmus test. If a company cannot control its sensitive data during the simple act of writing a proposal, it cannot be trusted with a high-impact AI system governing national security or critical civilian functions.
    Conclusion: The Mandate for Internal AI Governance
    The OMB M-25-22 guardrails have formalized the risks of AI, transforming responsible data handling from an internal IT policy into a critical competitive prerequisite. For North Carolina firms, the time for passive observation is over.
    To eliminate this "Fatal Input" risk and secure future awards, the North Carolina Military Business Center suggests contractors to adopt a proactive internal governance strategy:
    Implement a Zero-Trust Data Policy: Formally designate all pre-award government documents, proprietary cost models, and technical architecture details as strictly prohibited input for public, commercial Generative AI models.
    Invest in Secure Environments: If AI is deemed essential for proposal efficiency, utilize private, enterprise-level models that contractually guarantee data input is not used for training commercial services. This is an investment in compliance, not just productivity.
    Audit and Certify: Establish a mandatory internal audit process ensuring that BD and proposal teams fully understand and comply with this segregation policy. Be prepared to proactively disclose your internal AI governance structure as a competitive strength in your next bid.

The M-25-22 guardrails are here to stay. Contractors who fail to master them are actively jeopardizing their ability to compete in the future of federal AI procurement.
For more information on the North Carolina Military Business Center visit https://www.ncmbc.us/ or contact Reena Bhatia at reena@ncmbc.us.

The North Carolina Military Business Center (NCMBC) is a statewide business development and technology transition entity dedicated to leveraging military and other federal business opportunities to expand the economy, grow jobs, and improve the quality of life in North Carolina.

Join The Discussion

Ico insights

INSIGHTS

SPONSORS' CONTENT
Ico insights

INSIGHTS

SPONSORS' CONTENT
the-arts-council-of-fayettevillecumberland-county kennon-jackson headshott

ArtsXL Is a Tourism Strategy, Not Just a Building

Kennon Jackson - Chief of Staff, The Arts Council of Fayetteville/Cumberland County
north-carolina-military-business-center tim-malone headshott

Federal Construction & Infrastructure Leaders Head to Wilmington for 2026 Southeast Region Summit, April 14–16

Tim Malone - Data Management and Programming Technician, North Carolina Military Business Center
cape-fear-valley-health marty-breswitz headshott

A second chance: Family, faith and a life-saving heart

Marty Breswitz - Accounts Payable Analyst, Cape Fear Valley Health

In The Current Issue

Mutts with a mission: Specialized K9 program supports local Veterans

Kristen Botts co-founded the program with her husband, Nathan Botts, who is a Veteran himself. Photos provided by Kristen Botts.An organization helping Veterans live a full life after their service in the U.S. Military wants to connect Veterans and d


Committed to community: Huntington Bank completes merger with Cadence Bank, continues to grow client base

Patrick NoblesHuntington Bancshares Incorporated announced on Feb. 2 that it has closed its merger with Cadence Bank, a regional bank headquartered in Houston, Texas and Tupelo, Miss. This strategic partnership accelerates Huntington’s growth in


Editor's note: What really catches the attention of someone new to Fayetteville?

There is extensive dialogue surrounding Fayetteville as a travel destination or city aimed at recruiting new businesses and new residents. As someone who moved here from out of state, I thought it could be fun to share my personal experience as