DFARS Rule Clarifies Allowability of Costs Related to Counterfeit Electronic Parts

The Department of Defense has finalized its proposed rule addressing the allowability of costs of counterfeit electronic parts or suspect counterfeit electronic parts and the cost of rework or corrective action.

The final rule in DFARS Case 2016-D004 amends the Defense Federal Acquisition Regulation Supplement at DFARS 231.205-71 to provide that these costs may be allowable if the parts were obtained by the contractor/subcontractor in accordance with the clause at DFARS 252.246-7008, Sources of Electronic Parts.

More specifically, DFARS 231.205-71 now provides that the costs of counterfeit electronic parts and suspect parts, and the costs of rework or corrective action, are unallowable unless:

  • the contractor has a DoD-approved system (see DFARS 244.303(b)) to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts;
  • the parts are government-furnished property, as defined in FAR 45.101, or were obtained by the contractor in accordance with DFARS 252.246-7008;
  • the contractor becomes aware of the counterfeit parts through inspection, testing, and authentication efforts through a Government Industry Data Exchange Program alert, or by other means; and
  • the contractor provides timely notice to the cognizant contracting officer and GIDEP.

The proposed version of the rule did not include the notice requirement.

The effective date of the rule is August 30, 2016. For the text of the rule, see 81 FR 59510.

DFARS Rule on Use of Trusted Sources for Electronic Parts Finalized

The Department of Defense has finalized the rule in DFARS Case 2014-D005, Detection and Avoidance of Counterfeit Electronic Parts—Further Implementation, which addresses required sources of electronic parts for defense contractors and subcontractors.

The new requirements are added at revised DFARS 246.870, Contractor counterfeit electronic part detection and avoidance, and in a new clause at DFARS 252.246-7008, Sources of Electronic Parts. Definitions for key terms are added at DFARS 202.101.

Under the new clause and revised DFARS 246.870-2, Policy, the contractor must acquire electronic parts that are in production by the original manufacturer or an authorized aftermarket manufacturer, or currently available in stock from the original manufacturers of the parts, their authorized suppliers, or suppliers that obtain such parts exclusively from the original manufacturers of the parts or their authorized suppliers.

If electronic parts are not in production by the original manufacturer or an authorized aftermarket manufacturer, and not currently available in stock from one the allowable sources, the contractor must obtain electronic parts from contractor-approved suppliers using established counterfeit prevention industry standards and processes. The contractor assumes responsibility for the authenticity of parts provided by contractor-approved suppliers, and their selection is subject to review and audit by the contracting officer.

The contractor must promptly notify the CO in writing if it (1) obtains an electronic part from another source due to nonavailability from a permitted source, or from a subcontractor (other than the original manufacturer) that refuses to accept flowdown of the clause; or (2) cannot confirm that an electronic part is new or previously unused and that it has not been comingled in supplier new production or stock with used, refurbished, reclaimed, or returned parts.

The contractor is also responsible for inspection, testing, and authentication, in accordance with existing applicable industry standards, and it must make documentation of inspection, testing, and authentication of such electronic parts available to the government upon request.

Further, if the contractor is not the original manufacturer of, or authorized supplier for, an electronic part, it must have risk-based processes that enable tracking of electronic parts from the original manufacturer to product acceptance by the government.

If the contractor cannot establish this traceability from the original manufacturer for a specific electronic part, it is responsible for inspection, testing, and authentication, in accordance with industry standards. Also, the contractor must maintain documentation of traceability, or the inspection, testing, and authentication required when traceability cannot be established, in accordance with the records retention requirements at FAR Subpart 4.7, and it must make the documentation available to the government upon request.

Under the prescription at DFARS 246.870-3(b), the new clause will be used in all solicitations and contracts, including those for commercial items, when procuring electronic parts; end items, components, parts, or assemblies containing electronic parts; or services, if the contractor will supply electronic parts or components, parts, or assemblies containing electronic parts as part of the service.

The new clause is not limited to contractors subject to the Cost Accounting Standards, and it applies to small businesses. Also, prime contractors must include the substance of the clause in subcontracts that are for electronic parts or assemblies containing electronic parts.

The effective date of the rule is August 2, 2016. For the text of the final rule, see 81 FR 50635.