On December 3, 2013, the Department of Defense (“DoD”) published the second part of a trio of promised regulations regarding efforts contractors must take to prevent the entry of counterfeit electronics into the DoD supply chain. We previously discussed the first proposed rule here, published on May 16, 2013, which was supposed to provide the foundation for detection and avoidance of counterfeit parts. The third proposed rule has still not been released, but will address reporting requirements for identified counterfeit parts.
The second proposed rule, by its own admission, “does not directly implement any specific aspect of section 818,” the statute requiring DoD to assess its policies and systems for the detection of counterfeit electronic parts (see our previous blog post here for more details). Instead, it continues DoD’s focus on contractor’s purchasing systems to stem the impact of counterfeit parts by amending the regulations concerning the use of higher-level quality systems (such as ISO, ASQ, and SAE standards). According to the proposed rule, its purpose is “to ensure that agencies assess the risk of nonconforming items when determining whether higher-level quality standards should be used by the Government and relied on by contractors.”
The proposed rule revises FAR 44.303 to add implementation of higher-level quality standards to areas for evaluation when conducting a review of a contractor’s purchasing system. The proposed rule also makes small changes to FAR 46.202-4, which addresses higher-level quality systems. These changes include (1) adding “design” and “testing” to the list of examples of technical requirements requiring control and (2) revising quality standards to remove outdated or obsolete standards as well as including higher-level quality standards related to counterfeit electronic parts and materials. The proposed rule also sets selection of the appropriate standard with the contracting officer by revising FAR 46.311 to clarify that if the clause is used, the contracting officer is required to list one or more higher-level quality standard and revising FAR 52.246-11 to remove the opportunity for the offeror to select the standard.
While DoD does not expect the proposed rule to have a significant economic impact on a substantial number of small entities, DoD acknowledges “that small businesses that provide critical items directly to the government or to government prime contractors may be impacted by this rule.” As we have discussed in previous blog posts (see here), by implementing counterfeit part avoidance through contractor purchasing systems, the impact to small businesses could be significant as it is unlikely that prime contractors will maintain separate purchasing systems for critical items and instead flow down the requirements to all their subcontractors.