United States: Proposed Rule Clarifies Contractor Requirements For Counterfeit Electronic Part Detection And Avoidance

Yesterday, September 21, 2015, the Department of Defense (DOD) published a proposed rule in the Federal Register that would amend the Department of Defense FAR Supplement (DFARS) to further implement Section 818 of the National Defense Authorization Act for Fiscal Year 2012 regarding counterfeit electronic parts (Proposed Rule). See Detection and Avoidance of Counterfeit Electronic Parts–Further Implementation, 80 Fed. Reg. 56,939 (Sept. 21, 2015). The Proposed Rule adds clarity on key issues under the current counterfeit electronic parts rule, DFARS 252.246-7007, Contractor Counterfeit Electronic Part Detection and Avoidance System, which was implemented in May 2014.

The most notable elements of the Proposed Rule are as follows:

• The Proposed Rule contains a new clause, DFARS 252.246-70XX, Sources of Electronic Parts, that would be applicable to all contracts involving electronic parts, including contracts for services that include the supply of electronic parts or components containing electronic parts.  This new clause would require all contractors and subcontractors to obtain electronic parts currently in production from original manufacturers, authorized dealers or suppliers that obtain the parts exclusively from such sources.  Additionally, electronic parts that are out of stock or no longer in production must be obtained from trusted suppliers.  The new clause also specifies that contractors and subcontractors must employ risk-based processes for traceability that enable the tracking of the electronic parts from the original manufacturer to the point of government acceptance.
  
  Unlike the current DFARS rule, which is only applicable to prime contracts subject to the Cost Accounting Standards, all contractors and subcontractors providing electronic parts or subassemblies containing electronic parts would be required to comply with the requirements in the new clause.  Accordingly, contracts below the simplified acquisition threshold, small-business set asides and contracts for commercial items (including commercially available off-the-shelf items) would be subject to the new clause.
• The Proposed Rule defines several terms used in the current rule at DFARS 252.246-7007, including the term “trusted supplier.”  Under the proposed definition, trusted suppliers for a particular part would include: (1) the original manufacturer; (2) an authorized dealer; (3) suppliers that obtain the part exclusively from an original manufacturer or authorized dealer and (4) suppliers “that a contractor or subcontractor has identified as a trustworthy supplier, using DOD-adopted counterfeit prevention industry standards and processes, including testing.”  Additionally, the Proposed Rule requires notice to the Contracting Officer if a part cannot be sourced from a trusted supplier.
• The Proposed Rule provides much-needed clarity on traceability requirements for electronic parts.  Specifically, the Proposed Rule recognizes that traceability may not be feasible in all cases.  In those instances where the contractor cannot establish traceability, the Proposed Rule provides that the contractor should “complete an evaluation that includes consideration of alternative parts or utilization of tests and inspections commensurate with the risk.”  Factors relevant to the contractor’s risk analysis are:
  • The probability of receiving a counterfeit electronic part;
  • The probability that the inspection or test selected will detect a counterfeit; and
  • The potential negative consequences of utilizing a counterfeit electronic part, such as impacts on human safety and mission success, when such potential consequences are made known to the contractor.
• The Proposed Rule announces that DOD will address the use of trusted suppliers by DOD and further qualification requirements for trusted suppliers in a separate, forthcoming rule, DFARS Case 2015-D020, DOD Use of Trusted Suppliers for Electronic Parts.

Comments on the Proposed Rule are due on or before November 20, 2015.  Dentons will continue to monitor developments with the Proposed Rule and provide updates here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.