The infiltration of counterfeit parts into the Department of Defense (DoD) supply chain, which drives the U.S. military’s major weapon systems, has been a concern of the U.S. Congress and DoD leadership. In response, the DoD has established directives to prevent the infiltration of counterfeit materials and parts into the DoD supply chain—particularly counterfeit materials that present a threat to personnel safety and mission assurance. To this end, and to address the 2012 Senate Armed Services Committee (SASC) investigations that uncovered overwhelming evidence of counterfeit parts pervading the DoD supply chain, the DoD issued a final rule (the “Final Rule”) in May 2014. The Final Rule imposed on DoD contractors various requirements and responsibilities to detect and avoid counterfeit electronic parts. The Final Rule, among other things, detailed actions necessary for contractors to develop and maintain acceptable counterfeit electronic part detection and avoidance systems including training personnel, inspecting and testing electronic parts, and vetting trusted suppliers.
To address further its concerns about the infiltration of counterfeit electronic parts into the supply chain, the DoD recently proposed a new rule (the “Proposed Rule”) that would amend the Defense Federal Acquisition Regulation Supplement (DFARS) to implement a requirement of the Fiscal Year (FY) 2012 National Defense Authorization Act (the “Act”) as modified by section 817 of the FY 2015 Act. The Proposed Rule, which was published on September 21, 2015, requires the DoD to issue regulations establishing requirements for the acquisition of electronic parts by the DoD, defense contractors and subcontractors at all tiers from trusted suppliers, thereby reducing the purchase of counterfeit electronic parts. The Proposed Rule also provides clarity on issues such as: i) removal of embedded software or firmware from the definition of “electronic part,” ii) clarification of traceability expectations, and iii) guidance on determination of risk.
The Proposed Rule purports to amend DFARS 246.870 and establishes a new clause at DFARS 252.246-70XX, titled “Sources of Electronic Parts.” This clause, more specifically, establishes the applicability of the requirements for the acquisition of electronic parts from trusted suppliers whenever procuring: i) electronic parts; ii) end items, components, parts or assemblies containing electronic parts; or iii) services, if the contractor will supply electronic parts or components, parts or assemblies containing electronic parts as part of the service. In addition to being applicable to contractors subject to the Cost Accounting Standards (CAS), this new clause is also applicable to contractors subject to small business set-asides. This is a departure from DFARS 252.246-7007 titled “Contractor Counterfeit Electronic Part Detection and Avoidance System,” established pursuant to the Final Rule and only applicable to prime contracts subject to the Cost Accounting Standards (CAS). The Proposed Rule requires all contractors and subcontractors, whether subject to the CAS or not, to obtain electronic parts currently in production from original manufacturers, authorized dealers or suppliers that obtain parts exclusively from those sources. Thus, the once-exempt small business set-asides, subcontracts and subcontracts for commercial items are subject to the new clause. The DoD estimates the Proposed Rule would apply to some “33,000 small entities with prime or subcontracts for electronic parts.”
The Proposed Rule requires contractors and subcontractors, regardless of CAS status, to employ risk-based systems enabling traceability of electronic parts from the original manufacturer to the point of government acceptance. The Proposed Rule provides clarification for traceability expectations by acknowledging and providing options for those instances when traceability may not be possible. If it is determined that traceability is not feasible, contractors are provided a process where they would be required to “complete an evaluation that includes consideration of alternative parts or utilization of tests and inspections corresponding with the risk.” If it is determined that obtaining an electronic part from a trusted supplier is not feasible, the Proposed Rule requires contractors to notify their contracting officer.
The Proposed Rule also redefines and clarifies definitions of key terms at DFARS 202.101. For example, proposed definition changes include modifying the term “electronic part” by deleting the sentence “The term ‘electronic part’ includes any embedded software or firmware” from its definition given the requirements of this rule are more applicable to hardware than to electronic parts. Additionally, the Proposed Rule defines “original manufacturer” at DFARS 202.101 to include the “contract electronics manufacturer,” the “original component manufacturer,” or the “original equipment manufacturer.
In light of the fact that a substantial percentage of the DoD’s electronic parts are valued at or below the simplified acquisition threshold of $150,000, the Proposed Rule also makes clear the DoD’s intent to subject simplified acquisition threshold contracts to the requirements for the acquisition of electronic parts from trusted suppliers. Additionally, since most electronic parts used by the DoD are Commercial Off-The-Shelf (COTS) items and since a significant proportion of counterfeit items are purchased as COTS, the DoD intends to apply the requirements established by the Proposed Rule to contracts for the acquisition of commercial items including COTS items.
Finally, the DoD will look to address use and further qualification requirements for trusted suppliers in DFARS Case 2015-D020, titled “DoD Use of Trusted Suppliers for Electronic Parts.” The DoD is accepting comments on the Proposed Rule until November 20, 2015.
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