On May 16, 2013, the Department of Defense (“DoD”) published long awaited proposed regulations regarding efforts contractors must take to prevent the entry of counterfeit electronics into the DoD supply chain. As previously discussed on this blog, Section 818 of the National Defense Authorization Act for FY2012 required DoD to revise its acquisition regulations to address the detection and avoidance of counterfeit parts. This blog discussed the scope of one interim measure, DoD Instruction No. 4140.67, earlier this month.
So what’s new? Thursday’s proposed regulations represent the self-described “partial implementation” of Section 818. Nevertheless, the revised regulations purport to accomplish several key changes to the Defense Acquisition Regulation Supplement in response to Section 818.
Definitions. First, the regulations propose several new definitions, including those of “counterfeit part,” “electronic part,” “legally authorized source,” and “suspect counterfeit part.”
Applicability. These proposed regulations extend only to contracts that are subject to the Cost Accounting Standards.
Contractors’ counterfeit electronic part avoidance and detection systems. The new proposed regulations (and corresponding DFARS clauses) outline the various required elements of an acceptable counterfeit electronic part avoidance and detection system. All such systems must, at a minimum, address the following items: the training of personnel; electronic part inspection and testing; processes to abolish counterfeit part proliferation; traceability of parts to suppliers; use and qualification of trusted suppliers; reporting and quarantining of counterfeit and suspect counterfeit electronic parts; methodologies to identify suspect counterfeit parts and to quickly determine if a suspect part is, in fact, counterfeit; the design, operation, and maintenance of systems to detect and avoid counterfeit and suspect counterfeit electronic parts; and the flow down of counterfeit detection and avoidance requirements to subcontractors. In the event a contractor fails to maintain an adequate purchasing system (which includes the detection and avoidance system requirements outlined above if applicable), the contracting officer is entitled to withhold payments, assuming the rule is implemented as proposed.
Unallowability of costs. Finally, the proposed regulations explain that contractors cannot recover the costs incurred for any rework or corrective action resulting from the inclusion of counterfeit electronic parts or suspect counterfeit electronic parts. Although a safe harbor exclusion exists, that exclusion is narrow, and limited to situations where the contractor has a DoD approved system to detect and avoid counterfeit and suspect counterfeit electronic parts, the counterfeit or suspect counterfeit electronic parts are Government-furnished property, and the contractor provides timely notice to the Government. Given the narrow scope of this exception, this so-called safe harbor is likely to raise some questions.
This blog will continue to discuss these new regulations and their impact on contractors in the coming weeks.