A Refresher on the Major DoD Counterfeit Parts Clauses

For the last several years, the DoD has bulked up regulations aimed at detecting and preventing electronic counterfeit parts within Government contracts. Two major clauses apply these regulations to defense contractors: “Contractor Counterfeit Electronic Part Detection and Avoidance System,” and “Sources of Electronic Parts.” Here’s a summary of the main points of each clause.

DoD Clause to Combat Counterfeits Takes a “Top Down” Approach

The first clause is DFARS 252.246-7007, “Contractor Counterfeit Electronic Part Detection and Avoidance System (Aug 2016)”, which was first promulgated in May 2014. The clause applies to contractors who are subject to the Cost Accounting Standards, i.e. generally large defense contractors. That said, these large contractors must flow down the requirements of the clause to all subcontractors providing electronic parts, even if they are commercial items. As such, the obligations of this clause echo down to companies throughout the entire supply system.

Under the clause, the contractor must establish and maintain a system to avoid and detect counterfeit electronic parts, and that system must meet DoD standards. Among those DOD standards are the obligation to train personnel, enact risk-based and testing regimens, establish risk-based parts tracking systems tracing parts from original manufacturer to acceptance by the Government, have methods to ID suspect parts, systematize reporting and quarantining of suspected and actual counterfeit parts, and more. It’s no surprise that the cost of compliance can be substantial.

Furthermore, there’s a monetary consequence when contractors detect counterfeit parts in their supply chains. Under the regulation (and the statute that it implements), costs associated with suspect counterfeit parts are unallowable. In other words, the contractor or subcontractor isn’t allowed to pass along the costs related to removing counterfeit parts to the Government. In sum, running a supply chain for many defense contractors has become significantly more risky and expensive since the clause’s inception.

 

Second DoD Clause Targets the Sources of Electronic Parts.

In August 2016, the DoD issued a second clause (amended in October), DFARS 252.246-7008, “Sources of Electronic Parts (Oct 2016)” that applies to all contracts that involve the supply of electronic parts, regardless of the size of the contract or contractor. That clause includes commercial item contracts, and outlines a new system establishing three categories of parts suppliers, in order of preference.

If the part is in production (or available from stock), you must get it from a Category 1 supplier. That means an actual manufacturer or an authorized supplier who gets it from the manufacturer. When this isn’t possible, things get a little more challenging in Categories 2 and 3.

Category 2 applies to parts that are out of production or unavailable from the original manufacturer or an authorized aftermarket manufacturer. Under Category 2, you must get the part from a contractor-approved source. The contractor must approve the source using established industry standards and processes. The Contracting Officer, however, has the last say and can review and audit these processes. As such, the clause expands the power of the Government Contracting Officer to review, audit, and approve the processes and suppliers themselves.

Category 3 is applicable in several instances. First, it applies when parts are not available from Category 1 or Category 2 sources. Next, Category 3 goes into effect if a subcontractor (other than the original manufacturer) refuses to accept the flow down of this clause into the subcontract. Finally, Category 3 is applicable when a contractor can’t confirm that a part is new or unused or hasn’t been comingled with parts that aren’t new and unused. In these circumstances, the contractor must notify the Contracting Officer, and then implement and document an inspection test and authentication process. These measures are, of course, time-consuming and costly.

 And there’s an additional aspect of the more recent clause that’s quite important: the contractor’s obligation in terms of traceability. The contractor must be able to track electronic parts from the original manufacturer all the way to acceptance by the Government. Contractors who can’t do so are required to inspect, test, and authenticate the part in accordance with industry standards, and then provide documentation to the Government. Again, that means more time and more costs for the contractor.

 

How Contractors Can Come Out on Top

Under both clauses, the process is pretty straightforward for contractors who can use parts directly from the manufacturer or from an authorized source. When that isn’t possible, other sources are permitted, but the clauses do pose a challenge, particularly when traceability is an issue. If you’re in that category, chances are you will have to spend more time and money proving your parts are authentic. The key in both cases is being able to document and legitimize all electronic parts in your supply chain. As we gain experience under these regimes, we may get new rules and refinements of old ones. And the state of the art advances, as counterfeiters get more clever, and industry adapts. So keeping current is key.

 

To learn more about the first DoD clause and the second one, listen to my interviews with Tom Temin on Federal News Radio’s Federal Drive podcast.

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