The Department of Defense (DOD) issued the much-anticipated final rule regarding detection and avoidance of counterfeit electronic parts. The rule differs from the proposed rule in certain critical ways, including new definitions of key terms and additional criteria for contractor business systems. The final rule has significant implications for contractors at all levels of the supply chain and places substantial risk on contractors. The rule is effective May 6, 2014 and can be found here.
Both the final and proposed rule provide that contractors who supply electronic parts or items that include electronic parts under contracts covered by the Cost Accounting Standards (CAS) are responsible for “detecting and avoiding the use or inclusion of counterfeit electronic parts or suspect counterfeit electronic parts.” The final rule clarifies the applicability of these requirements by adopting revised definitions of key terms. For example, the terms “counterfeit electronic part” and “suspect counterfeit electronic part” both now include the word “electronic,” removing any ambiguity that the rule could be applied more broadly.
The final rule also clarifies that the definition of “counterfeit electronic part” includes an intent element. Specifically, a counterfeit electronic part is a part that “has been knowingly mismarked, misidentified, or otherwise misrepresented” to be an authentic part. The addition of this intent element eliminates the concern raised by commenters that, under the proposed rule, ordinary
noncompliant parts could potentially be considered counterfeit.
The definition of “suspect counterfeit electronic part” was also revised, providing that a part is not a suspect counterfeit unless “credible evidence . . . provides reasonable doubt that the electronic part is authentic.” By adding the phrase “credible evidence,” contractors now will have the ability to conduct an investigation to determine whether a part is, in fact, a suspect counterfeit part. This is a key revision because once a part is determined to be suspect, the rule disallows all subsequent costs associated with rework and corrective action. On the other hand, the phrase “credible evidence,” which is borrowed from the Mandatory Disclosure Rule, is undefined and continues to be a source of uncertainty for contractors.
In addition to making revisions to certain key definitions, the rule adds three new counterfeit electronic part system criteria to the previous nine criteria. The new criteria require that contractors have: (1) a process for keeping continually informed of current counterfeiting information and trends; (2) a process for screening government-industry data exchange program (GIDEP) reports and other credible sources of counterfeiting information; and (3) control of obsolete electronic parts.
Additional notable aspects of the final rule include:
• New coverage relating to part obsolescence. Commenters expressed concern that the proposed rule did not adequately address the fact that the life cycle of typical weapons systems is many times longer than the lifecycle of typical electronic parts. While DOD acknowledged the issue, it placed the burden solely on contractors without providing any guidance on how to address the problem.
• Clarification that “authorized source” means “a source with the express written authority of the original manufacturer or current design activity.”
• Clarification that the “risk-based approach” described in the final rule means contractors can adopt inspection and testing practices that take into account the likelihood that a particular part is counterfeit and the potential consequences if it is.
• Clarification that the rule only applies to CAS-covered prime contracts, but that these prime contractors are required to flowdown its requirements to all subcontractors providing electronic parts, regardless of whether the subcontractor is CAS-covered, is providing a commercial item or is a small business.
• Elimination of the word “expressly” from the new DFARS cost principle disallowing certain costs associated with counterfeit or suspect counterfeit electronic parts.
• Clarification that the Defense Contract Management Agency (DCMA) will monitor contractor compliance with this rule in connection with contractor purchasing system reviews, and that DCMA is developing a “Counterfeit Detection and Avoidance System Checklist” for this purpose.
Contractors should immediately begin the process of comparing their existing systems to the counterfeit part detection and avoidance requirements to ensure that they are in compliance with these new requirements.
