An Appraisal of Proposed Amendments to NDAA2012§818 – Section 811 of the Proposed NDAA for FY2014

On 3 June 2013, Howard P. “Buck” McKeon, Chairman of the House Armed Services Committee (HASC), released his version of the National Defense Authorization Act for Fiscal Year 2014. The HASC Chairman’s markup includes further amendments to Section 818(c)(2)(B) of the National Defense Authorization Act for Fiscal Year 2012. Section 811 of the proposed NDAA2014 would amend NDAA2012§818 to “provide that the costs associated with the use of counterfeit electronic parts, and the subsequent cost of rework or corrective action that may be required to remedy the use or inclusion of such parts, are allowable costs under Department of Defense contracts if the counterfeit electronic parts were procured from an original manufacturer or its authorized dealer, or from a trusted supplier.”

NDAA2012 Section 818(c)(2)(B) would read as follows (emphasis has been added to identify amended language)…

(B) 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, unless–

(i) the covered contractor has an operational system to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts that has been reviewed and approved by the Department of Defense pursuant to subsection (e)(2)(B);

(ii) the counterfeit electronic parts or suspect counterfeit electronic parts were–

(I) procured from an original manufacturer or its authorized dealer or from a trusted supplier in accordance with regulations described in paragraph (3); or

(II) provided to the contractor as Government property in accordance with part 45 of the Federal Acquisition Regulation; and

(iii) the covered contractor provides timely notice to the Government pursuant to paragraph (4).

This proposed amendment would introduce an exception that is potentially narrower than the amendment introduced by NDAA2013§833. Furthermore, this amendment does not address important issues and leaves a number of gaps unresolved. These issues and gaps along with recommendations to address them have been described in my recent essays concerning the proposed DFARS rule on ‘Detection and Avoidance of Counterfeit Electronic Parts’ (DFARS Case 2012-D055).

Limited Safe Harbor for “counterfeit electronic parts were procured from an original manufacturer or its authorized dealer, or from a trusted supplier”

The term ‘trusted supplier’ is not defined in proposed regulations thus far and it is not defined in subsection (3) of NDAA2012§818 as the amendment seems to suggest. It is premature to speculate on where the rule making process will lead with respect to defining this term. Logic would dictate that ‘trusted suppliers’ would be those that are least likely to introduce counterfeit electronic parts in the DoD supply chain. Should a definition for the term ‘trusted supplier’ emerge that is consistent with this logic, such a safe harbor would be very narrow.

The proposal to introduce an exception for counterfeit parts acquired from “an original manufacturer or its authorized dealer” is hardly a significant safe harbor for contractors. This proposed exception is an extremely narrow one. Reporting trends continue to show that “an original manufacturer or its authorized dealer” are not generally associated with the sale of counterfeit electronic parts. It is the opinion of a noted expert in procurement fraud and criminal prosecutions associated with counterfeiting that a definition for ‘counterfeit part’ should not include a part manufactured by the original component manufacturer, its authorized producer or a licensee. In light of this, this portion of the proposed amendment is of little practical use and has the potential to create a conflict with other provisions.

In its description of a contractor’s ‘operational system’, NDAA2012§818 includes provisions for due diligence in the event electronic parts are purchased from other than OCMs, authorized dealers, and ‘trusted suppliers’, i.e. ‘inspection, testing, and authentication of electronic parts’ as described in subsection 818(c)(3)(B). The proposed amendment does not provide safe harbor for these purchases despite any due diligence performed as recommended by industry standards and subject matter experts; and now expected of ‘contractor counterfeit electronic parts avoidance and detection system’.

Imbalanced Approach to Counterfeit Prevention

NDAA2012§818 calls for DoD to implement a risk based approach to counterfeit prevention. The proposed amendment and proposed DFARS rule, however, do not extend this risk based approach to contractors. The proposed amendment would not cause counterfeit electronic parts avoidance and detection system requirements to reach the portion of the supplier base where counterfeits tend to creep into the supply chain in the first place. This leaves prime and upper tier contractors without an effective mechanism to “eliminate counterfeits” from the DoD supply chain as NDAA2012§818 and the proposed rule suggest.

Criteria for a “Contractor Counterfeit Electronic Part Avoidance and Detection System”

The proposed amendment and proposed DFARS rule fail to define criteria for a contractor’s counterfeit electronic parts avoidance and detection system and fail to define key terms. Without specific criteria and definitions of key terms, there is likely a risk for wide disparity among different DoD evaluators in the interpretation of what constitutes an acceptable contractor counterfeit electronic parts avoidance and detection system.

Definition of ‘counterfeit’

The proposed definition of “counterfeit part” within the proposed DFARS rule introduces a number of inconsistencies and problems that are not addressed by these amendments. The definition of ‘counterfeit’ is very broad and seriously problematic. The definition of ‘legally authorized source’ does not include ‘authorized distributors’ who are identified as a key element of a trusted supplier concept specified in NDAA2012§818.

Parts Obsolescence Issues

The proposed amendment and proposed DFARS rule fail to address the vulnerability created by continued demand for obsolete parts and fails to address the increasing constraints on DoD regarding its ability to support and fund approaches to eliminate the use of obsolete parts.

NOTE: Since the writing of this essay, HASC introduced Section 812 of the proposed NDAA2014 that would address this issue.

Commercial-Off-The-Shelf (COTS) Items

The proposed amendment and proposed DFARS rule do not consider the COTS producer’s business practices and its compatibility with the specific counterfeit parts avoidance methodology described in NDAA2012§818.

CLOSING REMARKS

This essay described a number of issues gaps associated with Section 811 of the proposed NDAA for FY2014. These issues and gaps along with recommendations to address them have been described in my recent essays concerning the proposed DFARS rule on ‘Detection and Avoidance of Counterfeit Electronic Parts’ (DFARS Case 2012-D055)….

· An Imbalanced Approach to Counterfeit Prevention

· Criteria for a “Contractor Counterfeit Electronic Part Avoidance and Detection System”

· A Problematic Definition of ‘Counterfeit Part’

· Missing Definition of ‘Trusted Supplier’

· Parts Obsolescence Issues

· COTS

Henry Livingston

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