FY2012 NDAA Section 818 – Implications for Contractors

On 29 November 2011, the Senate approved an amendment by Senate Armed Services Committee to strengthen protections against counterfeit electronic parts coming into the defense supply system.

Sens. Carl Levin, D-Mich., and John McCain, R-Ariz., offered the legislation as an amendment to the National Defense Authorization Act (NDAA) for Fiscal Year 2012. It became part of the Senate’s version of the authorization act, passed on 1 December and subject to conference with the House. The conference report was released 13 December. The language agreed upon between the House and the Senate appears in Section 818.

Section 818 of the FY2012 NDAA, embraces many of the concepts to which this author subscribes and addresses many of the long-time impediments to addressing the challenge of counterfeit electronics in the defense supply chain.

  • Requirement that “all tiers” apply preference for procurement from the original component manufacturer (OCM) or its authorized supplier(s)
  • Adoption of internal systems to deter, detect, and avoid counterfeits
  • Requiring information sharing and the use of the Government-Industry Data Exchange Program (GIDEP) to report counterfeits
  • Removing from contractors and subcontractors civil liability on the basis of reporting counterfeits
  • Imposition of requirements on DOD organizations engaged in the purchase of electronic parts as well as industry
  • Enhanced inspection powers for Customs & Border Protection

There are elements of Section 818, however, that will prove to be a challenge for defense contractors.

Responsibility for costs to remedy a counterfeit escape

During its hearing on 8 November 2011, the Senate Armed Services Committee discussed how its legislation proposal would prohibit contractors from charging the Defense Department for the cost of fixing the problem when counterfeit parts are discovered. Based on the hearing and subsequent press releases, this element of the legislation was expected. Factors that are not addressed within the legislation will exacerbate the contractor’s ability to anticipate costs to remedy counterfeit part escapes. The legislation lacks clarity with respect to “cost of rework or corrective action”. It also treats all types of counterfeits equally with no apparent distinction of remedies for escapes or the risk of an escape on the specific application.

Focus is not on where the suspect material enters the DOD supply chain

During the Senate Armed Services Committee hearing, Committee members and witnesses discussed how counterfeits tend to find their way into DOD’s supply chain and that, in order to avoid counterfeits, parts should be purchased whenever possible from the original component manufacturer (OCM) or its authorized suppliers. Section 818 does include this requirement for contractors and DOD organizations, but it does not define what constitutes a “trusted supplier” in cases where parts are not available from the OCM or its authorized suppliers. The legislation is silent with regard to expectations and requirements for Independent Distributors and ‘brokers’.

Original Component Manufacturer Support

During the Senate Armed Services Committee hearing, Committee members and witnesses discussed the importance of support from the original component manufacturer (OCM) to determine the authenticity of parts that may have been acquired from sources other than the OCM or its authorized suppliers. Witnesses discussed how the OCM’s decision to discontinue product manufacturing cuts off the supply of product from low risk sources and elevates the need for OCM support to identify counterfeits among the remaining supply circulating in the open market. Section 818, however, includes no requirements for OCMs with respect to supply and cooperation.

Contractor Systems

Section 818 characterizes the adoption of internal systems to avoid and detect counterfeit parts as “Business Systems” and requires DOD to establish processes for the review and approval of contractor systems. The implications of this characterization are not clear. Furthermore, the legislation requires contractors to establish policies and procedures “to eliminate counterfeit electronic parts from the defense supply chain” – not to apply best practices to avoid and detect counterfeits, but to eliminate them. In addition to being responsible for the costs of rework and corrective action associated with a single counterfeit part escape, that escape could put DOD’s approval of a contractor’s business systems in jeopardy despite analysis that may show that the escape is relatively innocuous and despite whether or not a contractor purchased the parts from a ‘trusted supplier’.

Concluding Remarks

During engagements with many contractors, subcontractors, contract manufacturers, and others within DOD’s supply chain on the counterfeit electronic components problem, I have heard many misconceptions about the relevance of legislation such as this. Here are but a select few examples offered to me by some who do not believe such legislation concerns them:

“We buy subassemblies that contain component parts, but those assemblies are made by other companies.”

“My business uses COTS assemblies.”

“Part suppliers are responsible for costs to remedy the use or inclusion of counterfeit parts.”

On the contrary!

In the case of Section 818 of the FY2012 NDAA, there will be liability to a contractor regardless of where the counterfeit part entered the supply chain. This legislation will affect all contractors at all tiers and is not limited to direct acquisition of parts. Parts suppliers may be subject to debarment for selling counterfeit parts, but the contractor or subcontractor will assume responsibility for the authenticity of parts provided by the supplier and the costs to remedy a counterfeit part escape.

© Henry Livingston

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2 thoughts on “FY2012 NDAA Section 818 – Implications for Contractors

  1. Great Summery, thanks for writing this up! Any word on what the new reporting laws are going to be? In the past reporting could happen to many different organizations.. is it purely GIDEP now? …

    It will be interesting what the hand-down of responsibility starts to look like. I’m sure it will be everything from terms and conditions, to traceability paperwork.

    • According to Section 818 (http://wp.me/P263iE-8), DOD is expected to have established Department guidance and policies for a number of elements (including reporting) within 180 days. Regulations applicable to contractors are expected within 270 days.

      The language of Section 818 refers to GIDEP specifically, but allows for DOD to designate “a similar program”. I think it’s a good bet that DOD will elect to designate GIDEP and may make some reporting process refinements specific to counterfeit case reporting. My view is that GIDEP is very well suited for this sort of reporting and it makes more sense to continue to use it. The “issues” I’ve heard others have about GIDEP have little to with its suitability and more to do with reluctance to report regardless of the reporting vehicle.

      HL

      PS More on the reporting topic here …
      http://wp.me/p263iE-26

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