A long timeframe for completing a government regulation to address a known problem is not unusual.
Back in 2011 the Senate Armed Services Committee initiated an investigation into counterfeit electronic parts in the U.S. Department of Defense (DoD) supply chain. The resulting study, published a year later, found approximately 1,800 cases of suspect counterfeit electronic parts in military equipment over a two-year period. The total number of individual suspect parts exceeded one million.
In the four years since the Senate study was published DoD has improved its ability to trace parts to the original manufacturer. Nevertheless, fake electronic components continues to be a problem and as part of its ongoing effort to find and eliminate counterfeit electronic parts, last month DoD issued a Defense Acquisition Regulation Supplement (DFARS) final rule seeking to clarify the role of contractors.
The new rules focus on the careful selection of suppliers and verifying the authenticity of electronic parts. In short, DoD imposes a notable preference for acquisition and use of electronic parts from original or authorized manufacturers. It requires contractors and subcontractors to buy electronic parts from trusted suppliers [although the term itself, “trusted supplier,” is no longer used or defined—instead the DoD now prefers the term “contractor-approved suppliers.” For further clarification on regulatory semantics see the recent MarketEye column “When it Comes to Counterfeit Part Prevention, Semantics Matter” written by Kevin Sink, Vice President, Total Quality, at TTI North America.]
The new DoD rules have immediate and important implications for how a company does business with the federal government, regardless of whether it supplies electronic parts and equipment or has another role in the supply chain.
For example, when contractors and subcontractors are not the original manufacturers of a part and they can’t get parts from trusted suppliers but intend to supply items from non-trusted sources, they are now required to notify DoD contracting officers in writing. They must also thoroughly document the part’s inspection and testing results when authenticating such parts and should be prepared to provide this documentation to the government upon request.
Another new DFARS amendment proposes to make contractors and subcontractors subject to approval (as well as review and audit) by appropriate DoD officials when identifying a contractor-approved supplier of electronic parts.
There is also a traceability requirement for contractors who do not manufacture their electronic parts, requiring the contractor to trace the origin of the part from the original manufacturer to final acceptance by the government. If the contractor cannot establish traceability from the original manufacturer for a specific electronic part the rule puts the responsibility for inspecting, testing and authenticating parts (using industry standards) on the contractor.
As in the past, a section entitled “Contractor Responsibilities,” includes responsibility not just for detecting and avoiding the use or inclusion of counterfeit electronic parts but for any rework or corrective action that may be required to remedy the use or inclusion of such parts.
A new “Sources of Electronic Parts” rule applies to all contracts. It provides for a three-category approach deploying different protections and using various types of dealers depending upon the availability of the part.
Category 1: Suppliers of electronic parts that are in production or currently available in stock from the original manufacturer must be obtained either from that manufacturer, the manufacture’s authorized suppliers, or suppliers that only obtain parts from original manufacturers. Contractors must use Category 1 suppliers if the electronic part is in production or currently available in stock. DoD explains that even if there is an immediate need for a part in production with a substantial lead time, contractors do not have the option to seek the part from other than a Category 1 source. Contractors are required to make a "good faith" effort to determine whether an electronic part is available from a Category 1 source. Contractors also should document their attempts to determine whether a part is available from a Category 1 source.
Category 2: Electronic parts that are no longer in production or available from the stock of Category 1 suppliers and must be obtained instead from other contractor-approved suppliers. Contractors can only use Category 2 suppliers when the electronic part is not in production and is not currently available in stock from a Category 1 source. DoD recognizes that using Category 2 sources could result in added costs (and such decisions are subject to review and audit).
Category 3: Electronic parts that are not in production and not available from any of the above Category 1 and 2 sources. These parts can still be used, but only when the contractor: 1) notifies the contracting officer; 2) is responsible for inspection, testing and authentication; and 3) documents its inspection, testing and authentication for review by the Government.
The Sources of Electronic Parts rule also applies to contracts for the acquisition of commercial items, including COTS items.
When a contractor orders from Government Supply Sources, the government is responsible for the authenticity of requisitioned parts. If such a part is found to be counterfeit or suspected to be counterfeit, the government is responsible for promptly replacing the part at no charge and will consider an adjustment in the contract schedule to the extent the counterfeit or suspected counterfeit part caused a delay in performance. Additionally, the cost of required inspection, testing, and authentication of requisitioned parts can be charged to the government as a direct cost.
With these requirements comes added risk to contractors based on the goods they sell to DoD. More regulation generally means more compliance costs. The American Action Forum, a Washington, DC think tank led by Douglas Holtz-Eakin, former Director of the Congressional Budget Office, has calculated that in the first nine months of 2014 alone the federal government proposed or finalized rules imposing $150 billion in compliance costs and had imposed 30 million hours in paperwork on American companies.
But let’s put aside any big government irritation we may harbor. Happily. an August 30, 2016 final DFARS rule (DFARS 2301.205-71) seeks to mitigate some of this risk by allowing contractors to recover the costs of counterfeit electronic parts (or suspect counterfeit electronic parts) as well as the cost of rework or corrective action that may be required – as long as the contractor has taken certain steps to prevent the use of such parts.
Cost recovery is possible when a contractor meets the following three requirements:
- The contractor has implemented an operational system to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts;
- The part in question is government furnished property or has been purchased from an acceptable supplier under DFARS rules; and
- The contractor reports the part to its contracting officer and the Government Industry Data Exchange Program (GIDEP) within 60 days of becoming aware that the part is counterfeit or suspected counterfeit.
In conclusion, let me emphasize that one key guideline hasn’t changed: the best way to avoid buying bogus parts for the government or any other customer is to only buy directly from component manufacturers or their authorized distributors.
