Proposed Rule on the Detection and Avoidance of Counterfeit Electronic Parts in Government Contracting

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Authored by Summer Clerk, Jenny Eaton

On May 16, 2013 the Department of Defense (“DoD’) released a proposed rule to modify the Defense Federal Acquisition Regulation Supplement (“DFARS”). This proposed rule relates to the detection and avoidance of counterfeit electronic parts. The purpose of the rule is to hold contractors accountable for detecting and avoiding the use of counterfeit or suspect counterfeit electronic parts.

The proposed rule:
1. establishes a contractor’s responsibilities for detecting and avoiding the use or inclusion of counterfeit electronic parts or suspect counterfeit electronic parts
2. stipulates the use of trusted suppliers,
3. imposes requirements for contractors to report counterfeit electronic parts and suspect counterfeit electronic parts.

If made into a final rule, contractors will be required to create and maintain an acceptable counterfeit electronic part avoidance and detection system. Failure to create and maintain such a system could result in disapproval of the purchasing system by the contracting officer and/or the withholding of payments.

For purposes of the proposed rule, the definition of an electronic part is “an integrated circuit, a discrete electronic component (including, but not limited to, a transistor, capacitor, resistor, or diode), or a circuit assembly.”

A counterfeit part is defined as:
An unauthorized copy or substitute part that has been identified, marked, and/or altered by a source other than the part’s legally authorized source and has been misrepresented to be from a legally authorized source –
1. An item misrepresented to be an authorized item of the legally authorized source; or
2. A new, used, outdated, or expired item from a legally authorized source that is misrepresented by any source to the end-user as meeting the performance requirements for the intended use.

This proposed rule has potential cost implications on government contractors dealing with electronic parts. First, the proposed rule puts the responsibility on contractors to detect and avoid using counterfeit parts. Implementing detection systems, if systems are not already in place, places additional costs on the contractor. Next, these rules “flow down” to subcontractors, thus imposing another layer of detection and cost on the contractor. Further, the proposed rule generally does not reimburse the contractor for the costs of replacing any parts found to be counterfeit or suspected to be counterfeit.

Given these potential cost implications, contractors working with electronic parts should pay close attention to whether the proposed rule becomes a final rule.

These articles are meant to bring awareness to these topics and are not intended to be used as legal advice.

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