FY2012 NDAA – Customer / Supplier Engagement in Decision Making and Costs to Remedy Use of Counterfeit Electronic Parts

According to Section 818 of the FY2012 NDAA, DOD is expected to issue or revise guidance applicable to Department components to implement a risk-based approach to minimize the impact of counterfeit or suspect counterfeit electronic parts. DOD guidance and policies are to be established within 180 days after the date of the enactment of the NDAA. Regulations applicable to contractors are expected within 270 days. The revised regulations are to provide that the cost of counterfeit electronic parts and suspect counterfeit electronic parts and the cost of rework or corrective action that may be required to remedy the use or inclusion of such parts are not allowable costs under Department contracts.

The author offers the following for DOD to consider as it develops guidance, policy and regulations with respect to costs to remedy a counterfeit part escape. …

During the 8 November Senate Armed Services Committee hearing, Lieutenant General O’Reilly referred to a contract clause used by the Missile Defense Agency (MDA) concerning responsibility for costs to remedy a counterfeit part escape. The Lt Gen described a requirement for a contractor to request approval from MDA to purchase parts from other than the original manufacturer or its authorized dealer. Lt Gen O’Reilly described cases where parts become obsolete or a manufacturer changes a part specification. Many of these events are not predictable and are not under the control of the DOD customer or the contractor. The Lt Gen described how MDA is then faced with a decision to either redesign assemblies at a prohibitive cost or to seek other sources for parts through independent or unauthorized distributors. Lt Gen O’Reilly said that if MDA approved such a purchase and those parts are later found to be counterfeit, costs to remedy such an escape would be allowable costs.

Using MDA’s requirements as a model, DOD could consider policy and regulations that would consider costs to remedy a counterfeit part escape to be allowable costs provided:

  1. The contractor notifies the DOD customer and seeks approval to use parts obtained from other than the original manufacturer or its authorized dealer.
  2. The DOD customer approves the contractor’s request and the due diligence approach to avoid the introduction of counterfeits through the purchase.

Section 818 of the NDAA for FY2012 presently requires DOD to establish requirements for a contractor or subcontractor to notify its DOD customer when electronic parts are obtained from any source other than the original manufacturer or its authorized dealer. In the case of a lower tier supplier, the request and approval process could be somewhat involved. The request would be flowed up the supply chain to the DOD customer and the approval (or disapproval) flowed down the supply chain from the DOD customer.

DOD might also consider costs to remedy a counterfeit part escape to be allowable costs in the event the parts were Government Furnished Material or acquired from the DLA or DOD Depots. In these cases, the contractor is not involved in the original procurement of the materiel and, therefore, does not have visibility into the supply chain traceability associated with the material or the tests and inspections applied if the original purchase was made from other than the original manufacturer or its authorized dealer.

Approaches such as these would be consistent with a risk-based approach suggested by NDAA Section 818 and address a number of requirements within the NDAA, including customer / supplier engagement in sourcing decisions and the inspecting and testing of parts to minimize the impact of counterfeit or suspect counterfeit electronic parts.

© Henry Livingston

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