New DFARS Rule: Detection and Avoidance of Counterfeit Electronic Parts
By: William F. Bresee, Esq.
On May 6, 2014, the Department of Defense / Defense Acquisition Regulations System released a new final Defense Federal Acquisition Regulation Supplement (“DFARS”) rule on the detection and avoidance of counterfeit electronics parts (case 2012-DO55). The new rule addresses Defense contractor responsibilities including:
- Detecting and avoiding the use or inclusion of counterfeit electronic parts or suspect counterfeit electronic parts,
- The use of trusted suppliers,
- Requirements for contractors to report counterfeit electronic parts and suspect counterfeit electronic parts, and
- Requirements for the establishment of training, procurement and contracting standards by Defense contractors.
The new rule applies only to contractors that are subject to the Cost Accounting Standards (“CAS”) and not to small entities that are exempt from CAS; it applies to contractors that supply electronic parts or products that include electronic parts and their subcontractors that supply electronic parts or products that include electronic parts. Failure to establish and maintain an acceptable counterfeit electronic part detection and avoidance system. may result in disapproval of the purchasing system by the contracting officer and/or withholding of payments.
The new rule requires contractors to:
(a) Establish and maintain policies and procedures to ensure purchase orders and subcontracts contain mandatory and applicable flowdown clauses, as required by the FAR and DFARS, including terms and conditions required by the prime contract and any clauses required to carry out the requirements of the prime contract, including the requirements of 252.246-7007, Contractor Counterfeit Electronic Part Detection and Avoidance System, if applicable;
(b) Provide for an organizational and administrative structure that ensures effective and efficient procurement of required quality materials and parts at the best value from responsible and reliable sources, including the requirements of 252.246-7007, Contractor Counterfeit Electronic Part Detection and Avoidance System, if applicable; and
(c) Establish and maintain selection processes to ensure the most responsive and responsible sources for furnishing required quality parts and materials and to promote competitive sourcing among dependable suppliers so that purchases are reasonably priced and from sources that meet contractor quality requirements.
The new DFARS rule requires that a counterfeit electronic part detection and avoidance system include risk-based policies and procedures that address, at a minimum, the following areas:
(1) The training of personnel.
(2) The inspection and testing of electronic parts, including criteria for acceptance and rejection.
(3) Processes to abolish counterfeit parts proliferation.
(4) Processes for maintaining electronic part traceability.
(5) Use of suppliers that are the original manufacturer, sources with the express written authority of the original manufacturer or current design activity, including an authorized aftermarket manufacturer or suppliers that obtain parts exclusively from one or more of these sources.
(6) The reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts.
(7) Methodologies to identify suspect counterfeit electronic parts and to rapidly determine if a suspect counterfeit electronic part is, in fact, counterfeit.
(8) Design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts.
(9) Flow down of counterfeit detection and avoidance requirements.
(10) Process for keeping continually informed of current counterfeiting information and trends.
(11) Process for screening the Government-Industry Data Exchange Program (GIDEP) reports and other credible sources of counterfeiting information.
(12) Control of obsolete electronic parts.
Issues which may arise under the new rule include whether a “nonconforming item”, even one that is wholly unintentional and furnished by its original source, would be considered “counterfeit”, whether out-of-specification escapes that are unintentional and unobserved by the supplier but are represented to the customer as “meeting the performance requirements for the intended use;” would expose the supplier to False Claims Act liability, and whether an escape due to a temporary lapse of manufacturing and testing process control could result in liability for misrepresentation.
The new DFARS rule on counterfeit electronic parts is a positive step as suppliers must reduce the real threat of counterfeit parts. The final rule recognizes that “best value” in purchasing parts may reflect added costs. The rule endorses contractor use of risk-based assessment based upon vulnerability and consequence. A flexible approach to adequacy of contractor systems is informed by industry standards and best practices. However, the rule does not provide guidance on how to qualify trusted suppliers when parts can’t be purchased from OEMs and preferred suppliers.
This Client Alert is not intended to fully analyze supply chain management issues or to provide legal advice in any particular business situation, and cannot be used or relied upon for those purposes. Leech Tishman, however, looks forward to assisting our clients in reviews of their electronic parts supply management or in answering questions regarding the effects of the new Contractor Counterfeit Electronic Part Detection and Avoidance System requirements.
William F. Bresee is a partner at Leech Tishman, is a member of the firm’s Corporate and Construction Practice Groups, and chairs the firm’s Energy Practice Group. Bill, who is also a retired U.S. Navy/Naval Reserve Captain (Supply Corps), can be reached at 626.817.7500 x 425 or 412.261.1600 x 261 or firstname.lastname@example.org. For any further analysis of how the Contractor Counterfeit Electronic Part Detection and Avoidance System requirements may affect your interests, or if you have any questions about this article, please feel free to contact Bill.